20-F

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 2005

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

(Mark One)
o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
or
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the fiscal year ended December 31, 2004
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the transition period from          to

Commission file number 1-16055

PEARSON PLC

(Exact name of Registrant as specified in its charter)

England and Wales

(Jurisdiction of incorporation or organization)

80 Strand

London, England WC2R 0RL

(Address of principal executive offices)

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

Title of Class	Name of Each Exchange on Which Registered
*Ordinary Shares, 25p par value	New York Stock Exchange
American Depositary Shares, each Representing One Ordinary Share, 25p per Ordinary Share	New York Stock Exchange

*  Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the SEC.

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

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

      Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at the close of the period covered by the annual report:

Ordinary Shares, 25p par value 803,250,000

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

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

Item 17 þ                     Item 18 o

TABLE OF CONTENTS

		Page
	Introduction		4
	Forward-Looking Statements		4
PART I
Item 1.	Identity of Directors, Senior Management and Advisers		6
Item 2.	Offer Statistics and Expected Timetable		6
Item 3.	Key Information		6
	Selected Consolidated Financial Data		6
	Dividend Information		8
	Exchange Rate Information		9
	Risk Factors		9
Item 4.	Information on the Company		12
	Pearson		12
	Overview of Operating Divisions		12
	Our Strategy		13
	Operating Divisions		13
	Pearson Education		13
	The FT Group		15
	The Penguin Group		16
	Competition		17
	Intellectual Property		17
	Raw Materials		17
	Government Regulation		18
	Licenses, Patents and Contracts		18
	Recent Developments		18
	Organizational Structure		19
	Property, Plant and Equipment		19
Item 5.	Operating and Financial Review and Prospects		20
	General Overview		20
	Results of Operations		26
	Liquidity and Capital Resources		40
	Accounting Principles		42
Item 6.	Directors, Senior Management and Employees		46
	Directors and Senior Management		46
	Compensation of Senior Management		47
	Share Options of Senior Management		53
	Share Ownership of Senior Management		55
	Employee Share Ownership Plans		56
	Board Practices		56
	Employees		57
Item 7.	Major Shareholders and Related Party Transactions		57
Item 8.	Financial Information		58
	Legal Proceedings		58
Item 9.	The Offer and Listing		58
Item 10.	Additional Information		59
Item 11.	Quantitative and Qualitative Disclosures About Market Risk		68
	Introduction		68
	Interest Rates		68
	Currency Exchange Rates		68
	Forward Foreign Exchange Contracts		69
Item 12.	Description of Securities Other Than Equity Securities		70

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		Page
PART II
Item 13.	Defaults, Dividend Arrearages and Delinquencies		70
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds		70
Item 15.	Controls and Procedures		70
Item 16A.	Audit Committee Financial Expert		70
Item 16B.	Code of Ethics		70
Item 16C.	Principal Accountant Fees and Services		71
Item 16D.	Exemptions from the Listing Standards for Audit Committees		71
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchases		71
PART III
Item 17.	Financial Statements		71
Item 18.	Financial Statements		72
Item 19.	Exhibits		72
EX-2.2
EX-4.1
Ex-4.2
EX-8.1
EX-10
EX-12.1
EX-12.2
EX-13.1
EX-13.2

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INTRODUCTION

      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, which differs 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 34 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.

      In common with other listed companies governed by the law of an EU member state, for financial years beginning on or after January 1, 2005 the Group will be required to prepare its financial statements in accordance with international accounting standards adopted at the European level (endorsed IAS’s or IFRS’s). This requirement will therefore first be applicable to the Group’s financial statements for the year ended December 31, 2005. Details of the impact of IFRS on the Group’s 2004 financial statements are available on our website, www.pearson.com/ifrs. The information on this website is not incorporated by reference into this Annual Report.

      We publish our consolidated financial statements in sterling. We have included, however, references to other currencies. In this Annual Report:

•  references to “sterling”, “pounds”, “pence” or “£” are to the lawful currency of the United Kingdom,

•  references to “euro” or “€” are to the euro, the lawful currency of the participating Member States in the Third Stage of the European Economic and Monetary Union of the Treaty Establishing the European Commission, and

•  references to “US dollars”, “dollars”, “cents” or “$” are to the lawful currency of the United States.

      For convenience and except where we specify otherwise, we have translated some sterling figures into US dollars at the rate of £1.00 = $1.92, 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. 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.

FORWARD-LOOKING STATEMENTS

      You should not rely unduly on forward-looking statements in this Annual Report. This Annual Report, including the sections entitled “Item 3. Key Information — Risk Factors”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects”, contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “expect”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or the negative of these terms or other comparable

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terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following:

•  operations and prospects,

•  growth strategy,

•  funding needs and financing resources,

•  expected financial position,

•  market risk,

•  currency risk,

•  US federal and state spending patterns,

•  debt levels, and

•  general market and economic conditions.

      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.

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

      Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

      Not applicable.

ITEM 3. KEY INFORMATION

Selected Consolidated Financial Data

      The table below shows selected consolidated financial data for each of the years in the five-year period ended December 31, 2004. The selected consolidated profit and loss account data for the years ended December 31, 2004, 2003 and 2002 and the selected consolidated balance sheet data as at December 31, 2004 and 2003 have been derived from our 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, which differs from US GAAP in certain significant respects. See “Item 5. Operating and Financial Review and Prospects — Accounting Principles” and note 34 to our 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 2004 amounts into US dollars at the rate of £1.00 = $1.92, the noon buying rate in The City of New York on December 31, 2004.

Restatement

      The Company has restated its UK GAAP shareholders’ funds for the financial years ended December 31, 2003 and 2002 for adoption of UITF Abstract 38 “Accounting for ESOP trusts’. This has reduced shareholders’ funds as at December 31, 2003 and 2002 by £59 million and £62 million respectively (see note 24 in “Item 17. Financial Statements”).

      The Company has restated its US GAAP profit and loss account and shareholders’ funds for the financial years ended December 31, 2003 and 2002 to reflect the correct accounting treatment in respect of incentives and fixed rental escalations under one of its leases. Previously the incentives were recognized in the profit and loss account over the period during which the lease incentives were applicable until the lease returned to a market level. Additionally, fixed future market-based rent increases were charged to the profit and loss account as they became applicable under the terms of the lease. As required by US GAAP, both the lease incentives and fixed market-based rent increases are now being charged to the profit and loss account over the entire term of the lease. Consequently, the profit reported under US GAAP for the 2003 and 2002 financial years has been reduced by £14 million and £12 million, respectively, on a pre-tax basis and £10 million and £9 million, respectively, on a post-tax basis and the shareholders’ funds reported as at December 31, 2003 and 2002 has been reduced by £19 million and £9 million, respectively, from amounts previously reported.

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	Year Ended December 31
	2004			2004			2003			2002			2001			2000
							Restated			Restated			Restated			Restated
	$			£			£			£			£			£
	(In millions, except for per share amounts)
UK GAAP Information:
Consolidated Profit and Loss Account Data
Statutory Measures
Total sales		7,524			3,919			4,048			4,320			4,225			3,874
Total operating profit/(loss)		444			231			226			143			(47	)		209
Profit/(loss) after taxation		209			109			77			(89	)		(403	)		173
Profit/(loss) for the financial year		169			88			55			(111	)		(423	)		174
Basic earnings/(loss) per equity share(4)	$	0.21			11.1	p		6.9	p		(13.9	)p		(53.2	)p		23.9	p
Diluted earnings/(loss) per equity share(5)	$	0.21			11.0	p		6.9	p		(13.9	)p		(53.2	)p		23.4	p
Dividends per ordinary share	$	0.49			25.4	p		24.2	p		23.4	p		22.3	p		21.4	p
Consolidated Balance Sheet Data
Total assets (Fixed assets plus Current assets)		11,493			5,986			6,336			6,790			8,209			8,924
Shareholders funds		4,998			2,603			2,893			3,276			3,712			4,100
Long-term obligations(6)		(3,291	)		(1,714	)		(1,349	)		(1,737	)		(2,616	)		(2,715	)
Capital stock(1)		386			201			201			200			200			199
Number of equity shares outstanding (millions of ordinary shares)		803			803			802			802			801			798

	Year Ended December 31
	2004		2004			2003			2002			2001			2000
						Restated			Restated
	$		£			£			£			£			£
	(In millions, except for per share amounts)
US GAAP Information(7):
Consolidated Profit and Loss Account Data
Statutory Measures
Total sales		7,465		3,888			4,048			4,320			4,225			3,874
Total operating profit/(loss)(2)		564		294			397			453			(389	)		25
Profit/(loss) after taxation		390		203			198			219			(1,483	)		1,370
Profit/(loss) for the financial year(8)		349		182			173			189			(1,500	)		1,362
Profit/(loss) from continuing operations for the financial year(3)		319		166			160			216			(476	)		(61	)
(Loss)/profit from discontinued operations(3)		31		16			16			(5	)		(39	)		1,434
Loss on disposal of discontinued operations(3)		—		—			(3	)		(1	)		(985	)		—
Basic earnings/(loss) per equity share(4)	$	0.44		22.9	p		21.8	p		23.7	p		(188.6	)p		187.2	p
Diluted earnings/(loss) per equity share(5)	$	0.44		22.8	p		21.8	p		23.7	p		(188.6	)p		185.0	p
Basic earnings/(loss) from continuing operations per equity share(1)(4)	$	0.40		20.9	p		20.1	p		27.1	p		(59.8	)p		(8.4	)p
Diluted earnings/(loss) from continuing operations per equity shares(3)(5)	$	0.40		20.8	p		20.1	p		27.1	p		(59.8	)p		(8.4	)p
Basic (loss)/earnings per share from discontinued operations(3)(4)	$	0.04		2.0	p		1.7	p		(3.4	)p		(128.7	)p		195.6	p

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	Year Ended December 31
	2004			2004			2003			2002			2001			2000
							Restated			Restated
	$			£			£			£			£			£
	(In millions, except for per share amounts)
Diluted (loss)/earnings per share from discontinued operations(3)(5)	$	0.04			2.0	p		1.7	p		(3.4	)p		(128.7	)p		193.4	p
Dividends per ordinary share	$	0.47			24.5	p		23.7	p		22.7	p		21.9	p		20.6	p
Consolidated Balance Sheet Data
Total assets		12,048			6,275			6,381			6,767			8,280			10,066
Shareholders’ funds		6,179			3,218			3,333			3,699			4,155			6,018
Long-term obligations(6)		(3,807	)		(1,983	)		(1,647	)		(2,026	)		(2,829	)		(2,715	)

(1)	Capital stock and the number of equity shares outstanding are the same under both UK and US GAAP.
(2)	Total operating profit under US GAAP includes a profit of £14 million in 2004 (a loss of £7 million in 2003 and a loss of £15 million in 2002) on the sale of fixed assets and investments. Additionally, the US GAAP operating profit includes the operating profit impact of the GAAP adjustments discussed in note 34 in “Item 17. Financial Statements”.
(3)	Discontinued operations under both UK GAAP and US GAAP comprise the results of Recoletos for all years presented and the results of RTL Group for 2002, 2001 and 2000. Before the formation in July 2000 of the RTL Group, in which Pearson had an equity interest, Pearson’s television operations were wholly owned subsidiaries. Discontinued operations under US GAAP also include the results of the Forum Corporation for 2003, 2002, 2001 and 2000.
(4)	Basic earnings/loss per equity share is based on profit/loss for the financial period and the weighted average number of ordinary shares in issue during the period.
(5)	Diluted earnings/loss per equity share is based on diluted earnings/loss for the financial period and the diluted weighted average number of ordinary shares in issue during the period. Diluted earnings/loss comprise earnings/loss adjusted for the tax benefit on the conversion of share options by employees and the weighted average number of ordinary shares adjusted for the dilutive effect of share options. Under UK GAAP, in both 2002 and 2001, the Group made a retained loss for the financial year. Consequently the effect of share options is anti-dilutive for those years and there is no difference between the basic loss per share and the diluted loss per share.
(6)	Long-term obligations are comprised of medium and long-term borrowings, amounts falling due after more than one year related to obligations under finance leases and amounts falling due after more than one year in respect of pension obligations.
(7)	See note 34 to the consolidated financial statements included in this Annual Report entitled “Summary of principal differences between United Kingdom and United States of America generally accepted accounting principles”.
(8)	The loss of £1,500 million in 2001 and profit of £1,362 million in 2000 are after charging goodwill amortization of £527 million and £288 million respectively. Since 2002, goodwill has no longer been subject to amortization under US GAAP. See note 34 in “Item 17. Financial Statements”. The 2002 profit also incorporates a post- tax charge of £21 million in respect of the cumulative effect of a change in accounting principle. See note 34 in “Item 17. Financial Statements”.

Dividend Information

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

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2005 our shareholders approved a final dividend of 15.7p per ordinary share for the year ended December 31, 2004.

      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 2004 fiscal year was paid in May 2005.

Fiscal Year	Interim		Final		Total		Interim		Final		Total
	(Pence per ordinary share)						(Cents per ordinary share)
2004		9.7		15.7		25.4		18.6		30.2		48.8
2003		9.4		14.8		24.2		16.7		26.4		43.1
2002		9.1		14.3		23.4		14.7		23.0		37.7
2001		8.7		13.6		22.3		12.6		19.7		32.3
2000		8.2		13.2		21.4		13.3		18.7		32.0

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

Exchange Rate Information

      The following table sets forth, for the periods indicated, information concerning the noon buying rate for sterling, expressed in dollars per pound sterling. The average rate is calculated by using the average of the noon buying rates in the city of New York on each day during a monthly period and on the last day of each month during an annual period. On December 31, 2004, the noon buying rate for sterling was £1.00 = $1.92.

Month	High		Low
May 2005	$	1.90	$	1.82
April 2005	$	1.92	$	1.87
March 2005	$	1.93	$	1.87
February 2005	$	1.92	$	1.87
January 2005	$	1.91	$	1.86
December 2004	$	1.95	$	1.91

Year Ended December 31	Average Rate
2004	$	1.84
2003	$	1.63
2002	$	1.51
2001	$	1.45
2000	$	1.52

Risk Factors

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

Our US educational textbook and testing businesses may be adversely affected by changes in state educational funding that result from the condition of the local state or US economy, changes in legislation, both at the federal and state level, and/or changes in the state procurement process.

      The results of our US educational textbook and testing business, Pearson Education, which accounted for 60% of our total 2004 revenue, depend on the level of US and state educational funding. The economic slowdown in 2002 and 2003, coupled with declining tax revenues, resulted in some US states deferring

9

purchases as they sought to reduce budget deficits. State budgets have begun to recover but there is no guarantee that states will fund new programs, or that we will win this business.

      Legislative changes can also affect the funding available for educational expenditure. These might include changes in the procurement process for textbooks, learning material and student tests, particularly in the adoptions market and thus our ability to grow. For example, changes in curricula, delays in the timing of the adoptions and changes in the student testing process can all affect these programs and therefore the size of our market in any given year.

Our newspaper business may be adversely affected by a weak global advertising environment and other economic and market factors.

      Our newspaper business results have been adversely affected by the reduction in advertising, particularly financial advertising, since 2001. Also some of our newspapers’ circulation is declining or static due to general economic conditions and changes in consumer purchasing habits, as readers look to alternative sources and/or providers of information such as the internet.

Our intellectual property and proprietary rights may not be adequately protected under current laws in some jurisdictions and that may adversely affect our results and our ability to grow.

      Our products are largely comprised of 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 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.

The contracting risks associated with our Professional division within Pearson Education are complex and, if unmanaged, could adversely affect our financial results and growth prospects.

      In recent years we have begun, through our Professional division, to offer services ranging from call center operations to complete outsourcing of administrative functions. Customers are government agencies and professional organizations, mainly in the United States and 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 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.

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A control breakdown in our school testing businesses could result in financial loss and reputational damage.

      There are inherent risks particularly associated with our school testing businesses, both in the United States and the United Kingdom. A breakdown in our testing and assessment products and processes could lead to either a mis-grading of student test scores and/or late delivery of test scores 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. It is also likely that such events would result in adverse publicity, which may affect our school testing business’s ability to retain existing clients and/or obtain new clients.

Changes in the Penguin business may restrict our ability to grow and return this business to historical profit levels.

      Weak US market conditions (particularly in mass market books), higher than average historical return rates, the weak US dollar and distribution problems in the United Kingdom associated with a new automated warehouse facility all adversely affected 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 will also be negatively affected if book return rates remain above their historical average or increase further.

      The majority of the UK warehousing problems were resolved by the 2004 year end. We are planning to move Pearson Education into this new facility in the second half of 2005. This represents a short term operational risk to both businesses. We will continue to incur dual running costs until this project is successfully completed.

We operate in a highly competitive environment that is subject to rapid change and we must continue to invest and adapt to remain competitive.

      Our education, business information and book publishing businesses 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:

•  Students seeking cheaper sources of content, e.g. on-line, used books or imported textbooks. To counter this trend we introduced our own on-line format (called SafariX) and are providing students with a greater choice and customization of our products.

•  Competition from major publishers and other educational material and service providers in our US educational textbook and testing business.

•  Author advances in Penguin. We compete with other publishing businesses for the rights to author manuscripts, and a competitive situation arises where author advances can be bid up to a level at which we cannot generate a sufficient return on our investment.

We operate in markets which are dependent on Information Technology systems and technological change.

      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 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.

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Our reported earnings may be adversely affected by changes in our pension costs and funding requirements due to poor investment returns and/or changes in pension regulations.

      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.

We generate a substantial proportion of our revenue in foreign currencies, particularly the US dollar, and foreign exchange rate fluctuations could adversely affect our earnings.

      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 2003 average rates had prevailed in 2004, sales for 2004 would have been £306 million or 8% 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. 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.

ITEM 4.     INFORMATION ON THE COMPANY

Pearson

      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).

Overview of Operating Divisions

      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.

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

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      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.

Our Strategy

      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:

•  to focus on businesses which provide “education” in the broadest sense of the word.

•  to provide a combination of publishing, both in print and online, and related services that make our publishing more valuable and take us into new, faster-growing markets.

•  to continue to invest in the growth of our businesses, including:

•  extending our lead in education publishing, investing in new programs for students in School and Higher Education and in testing and software services that help educators to personalize the learning process, both in the US and around the world;

•  developing our fast-growing contracting businesses, which provide testing and other services to corporations and government agencies;

•  building the international reach of the Financial Times — both in print through its four editions worldwide and online through FT.com — and enhancing the market positions of our network of national business newspapers around the world; and

•  growing our position in consumer publishing, balancing our investment across our stable of best-selling authors, new talent and our own home-grown content.

•  to foster a collaborative culture which facilitates greater productivity and innovation by sharing processes, costs, technology, talent and assets across our business.

•  to capitalize on the growth prospects in our markets and on our leaner operations to improve profits, cash flows and returns on invested capital.

Operating Divisions

Pearson Education

      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 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.

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

School

      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

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college materials in local languages in a number of countries. In the United States, we publish for pre-kindergarten through 12th grade, with a comprehensive range of textbooks, supplementary materials and electronic education programs. Pearson Education’s elementary school imprint, Pearson Scott Foresman, and premier secondary school imprint, Pearson Prentice Hall School, publish high quality programs covering subjects such as reading, literature, math, science and social studies. We also publish supplementary teaching aids for both elementary and secondary schools and teacher-written activity books. We are a leading publisher in online assessment and digital courseware through Pearson Digital Learning, whose offerings include SuccessMaker, NovaNet and the Waterford Early Reading Program. Through LessonLab, we provide professional development for teachers in kindergarten through 12th grade with the use of the latest technologies and software tools to improve classroom teaching.

      Pearson’s Assessments & Testing operations make us a leading service provider 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 provide 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 16,000 schools nationwide and 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 Federal 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 market directly to the school districts. In the states without adoptions, or “open territories”, local school districts choose education programs from the extensive range available. We actively market 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 began electronic scanning and marking of GCSE and A-level exams in 2004. 3.5 million scripts are expected to be marked electronically in 2005.

Higher Education

      Pearson Education is the United States’ largest publisher of textbooks and related course materials for colleges and universities based on sales. 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 one 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.

Professional

      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 imprints), Peachpit Press and New Riders Press (our graphics and design imprints), Que/ Sams (consumer and professional imprint), Prentice Hall Financial Times (professional business imprint) and BradyGames (software game guides imprint). We also generate revenues through our own website — InformIt. We also provide services to

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professional markets. We manage significant commercial contracts to implement and execute qualification and assessment systems for individual professions, including IT professionals and nurses.

      Our Government Solutions group manages and processes student loan applications on behalf of the US Department of Education and has a number of education, testing-related contracts with various government departments. 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 being a seven year contract to develop and deliver the Graduate Management Admissions Test (GMAT) worldwide. We will begin receiving revenues from this contract in 2006. Another successful tender was for the contract to deliver the National Association of Security Dealers exams over nine years on a non-exclusive basis.

The FT Group

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

The Financial Times Newspaper

      The Financial Times is a leading international daily business newspaper. Its average daily circulation of 427,800 copies in December 2004, as reported by the Audit Bureau of Circulation, gives the Financial Times the second largest circulation of any English language business daily in the world. The Financial Times derived approximately 67% of its revenue in 2004 from advertising and approximately 33% from circulation. The geographic distribution of the Financial Times average daily circulation in 2004 was:

United Kingdom/ Republic of Ireland	31%
Continental Europe, Africa and Middle East	32%
Americas	30%
Asia	7%

      The Financial Times is 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, the Financial Times uses computer-driven communications and printing technology for timely delivery of the various editions of the newspaper to the appropriate geographic markets. The Financial Times is 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 January 2005, FT.com had 76,000 paying subscribers. According to figures independently audited by ABC, the site has 3.7 million unique monthly users and 58.3 million page views.

Financial Times Publishing

      Our other business publishing interests include France’s leading business newspaper, Les Echos with circulation of 119,800 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 with Money Management, Financial Advisor and The Banker for professional advisers and financial sector professionals.

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Recoletos

      On December 14, 2004, the Group announced an agreement with Retos Catera S.A. to sell our 79% stake in Recoletos, a publicly quoted Spanish media group that we built with its Spanish founding shareholders over a number of years, for gross proceeds of €743 million. The consortium of investors behind Retos Cartera includes members of the Recoletos management team, individual Spanish investors and the Banesto banking group. We decided to accept Retos Catera’s financial offer as Recoletos’ strategy in sport, lifestyle and general publications had taken it further away from the FT Group’s core focus on financial and business news and information. The sale became unconditional in February, 2005 and net cash proceeds of £372 million were received on April 8, 2005.

Interactive Data Corporation

      Through our 61% interest in Interactive Data Corporation (“Interactive Data”), we are one of the world’s leading global providers of financial and business information to financial institutions and retail 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.

Joint Ventures and Associates

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

      A 50% interest in FT Deutschland, launched in February 2000, in partnership with Gruner + Jahr, is our German language newspaper with a fully integrated online business news, analysis and data service. Its circulation grew by 5.4% in 2004 to 96,900 copies.

      A 50% interest in The Economist Group, which publishes the world’s leading weekly business and current affairs magazine.

      A 50% interest in FTSE International, a joint venture with the London Stock Exchange, which, among other things, publishes the FTSE index.

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

      A 50% interest in Business Day and Financial Mail, publishers of South Africa’s leading financial newspaper and magazine.

      A 14% interest in Business Standard, India’s second largest daily financial newspaper.

      A 22% interest in MarketWatch, a financial and business information website (sold in January 2005).

The Penguin Group

      Penguin is one of the premier English language 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 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, Penguin’s US imprints placed 132 titles on The New York Times bestseller list. In the United Kingdom,

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49 Penguin titles featured on the Nielsen Bookscan top fifteen bestseller list. Our illustrated reference business, Dorling Kindersley, or DK, is the leading global publisher of high quality illustrated reference books. DK has built a unique graphic style that is now recognized around the world. It produces books for children and adults covering a huge variety of subjects including childcare, health, gardening, food and wine, travel, business and sports. Not only does DK’s “lexigraphic” design approach make its books easily translatable across cultures, but it has also formed the basis of a library of 2.5 million wholly-owned images which have many applications — in print and online.

      In 2004, Penguin had sales of £786 million representing 20% of Pearson’s total sales (21% in 2003). 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.

      In 2004, we decided to close Penguin TV, created from the former Pearson Broadband Television Group and specializing in two areas: factual, non-fiction documentary programming and children’s programming.

Competition

      All of Pearson’s businesses operate in highly competitive environments.

      Pearson Education competes with other publishers and creators of educational materials and services. These companies include 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 as The 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 and HarperCollins. Publishers compete by developing a portfolio of books by established authors and by seeking out and promoting talented new writers.

Intellectual Property

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

Raw Materials

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

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our operations, with sourcing available from numerous suppliers. While local prices fluctuate depending upon local market conditions, we have not experienced extensive volatility in fulfilling paper requirements. In the event of a sharp increase in paper prices, we have a number of alternatives to minimize the impact on our operating margins, including modifying the grades of paper used in production.

Government Regulation

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

Licenses, Patents and Contracts

      We are not dependent upon any particular licenses, patents or new manufacturing processes that are material to our business or profitability. Likewise, we are not materially dependent upon any contracts with suppliers or customers, including contracts of an industrial, commercial or financial nature.

Recent Developments

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

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

      In April 2005, we completed the sale of our 79% stake in Recoletos to Retos Catera S.A, receiving net cash proceeds of £372 million.

      In June 2005, we announced the acquisition of AGS Publishing from WRC Media for $270 million. AGS Publishing specialises in testing and publishing for students with special educational needs in the United States school market.

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Organizational Structure

      Pearson plc is a holding company which conducts its business primarily through subsidiaries and other affiliates throughout the world. Below is a list of our significant subsidiaries as at December 31, 2004, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.

		Percentage
		Interest/Voting
Name	Country of Incorporation/Residence	Power
Pearson Education
Pearson Education Inc.	United States (Delaware)		100%
Pearson Education Ltd.	England and Wales		100%
NCS Pearson Inc.	United States (Minnesota)		100%
FT Group
The Financial Times Limited	England and Wales		100%
Financial Times Business Ltd.	England and Wales		100%
Interactive Data Corporation	United States (Delaware)		61%
Recoletos Grupo de Comunicacion SA	Spain		79%
Les Echos SA	France		100%
The Penguin Group
Penguin Group (USA) Inc.	United States (Delaware)		100%
The Penguin Publishing Co Ltd.	England and Wales		100%
Dorling Kindersley Holdings Ltd.	England and Wales		100%

Property, Plant and Equipment

      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:

General Use of Property	Location	Area in Square Feet
Warehouse	Pittstown, Pennsylvania, USA		510,000
Warehouse	Kirkwood, New York, USA		409,000
Offices	Iowa City, Iowa, USA		310,000
Offices	Old Tappan, New Jersey, USA		210,100
Warehouse/office	Cedar Rapids, Iowa, USA		205,000
Offices	Reading, Massachusetts, USA(1)		158,527
Offices	London, UK		152,986
Printing/ Processing	Owatonna, Minnesota, USA		128,000
Printing/ Processing	Columbia, Pennsylvania, USA		121,400
Offices	Eagan, Minnesota, USA		109,500
Offices	Mesa, Arizona, USA		96,000

(1)  Held for sale.

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      We lease the following principal properties:

General Use of Property	Location	Area in Square Feet
Warehouses/ Offices	Lebanon, Indiana, USA		1,091,400
Warehouse/ Offices	Cranbury, New Jersey, USA		886,700
Warehouse	Indianapolis, Indiana, USA		737,850
Warehouse/ Offices	Newmarket, Ontario, Canada		518,128
Warehouse/ Offices	Rugby, UK		476,000
Offices	Upper Saddle River, New Jersey, USA		474,801
Offices	Hudson St., New York, USA		302,000
Offices	London, UK		273,000
Warehouse/ Offices	Austin, Texas, USA		226,100
Warehouse	Bitteswell, UK		221,909
Warehouse	Scoresby, Victoria, Australia		215,280
Offices	Boston, Massachusetts, USA		191,360
Offices	Glenview, Illinois, USA		187,500
Offices	Bloomington, Minnesota, USA		151,056
Offices	Parsippany, New Jersey, USA		143,800
Offices	Harlow, UK		137,900
Warehouse	San Antonio Zomeyucan, Mexico		107,642
Offices	Boston, Massachusetts, USA		102,751
Offices	New York, New York, USA		101,000
Offices	Bedford, Massachusetts, USA		80,348
Offices	Camberwell, Victoria, Australia		52,656

ITEM 5.     OPERATING AND FINANCIAL REVIEW AND PROSPECTS

      The following discussion and analysis is based on and should be read in conjunction with the consolidated financial statements, including the related notes, appearing elsewhere in this Annual Report. The financial statements have been prepared in accordance with UK GAAP, which differs in certain significant respects from US GAAP. Note 34 to our consolidated financial statements, included in “Item 17. Financial Statements”, provides a description of the significant differences between UK GAAP and US GAAP as they relate to our business and provides a reconciliation to US GAAP.

General Overview

Introduction

      Sales declined from £4,048 million in 2003 to £3,919 million in 2004, a decrease of 3%. This decline was attributable to the impact of exchange, principally the weakness of the US dollar, which had the affect of reducing reported sales in 2004 by £306 million when compared to the equivalent figure at constant 2003 rates. After taking out the effect of currency there were increases in sales at Pearson Education and IDC. Reported operating profit increased by 2% from £226 million in 2003 to £231 million in 2004, despite the adverse impact of exchange rates. There was good progress at Pearson Education and a significant improvement at the Financial Times, but Penguin’s results were disappointing.

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

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net debt offsetting a general rise in interest rates. Net finance costs also benefited in 2004 from a one-off credit of £9 million relating to interest on a repayment of tax in France.

      In December 2004, Pearson announced its intention to dispose of 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 shown as discontinued operations in the consolidated profit and loss account for 2004, 2003 and 2002.

      Net cash inflow from operating activities increased to £530 million in 2004 from £359 million in 2003. Cash flow in 2004 benefited from collection of the $151 million receivable in respect of the TSA contract, together with continued underlying improvements in Pearson Education and IDC. The weakness of the US Dollar 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, on an average basis, the use of working capital continued to improve. Cash outflow on acquisitions net of disposal proceeds was £20 million and, after dividends paid of £195 million and a favorable currency movement of £75 million, overall net borrowings (excluding finance leases) fell 11% from £1,361 million at the end of 2003 to £1,206 million at the end of 2004.

Outlook

      We expect Pearson to grow earnings strongly in 2005 and beyond, with further progress on cash and return on invested capital. Our outlook is:

Pearson Education

      We expect our worldwide School business to deliver significant 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 compared with 2005.

      Our US Higher Education business continues to benefit from its scale, the strength of its publishing and its lead in technology. We expect that those qualities will enable our business to grow ahead of its industry once again in 2005, at a similar rate to 2004 and with similar margins. We see good growth prospects for our US and international higher education businesses. 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.

FT Group

      We expect further profit progress at the FT Group. Advertising revenues at the Financial Times were up 3% 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 and net income in the high single-digit to low double-digit range.

      The results of Recoletos will be consolidated for January and February 2005 and, with the launch of its new freesheet during these months, its results during this period are likely to be around breakeven.

The Penguin Group

      2005 will be a year of transition for Penguin. We expect profits 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 action to adjust our publishing program and reduce costs, and we will expense approximately £5 million as a result of those actions in 2005.

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Exchange rates

      We generate around two-thirds of total revenues in the US and a five cent change in the average exchange rate for the full year (which in 2004 was £1: $1.83) will have an impact of approximately 1p on adjusted earnings per share.

Sales Information by Operating Division

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

	Year Ended December 31
	2004		2003		2002
	£m		£m		£m
Pearson Education		2,356		2,451		2,756
FT Group		587		588		578
The Penguin Group		786		840		838
Continuing operations		3,729		3,879		4,172
Discontinued operations		190		169		148
Total		3,919		4,048		4,320

Sales Information by Geographic Market supplied

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

	Year Ended December 31
	2004		2003		2002
	£m		£m		£m
United Kingdom		545		474		411
Continental Europe		300		294		271
North America		2,505		2,742		3,139
Asia Pacific		261		255		249
Rest of World		118		114		102
Continuing operations		3,729		3,879		4,172
Discontinued operations		190		169		148
Total		3,919		4,048		4,320

Exchange Rate Fluctuations

      We earn a significant proportion of our sales and profits in overseas currencies, principally the US dollar. Sales and profits are translated into sterling in the consolidated financial statements using average rates. The average rate used for the US dollar was $1.83 in 2004, $1.63 in 2003 and $1.51 in 2002. 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.

Critical Accounting Policies

      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 conformity with UK GAAP, which differs in certain significant respects from US GAAP.

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      The preparation of our consolidated financial statements in conformity with UK GAAP, and the reconciliation of these financial statements to US GAAP as described in note 34, 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 our 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.

Revenue Recognition

      Sales represent the amount of goods or services, net of value added tax and other sales taxes, and excluding any trade discounts and anticipated returns, provided to external customers and associates.

      Revenue from the sale of books is recognized when title passes. Anticipated returns are based primarily on actual return rates experienced in recent years.

      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.

      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

      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 stock where the title to which they relate has a useful life in excess of one year. 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 assessment of useful life and the calculation of amortization involve a significant amount of estimation and management judgment, as management must estimate the sales cycle and life of a particular title. The overstatement of useful lives could result in excess amounts being carried forward in stock 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.

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Royalty Advances

      Advances of royalties to authors are included within debtors 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. 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 judgment 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.

Defined Benefit Pensions

      The pension cost 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, depend on the selection of certain assumptions, which include the expected long-term rate of 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, differences arising from actual experience or future changes in assumptions may materially affect the pensions costs recorded 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 future periods.

Deferred Tax

      Deferred tax assets and liabilities require management judgment in determining the amounts to be recognized, and in particular, the extent to which deferred tax assets can be recognized. Under Financial Reporting Standard 19 Deferred 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 probability that there will be future taxable income against which these tax losses and other timing differences may be utilized. We regularly review our deferred tax assets to ensure that they are recoverable and have exercised significant judgments when considering the timing and level of future taxable income. Our business plans and any future tax planning strategies are considerations 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.

Amortization and Impairment of Goodwill

      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 as the nature and age of the business and the stability of the industry in which the acquired business operates as well as typical life spans of the acquired products to which the goodwill attaches. The estimated useful lives ascribed to goodwill range from 3 to 20 years. Goodwill relating to acquisitions in the more established book publishing businesses is typically written off over 20 years while 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.

      The charge for goodwill amortization is a significant item in arriving at our operating profit in the financial statements, and the estimation of useful life can therefore have a material effect on the results. Under US GAAP, we ceased amortization of goodwill in 2002 and test goodwill for impairment at least annually.

      Under UK GAAP, the carrying value of goodwill is subject to an impairment review at the end of the first full year following an acquisition and at any other time if events or changes in circumstances indicate that the carrying value may not be recoverable whereas under US GAAP it is tested at least annually. Changes in

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circumstances resulting in a more frequent impairment review may include, but are not limited to, a significant change in the extent or manner in which acquired assets are being used to support the business, continued operating losses and projection of future losses associated with the use of assets or businesses acquired, significant changes in legal or regulatory environments affecting the use and value of the assets, and adverse economic or industry trends.

      If the carrying value of assets is deemed not recoverable, we will determine the measurement of any impairment charge on anticipated discounted future cash flows. Significant assumptions are selected by management which impact the calculation of the anticipated future cash flows, with the most critical assumptions being discount rates, the period utilized for the cash flows, and terminal values. Discount rates are generally based on our Group cost of capital adjusted for any inherent risk associated with the specific business. Terminal values incorporate management’s estimate of the future life cycle of the business and of the cash flow for the period determined. Although we believe our assumptions to be appropriate, actual results may be materially different and changes to our assumptions and estimates may result in a materially different valuation of the assets. Our cash flow assumptions underlying these projections are also consistent with management’s operating and strategic plans for these businesses.

      Under UK GAAP, impairments of goodwill are evaluated on a discounted cash flow basis for each acquisition, where there is a triggering event to indicate a potential impairment or where there has been a previous impairment. Impairment evaluations under US GAAP are prepared at a reporting unit level as defined by Statement of Financial Accounting Standards (“SFAS”) No. 142 and incorporates a two-stage impairment test. It is possible that an impairment may be required under one set of accounting principles and not the other.

Investments

      Management reviews the carrying value of investments annually and records a charge to profit if an other-than-temporary decline in the carrying value is deemed to have arisen. To assess the recoverability of the carrying value of our investments and to determine if a write-down in carrying value is other-than-temporary, we consider several factors such as the investee’s ability to sustain an earnings capacity which would justify the carrying amount, the current fair value (using quoted market prices, when available), the length of time and the extent to which the fair value has been below carrying value, the financial condition and prospects of the investees, and the overall economic outlook for the industry. The evaluation of such factors involves significant management judgment and estimates in determining when a decline in value is other-than-temporary and ascribing fair value where there is no quoted market value. Changes in such estimates could have a material impact on our financial position and results of operations.

UK GAAP and US GAAP

      We prepare our financial statements in accordance with UK GAAP, which differs in certain significant respects from US GAAP. Our profit 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.

      Equity shareholders’ funds at December 31, 2004 under UK GAAP were £2,603 million compared with £3,218 million under US GAAP. Equity shareholders’ funds at December 31, 2003 under UK GAAP were £2,893 million compared with £3,333 million under US GAAP.

      The Company has restated its UK GAAP shareholders’ funds for the financial years ended December 31, 2003 and 2002 for adoption of UITF Abstract 38 “Accounting for ESOP trusts”. This has reduced shareholders’ funds as at December 31, 2003 and 2002 by £59 million and £62 million respectively (see note 24 in “Item 17. Financial Statements”).

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      The Company has restated its US GAAP profit and loss account and shareholders’ funds for the financial years ended December 31, 2003 and 2002 to reflect the correct accounting treatment in respect of incentives and fixed rental escalations under one of its leases. Previously the incentives were recognized in the profit and loss account over the period during which the lease incentives were applicable until the lease returned to a market level. Additionally, fixed future market-based rent increases were charged to the profit and loss account as they became applicable under the terms of the lease. As required by US GAAP, both the lease incentives and fixed market-based rent increases are now being charged to the profit and loss account over the entire term of the lease. Consequently, the profit reported under US GAAP for the 2003 and 2002 financial years has been reduced by £14 million and £12 million, respectively, on a pre-tax basis and £10 million and £9 million, respectively, on a post-tax basis and the shareholders’ funds reported as at December 31, 2003 and 2002 has been reduced by £19 million and £9 million, respectively, from amounts previously reported.

      The main differences between UK GAAP and US GAAP relate to goodwill and intangible assets, acquisition and disposal adjustments, derivatives, pensions and stock based compensation. These differences are discussed in further detail under “— Accounting Principles” and in note 34 to the consolidated financial statements.

Results of Operations

Year ended December 31, 2004 compared to year ended December 31, 2003

Consolidated Results of Operations

Sales

      Our total sales decreased by £129 million to £3,919 million in 2004, from £4,048 million in 2003. This decrease of 3% was attributable to the effect of foreign currency exchange. The strength of sterling compared to the US dollar had a significant negative effect on sales, and we estimate that had the 2003 average rates prevailed in 2004, sales would have been higher by £306 million. In constant exchange rate terms Pearson Education had a strong year with an increase in sales of 4%. The Higher Education and Professional businesses were the main contributors to this growth with the Higher Education business growing faster than its market for the sixth straight year and Professional benefiting from new contracts and add-ons to existing contracts at Pearson Government Solutions. The School business was helped by a full year contribution from Edexcel, the UK testing business, but otherwise sales were flat as new adoption spending in the US fell by approximately $200 million. The FT Group sales were ahead of last year after another good year at Interactive Data and a return to sales growth for the Financial Times newspaper in a more stable business advertising environment. Penguin’s results were disappointing with sales down 6% as reported, but flat on a constant currency basis after disruption to UK distribution and a weakness in the US consumer publishing market.

      Pearson Education, our largest business sector, accounted for 60% of our sales in 2004, compared to 61% in 2003. North America continued to be the most significant source of our sales although sales in the region decreased, as a proportion of total sales, to 64% in 2004, compared to 67% in 2003. This decrease, however, reflects the comparative strength of sterling and the euro compared to the US dollar.

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Cost of Sales and Net Operating Expenses

      The following table summarizes our cost of sales and net operating expenses:

	Year Ended
	December 31
	2004			2003
	£m			£m
Cost of sales		(1,866	)		(1,910	)
Distribution costs		(243	)		(239	)
Administration and other expenses		(1,635	)		(1,724	)
Other operating income		46			51
Net operating expenses		(1,832	)		(1,912	)

      Cost of Sales. Cost of sales consists of costs for raw materials, primarily paper, production costs, amortization of pre-publication costs and royalty charges. Our cost of sales decreased by £44 million, or 2%, to £1,866 million in 2004, from £1,910 million in 2003. The decrease mainly reflected the decrease in sales over the period with overall gross margin remaining consistent.

      Distribution Costs. Distribution costs consist primarily of shipping costs, postage and packing.

      Administration and Other Expenses. Our administration and other expenses decreased by £89 million, or 5%, to £1,635 million in 2004, from £1,724 million in 2003. Administration and other expenses as a percentage of sales decreased to 42% in 2004, from 43% in 2003. Included within administration and other expenses is the charge for goodwill amortization relating to subsidiaries. Total goodwill amortization, including that relating to associates (£nil in 2004; £7 million in 2003) decreased by £40 million to £224 million in 2004, from £264 million in 2003. This was mainly due to the weaker US dollar and goodwill in respect of Family Education Network and Marketwatch having been fully amortized in 2003. The remainder of the decrease in administration and other costs comes from both the effect of exchange and increased efficiencies, in particular from the cost actions taken at the Financial Times in recent years.

      After excluding goodwill charges, administration and other expenses were £1,411 million in 2004 compared to £1,467 million in 2003. The 4% improvement of £56 million includes the beneficial effect of foreign currency exchange and cost savings described above.

      Other Operating Income. Other operating income mainly consists of sub-rights and licensing income and distribution commissions. Other operating income decreased 10% to £46 million in 2004 from £51 million in 2003 with the decrease mainly representing the continued decline in distribution commissions received for distribution of third party books.

Operating Profit/ Loss

      The total operating profit in 2004 of £231 million compares to a profit of £226 million in 2003. This 2% increase was principally due to the £40 million reduction in the total goodwill charge partially offset by the impact of exchange. We estimate that had the 2003 average rates prevailed in 2004, operating profit before goodwill charges would have been £52 million greater.

      Operating profit attributable to Pearson Education increased by £13 million, or 12%, to £119 million in 2004, from £106 million in 2003. The increase was due to a £33 million reduction in goodwill amortization, offset by an estimated reduction in profit of £29 million from exchange. After accounting for these two factors, operating profit was ahead in each of the School, Higher Education and Professional businesses.

      Operating profit attributable to the FT Group increased by £38 million, or 136%, to £66 million in 2004, from £28 million in 2003. The increase was largely due to a £10 million reduction in goodwill amortization, another strong performance from Interactive Data and significant cost savings at the Financial Times newspaper.

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      Operating profit attributable to the Penguin Group decreased by £37 million, or 53%, to £33 million in 2004, from £70 million in 2003. The biggest single factor in the profit decline was exchange rates, which are estimated to have accounted for £14 million of the difference. There were also a number of other factors, including disruption in UK distribution following the move to a new warehouse and the weakness of the US consumer publishing market.

      Operating profit attributable to our discontinued business, Recoletos, fell by £9m, or 41%, from £22 million in 2003 to £13 million in 2004 mainly due to one-off costs associated with the launch of a Spanish language newspaper in the US.

Non-operating Items

      Profit before taxation on the sale of fixed assets, investments, businesses and associates was £9 million in 2004 compared to a profit of £6 million in 2003. In 2004, the principal items were profits on the sale of stakes in Capella and Business.com which were partially offset by losses elsewhere. In 2003 the principal item was a profit of £12 million on the sale of an associate investment in Unedisa by Recoletos.

Net Finance Costs

      Net finance costs consist primarily of net interest expense related to our borrowings. Our total net interest payable decreased by £11 million, or 14%, to £69 million in 2004, from £80 million in 2003. The reduction is due to lower average net debt levels in 2004, which more than offset the effect of a general increase in floating interest rates, and a one-off credit of £9 million for interest on a repayment of tax in France reduced the net interest cost in 2004. Year end indebtedness (excluding finance leases) decreased to £1,206 million in 2004 compared to £1,361 million in 2003 due to funds generated from operations and foreign exchange movements. The weighted average three month London Interbank Offered (“LIBOR”) rate, reflecting our borrowings in US dollars, euros and sterling, rose by 40 basis points, or 0.4%. The company is partially protected from these increases by our treasury policy, which put £736 million of the year end debt on a fixed rate basis. As a result the net interest rate payable (excluding the £9 million credit referred to above) rose by only 25 basis points or 0.25% to 5% in 2004. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowing” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

Taxation

      The overall taxation charge for 2004 was £62 million, compared to a charge of £75 million in 2003. In 2004 the Group recorded a total pre-tax profit of £171 million giving a tax rate of 36% compared to a rate of 49% on total pre-tax profits of £152m in 2003. These high rates of tax were mainly a result of only partial tax relief being available for goodwill charged in the profit and loss account. The total tax charge in 2003 and 2004 also included credits of £56 million and £48 million respectively relating to prior year items; these reflect a combination of settlements with the Inland Revenue authorities and changes to deferred tax balances.

Minority Interests

      Minority interests principally consist of the public’s 39% interest in Interactive Data and 21% interest in Recoletos.

Profit for the Financial Year

      The profit for the financial year after taxation and equity minority interests in 2004 was £88 million compared to a profit in 2003 of £55 million. The overall increase of £33 million, or 60%, was mainly due to the reduced charges for goodwill amortization, interest and tax. Increases in operating profit before goodwill have been eroded by the adverse movement in exchange.

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Earnings per Ordinary Share

      The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 11.1 pence in 2004 compared to 6.9 pence in 2003 based on a weighted average number of shares in issue of 795.6 million in 2004 and 794.4 million in 2003. This increase was due to the additional profit for the financial year described above and was not significantly affected by the movement in the weighted average number of shares.

      The diluted earnings per ordinary share of 11.0p in 2004 and 6.9p in 2003 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant.

Exchange Rate Fluctuations

      The weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 2004 compared to 2003. We estimate that if the 2003 average rates had prevailed in 2004, sales would have been higher by £306 million and operating profit would have been higher by £52 million. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a discussion regarding our management of exchange rate risks.

Sales and Operating Profit by Division

      The following table summarizes our operating profit and results from operations for each of Pearson’s divisions. Results from operations are included as they are a key financial measure used by management to evaluate performance and allocate resources to business segments, as reported under SFAS 131. Since 1998 we have reshaped the Pearson portfolio by divesting of non-core interests and investing in educational publishing and testing, consumer publishing and business information companies. During this period of transformation management have used results from operations to track underlying core business performance. Results from operations are determined by adding back to total operating profit costs or charges arising from significant acquisition activity, typically goodwill amortization charges and integration costs. This enables

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management to more easily track the underlying operational performance of the group. A reconciliation of results from operations to operating profit is included in the table below:

		Year Ended December 31
		2004					2003
		£m			%		£m			%
Results from operations
Pearson Education			293			68		313			68
FT Group			86			20		58			12
The Penguin Group			54			12		91			20
Pearson Group			433			100		462			100
Less:
	1) Goodwill Amortization
	Pearson Education		174					207
	FT Group		20					30
	The Penguin Group		21					21
	Pearson Group		215					258
	2) Goodwill Impairment
	Pearson Education		—					—
	FT Group		—					—
	The Penguin Group		—					—
	Pearson Group		—					—
	3) Integration Costs
	Pearson Education		—					—
	FT Group		—					—
	The Penguin Group		—					—
	Pearson Group		—					—
Operating profit from continuing operations
Pearson Education			119			55		106			52
FT Group			66			30		28			14
The Penguin Group			33			15		70			34
Pearson Group			218			100		204			100
Discontinued Operations (Recoletos)			13					22
Total operating profit			231					226
Non operating items			9					6
Net Finance Costs			(69	)				(80	)
Profit/(Loss) before taxation			171					152

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Pearson Education

      Pearson Education’s sales decreased by £95 million, or 4%, to £2,356 million in 2004 from £2,451 million in 2003, as good growth in our Higher Education and Professional businesses was reduced due to the effect of the weakening US dollar. Pearson Education’s 2004 sales comprised 60% of Pearson’s total sales. Results from operations decreased by £20 million, or 6%, from £313 million in 2003 to £293 million in 2004. The decrease is again attributable to exchange. After taking out the effect of exchange, profits were higher in all three businesses.

      The School business sales decreased by £58 million, or 5%, to £1,118 million in 2004, from £1,176 million in 2003 and results from operations decreased by £10 million, or 8%, to £117 million in 2004 from £127 million in 2003. Both sales and results were adversely affected by the weakening US dollar and we estimate that had 2003 average rates prevailed in 2004 then sales would have been approximately £94 million higher than reported and results from operations £8 million higher. The School results include a full year contribution from Edexcel, 75% of which was acquired in 2003. The extra Edexcel contribution increased sales growth in 2004 but reduced profit growth as the business is loss making in the first half.

      In the US school market, adoption spending in 2004 fell by some $200 million to approximately $500 million. Our school businesses took the largest share (27%) of the new adoption opportunities. We benefited from strength across a wide range of subjects and grade levels, with a decline in elementary sales (after particularly strong market share growth in 2003) mitigated by a strong performance in the secondary market. We returned to growth in the open territories and in supplementary publishing, helped by restructuring actions taken in 2003 and by the sharp recovery in US state budgets. Our US school testing business benefited from growth in new and existing state contracts, including Texas, Ohio, Virginia and Washington. We continued to win new multi-year contracts including Tennessee, New Jersey and California ahead of implementation of the No Child Left Behind Act testing requirements, which become mandatory in the school year starting in September 2005. Our digital learning business showed a further profit improvement on slightly lower sales as we continued to integrate our content, testing and technology in a more focused way.

      Outside the US, the School business sales increased with continued growth in English Language Teaching helped by a very significant investment in ELT and in school testing we won $200 million of multi-year contracts.

      The Higher Education business saw a decline in sales of £41 million, to £731 million in 2004, from £772 million in 2003. Results from operations decreased by £15 million, or 10%, to £133 million in 2004 from £148 million in 2003. Both sales and results were adversely affected by the weakening US dollar, and we estimate that had 2003 average rates prevailed in 2004 then sales would have been approximately £69 million higher than reported and results from operations £16 million higher than reported. In the US we grew faster than the market for the sixth consecutive year in US dollar terms, up 4% while the industry without Pearson was up 2% according to the Association of American Publishers.

      In the US, our Higher Education business benefited from strength in two-year career colleges, a fast growing segment, with vocational programs in allied health, technology and graphic arts, and elsewhere in math and modern languages. Margins reduced a little as we achieved good growth outside the US and continued to invest to make our technology central to the teaching and learning process. Our custom publishing business, which creates specific programs built around the curricula of individual faculties or professors, grew strongly. Pearson Custom has now increased its sales in dollar terms eight-fold over the past six years and we have introduced our first customized online resources for individual college courses.

      Sales and results from operations in our Professional business improved in spite of the weakening dollar. Sales increased by £4 million, or 1%, to £507 million in 2004 from £503 million in 2003. Results from operations increased by £5 million, or 13%, to £43 million in 2004, from £38 million in 2003. We estimate that had 2003 average rates prevailed in 2004 then sales would have been approximately £60 million higher than reported and results from operations £5 million higher than reported. After taking out the effect of exchange, Pearson Government Solutions grew sales by 25%, with strong growth from add-ons to existing programs. We also won some important new contracts, including multi-year contracts worth $500 million from customers

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such as the US Department of Health and Human Services and the London Borough of Southwark. Our professional testing business grew sales (before exchange impacts) by 31% as we benefited from the start-up of major new contracts, although we continued to operate at a small loss as we invested in building up the infrastructure for our 150-strong UK test center network. Markets remained tough for our technology publishing titles, where although sales were lower, profits were broadly level as a result of further cost actions.

FT Group

      Sales at the FT Group (excluding discontinued businesses) decreased by £1 million, from £588 million in 2003 to £587 million in 2004 but results from operations increased by £28 million, or 48%, from £58 million in 2003 to £86 million in 2004. We estimate that had 2003 average rates prevailed in 2004 then sales would have been approximately £22 million higher than reported and results from operations £8 million higher than reported. Sales increased in all divisions with another good year for Interactive Data and a return to sales growth at the Financial Times newspaper (“FT”) for the first year since 2000. The FT returned to profit in the seasonally strong fourth quarter of 2004 with both advertising and circulation revenues ahead for the full year.

      Advertising performance across all categories and regions at the FT were mixed throughout the year. While the recruitment and luxury goods categories increased by more than 20%, the business-to-business and technology sectors showed few signs of recovery. In terms of geography, good growth in Europe and Asia offset a very weak US corporate advertising market. Average circulation for 2004 was 3% lower than in 2003, whilst FT.com now has 76,000 paying subscribers and 3.7 million unique users.

      Results from operations at the FT improved by £23 million over 2003 as we continued to reduce the FT’s cost base, which is now £110 million lower than it was in 2000.

      Les Echos achieved euro sales growth of 4% and profits grew strongly despite a volatile advertising market. Average circulation grew 3% to 119,800, while competitors saw falling sales. FT Business posted significant sales growth of 8%, with progress in all its main markets. Profits improved 25% following a continued emphasis on cost management.

      Results from operations at the FT’s associates and joint ventures showed a profit of £6 million compared to £3 million in 2003. Losses narrowed at FT Deutschland as circulation and advertising revenue grew strongly. FT Deutschland reached the 100,000 copy sales mark in December and circulation averaged 96,600, up 6% on the previous year. The Economist Group again increased its results from operations with The Economist’s circulation passing the 1 million mark with an average weekly circulation of 1,009,759.

      Interactive Data, our 61%-owned financial information business, grew its sales by 3% and results from operations by 9% after taking out the effect of exchange rates. FT Interactive Data and e-Signal (its online financial information and pricing business) performed well particularly in the US where there were some signs of improvement in market conditions. Worldwide renewal rates among institutional clients remained at or above 95%. Demand for Interactive Data’s value-added services remained strong, with the signing of our 100th customer for our Fair Value Information Service product in December 2004. IDC had a first full year contribution from acquisitions made in 2003, ComStock and Hyperfeed Technologies, and acquired FutureSource in September 2004 to expand and compliment e-Signal. The consolidation of seven US data centers is on track for completion by the end of 2005.

      In December 2004 we announced our intention to sell our shareholding in Recoletos, our 79%-owned Spanish media group to Retos Cartera as part of a tender offer for all of Recoletos. Retos Cartera’s tender offer was launched on February 16, 2005 and we accepted it on February 25, 2005. The sale closed in early April and net cash proceeds of £372 million were received on April 8, 2005. In January 2005 we sold our 22% stake in MarketWatch to Dow Jones & Co for $101 million. The results of Recoletos have been included as a discontinued business in the financial statements.

The Penguin Group

      The Penguin Group had a difficult year with sales down 6% to £786 million in 2004 from £840 million in 2003 and results from operations down 41% to £54 million in 2004 from £91 million in 2003. Both sales and

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results were adversely affected by the weakening US dollar, and we estimate that had 2003 average rates prevailed in 2004 then sales would have been approximately £57 million higher than reported and results from operations £14 million higher than reported. In addition to exchange, the decline in results from operations was caused by a number of factors including disruption at the new UK warehouse and a weakening in the US consumer publishing market.

      In the UK, our move to a new warehouse, to be shared with Pearson Education, disrupted supply of our books and had a particular impact on backlist titles. Although we traded well in the second half of 2004, and shipped more books to our UK customers than in the previous year, we incurred some £9 million of additional costs as we took special measures to deliver books, including the costs of running two warehouses, shipping books direct and additional marketing support. By the end of the year we had eliminated the order backlog in the warehouse and the new management team has continued to make good progress in the early part of 2005.

      After a good start to the year, the US consumer publishing market deteriorated sharply in the second half and full year industry sales were 1% lower than in 2003, according to the Association of American Publishers. The adult mass market segment, which accounts for approximately one-third of Penguin’s US sales, was down 9% for the industry for the full year, and 13% in the second half.

      Despite the problems outlined above, Penguin had another great publishing year. We benefited from our new imprint strategy, with a further four imprints published for the first time. Non-fiction performed particularly well, with a 40% increase in our titles on the New York Times bestseller list, including Lynne Truss’s Eats Shoots & Leaves (now with over one million copies in print), Ron Chernow’s Alexander Hamilton and Maureen Dowd’s Bushworld. Best selling UK titles included Jamie Oliver’s Jamie’s Dinners, Sue Townsend’s Adrian Mole and the Weapons of Mass Destruction and Gillian McKeith’s You Are What You Eat.

Year ended December 31, 2003 compared to year ended December 31, 2002

Consolidated Results of Operations

Sales

      Our total sales decreased by £272 million to £4,048 million, or 6%, in 2003, from £4,320 million in 2002. The decrease was mainly attributable to Pearson Education’s Professional business where the shortfall was due to the absence of reported sales from the £250 million TSA contract and the effect of foreign currency exchange. The strength of sterling compared to the US dollar had a significant negative effect on sales, and we estimate that had the 2002 average rates prevailed in 2003, sales would have been higher by £181 million. In constant exchange rate terms the School and Higher Education businesses increased sales in 2003 by 8% and 6% respectively. The School business was helped by the acquisition of 75% of Edexcel, the UK testing business, in the first half of 2003 that contributed additional sales of £89 million. Penguin saw a small increase in sales even after the adverse effect of foreign currency movements as the schedule of new titles enabled Penguin to grow ahead of the industry despite tough conditions for backlist publishing in the US. The FT Group sales were slightly ahead of last year mainly due to Interactive Data where sales increased for the fourth consecutive year in a difficult marketplace (even after excluding additional sales generated from the acquisition of ComStock at the beginning of 2003). Our business newspapers continued to suffer from the corporate advertising recession which has seen advertising volumes at the Financial Times newspaper fall almost two-thirds since their peak in 2000.

      Pearson Education, our largest business sector, accounted for 61% of our sales in 2003, compared to 64% in 2002. North America continued to be the most significant source of our sales although sales in the region decreased, as a proportion of total sales, to 67% in 2003, compared to 72% in 2002. Some of this decrease, however, reflects the comparative strength of sterling and the euro compared to the US dollar.

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Cost of Sales and Net Operating Expenses

      The following table summarizes our cost of sales and net operating expenses:

	Year Ended
	December 31
	2003			2002
	£m			£m
Cost of sales		(1,910	)		(2,064	)
Distribution costs		(239	)		(233	)
Administration and other expenses		(1,724	)		(1,888	)
Other operating income		51			59
Net operating expenses		(1,912	)		(2,062	)

      Cost of Sales. Cost of sales consists of costs for raw materials, primarily paper, production costs, amortization of pre-publication costs and royalty charges. Our cost of sales decreased by £154 million, or 7%, to £1,910 million in 2003, from £2,064 million in 2002. The decrease mainly reflected the decrease in sales over the period with overall gross margins remaining consistent. Cost of sales as a percentage of sales improved slightly to 47% in 2003 from 48% in 2002.

      Distribution Costs. Distribution costs consist primarily of shipping costs, postage and packing.

      Administration and Other Expenses. Our administration and other expenses decreased by £164 million, or 9%, to £1,724 million in 2003, from £1,888 million in 2002. Administration and other expenses as a percentage of sales decreased to 43% in 2003, from 44% in 2002. Included within administration and other expenses is the charge for goodwill amortization and impairment relating to subsidiaries. Total goodwill amortization, including that relating to associates (£7 million in 2003; £48 million in 2002) decreased by £66 million to £264 million in 2003, from £330 million in 2002. The main reason for this decrease over last year is Family Education Network and our interest in Marketwatch, where the final amortization charges were incurred in the first half of 2003. In 2002, we also took a goodwill impairment charge of £10 million relating to a subsidiary of Recoletos in Argentina while in 2003 no impairment charges were deemed necessary. Also included in administration and other costs are the one-off costs of integrating significant recent acquisitions into our existing businesses. The last of these significant acquisitions occurred in 2000 and the final costs of integration of £10 million relating to Pearson NCS and Dorling Kindersley were incurred in 2002 with no further charges in 2003.

      After excluding goodwill charges and integration costs, administration and other expenses were £1,467 million in 2003 compared to £1,586 million in 2002. This 8% improvement of £129 million includes the beneficial effect of exchange rate movements, the results of cost saving measures taken in 2002 and 2003 and a reduced spend on internet enterprises.

      Other Operating Income. Other operating income mainly consists of sub-rights and licensing income and distribution commissions. Other operating income decreased to £51 million in 2003 from £59 million in 2002 with the decrease coming at both Pearson Education and Penguin where distribution commissions we receive for distributing third parties’ books has continued to decline.

Operating Profit/ Loss

      The total operating profit in 2003 of £226 million compares to a profit of £143 million in 2002. This 58% increase was principally due to a £76 million reduction in the total goodwill charge and the absence of integration costs. Operating profit was adversely affected by the impact of reduced profits at Pearson Education’s Professional business, due to the absence of the prior year TSA contract, but this was offset by growth in School and Higher Education, Interactive Data and Penguin. In addition there were reduced losses following disposals and rationalization of the FT Knowledge business. In 2003, operating profit was adversely

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affected by the weakening of the US dollar against sterling. We estimate that had the 2002 average rates prevailed in 2003, operating profit before goodwill charges would have been £27 million greater.

      Operating profit attributable to Pearson Education increased by £31 million, or 41%, to £106 million in 2003, from £75 million in 2002. The increase was due to a £37 million reduction in goodwill amortization, a £7 million reduction in integration costs, increases in profit reported by the School and Higher Education businesses of £12 million and £6 million respectively and the cessation of losses from FT Knowledge (a £12 million loss in 2002). Offsetting these favorable variances was the sharp reduction in profits in the Professional business of £43 million caused by both the absence of the prior year contribution from the TSA contract and further current year TSA contract close-out costs.

      Operating profit attributable to the FT Group increased by £45 million to £50 million in 2003, from £5 million in 2002. The increase was largely due to a £39 million reduction in goodwill amortization and impairment charges. In addition a strong performance from Interactive Data was enough to offset the increased losses at the Financial Times newspaper following a continuing decline of the business advertising market.

      Operating profit attributable to the Penguin Group increased by £4 million, or 6%, to £70 million in 2003, from £66 million in 2002. The profit increase reflected the continued growth in sales and improved margins.

      In 2003, we continued to integrate our book publishing operations around the world. In Australia and Canada, the first two markets where we combined Penguin and Pearson Education into one company, profits improved with operating profit growth in double digits for both companies. In the UK, we are shortly to move to a single shared warehouse and distribution center and, in the US, we continue to consolidate back office operations.

Non-operating Items

      Profit before taxation on the sale of fixed assets, investments, businesses and associates was £6 million in 2003 compared to a loss of £37 million in 2002. In 2003 the principal item was a profit of £12 million on the sale of an associate investment in Unedisa by Recoletos. In 2002, the principal items were a profit of £18 million relating to the completion of the sale of the RTL Group and a provision of £40 million for the loss on sale of our Forum business, which completed in January 2003. Other items in 2002 included a loss on sale of PH Direct of £8m, a profit of £3 million on finalization of the sale of the Journal of Commerce by the Economist and various smaller losses on investments and property.

Net Finance Costs

      Net finance costs consist primarily of net interest expense related to our borrowings. Our total net interest payable decreased by £51 million, or 39%, to £80 million in 2003, from £131 million in 2002. Our average net debt decreased by £157 million from £1,891 million in 2002 to £1,734 million in 2003, while our year end indebtedness (excluding finance leases) decreased to £1,361 million in 2003 compared to £1,408 million in 2002 due to foreign exchange movements. Interest decreased as a result of the lower average net debt and the effect of a general fall in interest rates during the year. The weighted average three month London Interbank Offered (“LIBOR”) rate, reflecting our borrowings in US dollars, euros and sterling, fell by 75 basis points, or 0.75%. The impact of these falls was dampened by our treasury policy in 2003 of having 40-65% of net debt at fixed interest rates. As a result, our net interest rate payable averaged approximately 4.6% in 2003, improving from 5.0% in 2002. During 2002 we took an additional one-off charge of £37 million for cancellation of certain swap contracts and the early repayment of debt following the re-balancing of the Group’s debt portfolio on the receipt of the RTL Group proceeds. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowing” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

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Taxation

      The overall taxation charge for 2003 was £75 million, compared to a charge of £64 million in 2002. In 2003 the Group recorded a total pre-tax profit of £152 million and the high rate of tax came about mainly because there was only very limited tax relief available for goodwill charged in the profit and loss account. The total tax charge in 2003 also included credits of £56 million relating to prior year items; these reflect a combination of settlements with the Inland Revenue authorities and changes to deferred tax balances. In 2002 there was a total pre-tax loss of £25 million, which was also the result of only very limited tax relief available for goodwill. In 2002 there was also a tax credit of £45 million attributable to the resolution of the tax position on the disposal in 1995 of the group’s remaining interest in BSkyB.

Minority Interests

      Minority interests principally consist of the public’s 39% interest in Interactive Data and 21% interest in Recoletos.

Profit for the Financial Year

      The profit for the financial year after taxation and equity minority interests in 2003 was £55 million compared to a loss in 2002 of £111 million. The overall change of £166 million was mainly due to the reduced goodwill amortization and impairment charges and lower interest payments. There was also a profit on the sale of fixed assets, investments, businesses and associates in 2003 compared to the loss in 2002.

Earnings Per Ordinary Share

      The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 6.9 pence in 2003 compared to a loss of 13.9 pence in 2002 based on a weighted average number of shares in issue of 794.4 million in 2003 and 796.3 million in 2002. This increase was due to the return to profit for the financial year described above and was not significantly affected by the decrease in the weighted average number of shares.

      In 2003 the diluted earnings per ordinary share was also 6.9 pence as the effect of dilutive share options was not significant. The Group made a loss for the financial year in 2002 and the effect of share options was therefore anti-dilutive and a diluted loss per ordinary share was shown as being equal to the basic loss of 13.9 pence.

Exchange Rate Fluctuations

      The weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 2003 compared to 2002. We estimate that if the 2002 average rates had prevailed in 2003, sales would have been higher by £181 million and operating profit would have been higher by £27 million. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a discussion regarding our management of exchange rate risks.

Sales and Operating Profit by Division

      The following table summarizes our operating profit and results from operations for each of Pearson’s divisions. Results from operations are included as they are a key financial measure used by management to evaluate performance and allocate resources to business segments, as reported under SFAS 131. Since 1998 we have reshaped the Pearson portfolio by divesting of non-core interests and investing in educational publishing and testing, consumer publishing and business information companies. During this period of transformation management have used results from operations to track underlying core business performance. Results from operations are determined by adding back to total operating profit costs or charges arising from significant acquisition activity, typically goodwill amortization charges and integration costs. This enables

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management to more easily track the underlying operational performance of the group. A reconciliation of results from operations to operating profit is included in the table below:

		Year Ended December
		31
							2002
		2003
		£m			%		£m			%
Results from operations
Pearson Education			313			68		326			70
FT Group			58			12		51			11
The Penguin Group			91			20		87			19
Pearson Group			462			100		464			100
Less:
	1) Goodwill Amortization
	Pearson Education		207					244
	FT Group		30					49
	The Penguin Group		21					18
	Pearson Group		258					311
	2) Goodwill Impairment
	Pearson Education		—					—
	FT Group		—					10
	The Penguin Group		—					—
	Pearson Group		—					10
	3) Integration Costs
	Pearson Education		—					7
	FT Group		—					—
	The Penguin Group		—					3
	Pearson Group		—					10
Operating profit from continuing operations
Pearson Education			106			52		75			56
FT Group			28			14		(8	)		(6	)
The Penguin Group			70			34		66			50
Pearson Group			204			100		133			100
Discontinued Operations (Recoletos and Television)			22					10
Total operating profit			226					143
Non operating items			6					(37	)
Net Finance Costs			(80	)				(131	)
Profit/(Loss) before taxation			152					(25	)

Pearson Education

      Pearson Education’s sales decreased by £305 million, or 11%, to £2,451 million in 2003 from £2,756 million in 2002, as good growth in our School and Higher Education businesses was reduced due to the effect of the weakening US dollar and the Professional business did not fill the gap left by the absence of the TSA contract. Pearson Education’s 2003 sales comprised 61% of Pearson’s total sales. Results from operations decreased by £13 million or 4% from £326 million in 2002 to £313 million in 2003. The decrease can be

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attributed to the reduction at the Professional business caused by both the absence of the prior year contribution from the TSA contract and further TSA contract close out costs recognized this year. Offsetting this were strong performances in School and Higher Education as margins improved and reduced losses at FT Knowledge following disposals and reorganization of that business.

      The School business sales increased by £25 million, or 2%, to £1,176 million in 2003, from £1,151 million in 2002 and results from operations increased by £12 million, or 10%, to £127 million in 2003 from £115 million in 2002. Both sales and results were adversely affected by the weakening US dollar and we estimate that had 2002 average rates prevailed in 2003 then sales would have been approximately £72 million higher than reported and results from operations £8 million higher than reported. In the US our textbook publishing business grew as our Pearson Scott Foresman and Pearson Prentice Hall imprints increased revenues ahead of the overall basal market growth. Our new elementary social studies program took a market share of more than 50% in adoption states, helping Pearson to take the leading position in new adoptions with a share of approximately 29%. Sales at our supplementary publishing business were lower than in 2002 as we discontinued some unprofitable product lines and were affected by industry-wide weakness in state budgets. Although the same pressures reduced sales at our School digital learning business, strong cost management enabled it to return to a small profit in 2003. In School testing, 2003 revenues were a little ahead of 2002, and we won more than $300 million worth of new multi-year contracts which we expect will boost sales from 2005, when the US Federal Government’s No Child Left Behind accountability measures become mandatory.

      Outside the US, the School business sales increased with good growth in English Language Teaching and in our School publishing operations in Hong Kong, South Africa, the UK and Middle East. Our 75% owned UK testing business, Edexcel, contributed sales of £89 million following its acquisition in the first half of 2003.

      The Higher Education business saw a decline in sales of £3 million, to £772 million in 2003, from £775 million in 2002. Results from operations increased by £6 million, to £148 million in 2003, from £142 million in 2002. Both sales and results were adversely affected by the weakening US dollar, and we estimate that had 2002 average rates prevailed in 2003 then sales would have been approximately £49 million higher than reported and results from operations £10 million higher than reported. Though the industry growth slowed a little in 2003, we expect the long-term fundamentals of growing enrolments, a boom in community colleges and a strong demand for post-secondary qualifications to more than offset the impact of state budget weakness and rising tuition fees.

      Our Higher Education business also benefited from a strong schedule of first editions including Faigley’s Penguin Handbook in English Composition, Wood & Wood’s Mastering World Psychology and Jones & Wood’s Created Equal in American History. The use of technology continues to distinguish our learning programs, with almost one million students now following their courses through our paid-for online sites, an increase of 30% on last year, and a further 1.4 million using our free online services. Our market-leading custom publishing business, which creates personalized textbook and online packages for individual professors and faculties, grew revenues by 35%, with sales exceeding $100m for the first time. Outside the US, our Higher Education imprints saw strong growth in key markets including Europe and Canada, solid local publishing and the introduction of our custom publishing model.

      Sales and results from operations were significantly lower in our Professional business, caused by both the absence of the prior year contribution from the TSA contract and the further current year close out costs, together with the impact of the weakening US dollar. Sales decreased by £281 million, to £503 million in 2003, from £784 million in 2002. Results from operations decreased by £43 million, to £38 million in 2003, from £81 million in 2002. Excluding the effect of the TSA contract, our Government Solutions business grew by 39%, benefiting from new contracts with the Department of Health and Human Services and the USAC. The Professional Testing business, which had revenues of approximately $100 million in 2003, 51% higher than in 2002 excluding TSA, won more than $600 million of new long-term contracts. These include testing learner drivers for the UK’s Driving Standards Agency, business school applicants for the Graduate Management Admissions Test and securities professionals for the National Association of Securities Dealers. In 2004 we will invest in the expansion of our international network of testing centers to support these contracts, from which we expect to generate significant revenue and profit growth from 2005. Our worldwide

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technology publishing operations maintained margins despite a drop in revenues. After a severe three-year technology recession, in which our publishing revenues have fallen by 36%, the rate of decline now appears to be slowing, particularly in the United States.

FT Group

      Sales at the FT Group (excluding discontinued businesses) increased £10 million or 2%, from £578 million in 2002 to £588 million in 2003 and results from operations increased by £7 million, or 14%, from £51 million in 2002 to £58 million in 2003. The main contributors to the sales increase was Interactive Data. Interactive Data posted a 10% sales increase despite the negative impact of exchange as it benefited from the acquisition of ComStock, in February 2003. For our business newspapers, 2003 was the third year of a corporate advertising recession which has seen advertising volumes at the Financial Times fall almost two-thirds since their peak in 2000. To compensate for this, we have reduced the FT’s cost base by more than £100 million over the same period.

      Results from operations at the Financial Times (“FT”) decreased by £9 million over 2002 as advertising revenues fell by £23m and we invested some £10m in the newspaper’s continued expansion around the world. Advertising revenues were down 15% as industry conditions remained tough for the FT’s key advertising categories of corporate finance, technology and business to business. The advertising declines were significantly worse immediately before and during the war in Iraq, but the rate of decline began to slow towards the end of the year, helped by growth in US, online and recruitment advertising. The newspaper’s circulation in the six months ended January 31, 2004 was 433,000, 4% lower than in the same period last year, although FT.com’s subscribers are some 50% higher at 74,000. The launch of our Asian edition in September 2003 completed the FT’s global network of four regional newspaper editions, backed up by a single editorial, commercial and technology infrastructure and by FT.com.

      Results from operations at Les Echos decreased from 2002, reflecting continuing declines in advertising revenues and investment in the newspaper’s relaunch. Average circulation for the year was down 4% to 116,400, but the September 2003 relaunch generated a positive response, with newsstand sales in the final quarter up 4% against a market decline of 6%. Despite a continued decline in the advertising market, FT Business posted profit growth, due to tight cost management.

      Results from operations at the FT’s associates and joint ventures showed a profit of £3 million (£6 million loss in 2002) with good progress at FT Deutschland, our joint venture with Gruner + Jahr, and at the Economist Group, in which Pearson owns a 50% interest. FT Deutschland’s average circulation for 2003 was 92,000, an increase of 9% on the previous year and advertising revenues increased in a declining market. The Economist Group increased its results from operations despite further revenue declines, reflecting additional measures to reduce costs. The Economist’s circulation growth continued, with average weekly circulation 3% higher at 908,000.

      Interactive Data grew its sales in a declining market for the fourth consecutive year. Sales increased by 10% and results from operations increased by 16%, despite continuing weakness in the market for financial services as institutions focused on containing costs. The performance was helped by strong institutional renewal rates, which continue to run at more than 95%, the addition of new asset classes to its core pricing services, the successful launch of new services and the acquisition of ComStock. Interactive Data continued to extend its range of services by marketing new products such as the Fair Value Information service, which has been installed in many leading financial institutions, as well as by enhancing existing products at CMS BondEdge with a new credit risk module and at eSignal with increased international exchange data. Interactive Data further enhanced its product offering with the acquisition of ComStock’s real-time market data services.

      In December 2004 we announced our intention to sell our shareholding in Recoletos, our 79%-owned Spanish media group. The sale was completed in early April 2005. The results of Recoletos have been included as a discontinued business in the financial statements.

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The Penguin Group

      The Penguin Group increased sales to £840 million in 2003 from £838 million in 2002 and increased its results from operations to £91 million in 2003 from £87 million in 2002. In the US, our largest market, accounting for around two-thirds of sales, our best ever schedule of new titles enabled Penguin to grow ahead of the industry despite tough conditions for backlist publishing. In the UK our backlist performed well, helped by the relaunch of Penguin Classics and BBC’s The Big Read.

      Penguin’s best-selling books included Sue Monk Kidd’s debut novel The Secret Life of Bees (2.3 million copies sold), John Steinbeck’s East of Eden(1.5 million), Al Franken’s Lies and the Lying Liars Who Tell Them (1.1 million), Scott Berg’s Kate Remembered (0.5 million), Paul Burrell’s A Royal Duty (0.9 million), Madonna’s The English Roses and Mr Peabody’s Apples (1.2 million) and Michael Moore’s Stupid White Men (0.8 million). Dorling Kindersley faced a tough backlist market but benefited from three major new titles: America 24/7, Tom Peters’ Re-Imagine! and an e-Encyclopaedia published in association with Google.

      We increased spending on authors’ advances as we invested in a number of new imprints including Portfolio (business books), Gotham (non-fiction), and The Penguin Press (non-fiction), which has already signed almost 100 authors, including Alexandra Fuller, Ron Chernow and John Berendt. We signed new multi-book deals with a number of our most successful authors including Catherine Coulter and Nora Roberts, whose books have spent a total of 71 weeks at number one on the New York Times bestseller list.

Liquidity and Capital Resources

Cash Flows and Financing

      Net cash inflow from operating activities increased by £171 million, or 48%, to £530 million in 2004, from £359 million in 2003. This cash inflow was aided by collection of the $151 million receivable in respect of the TSA contract. Cash flows within Pearson Education and IDC in particular continued to be strong despite the weakness of the US dollar reducing the value of our cash flows in sterling terms. Even excluding the impact of collecting the TSA receivable, working capital continued to improve. On an average basis, the working capital to sales ratio for our book publishing businesses improved from 32.8% to 32.3%. Compared to 2002, the net cash inflow from operating activities in 2003 decreased by £170 million, or 32%, to £359 million from £529 million. This reflected close-out payments to creditors in respect of the TSA contract and the concentration of the Penguin publishing schedule in the fourth quarter which pushed cash collection from debtors into 2004.

      Net interest paid was £85 million in 2004 compared to £76 million in 2003 and £140 million in 2002. The 12% increase in 2004 over 2003 reflected the year on year increase in interest rates, while the 2003 decrease compared to 2002 benefited from the full year effect of the 2002 debt repayment using the proceeds of the RTL Group sale and the non recurrence of £37 million of swap close-out costs.

      In 2004 capital expenditure was in excess of depreciation due to up-front expenditure on our Professional testing contracts and continued upgrading of our facilities and equipment. Capital expenditure was £125 million in 2004 compared to £105 million in 2003 and £126 million in 2002.

      The acquisition of subsidiaries accounted for a cash outflow of £35 million in 2004 against £94 million in 2003 and £87 million in 2002. The principal acquisitions in 2004 were of KAT and Dominie Press for £10 million each by Pearson Education and FutureSource by Interactive Data for £9 million. The principal acquisitions in 2003 were of ComStock by Interactive Data for net cash of £68 million and 75% of Edexcel by Pearson Education for net cash of £16 million. The largest acquisition in 2002 was the purchase of Merrill Lynch’s Securities Pricing Services by Interactive Data for net cash of £30 million. The sale of subsidiaries and associates produced a cash inflow of £24 million in 2004 against £53 million in 2003 and £923 million in 2002. All the proceeds in 2004 relate to the sale of Argentaria Cartera by Recoletos. The principal disposal in 2003 was the sale of Unedisa by Recoletos. Virtually all the proceeds in 2002 relate to the sale of the RTL Group.

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      The cash outflow from financing of £59m in 2004 reflects the repayment of one €550 bond offset by the proceeds from the issue of new $350 million and $400 million bonds. The cash inflow from financing of £64 million in 2003 largely reflects the issue in the year of a $300 million bond as we took advantage of favorable market conditions, offset by the repayment of a €250 million bond. The outflow of £663 million in 2002 was due to the repayment of loans and bonds using the proceeds from the sale of RTL Group. Bonds are issued as part of our overall financing program to support general corporate expenditure.

Capital Resources

      Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements of the educational book business. Assuming no acquisitions or disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December. Based on a review of historical trends in working capital requirements and of forecast monthly balance sheets for the next 12 months, we believe that we have sufficient funds available for the group’s present requirements, with an appropriate level of headroom given our portfolio of businesses and current plans. Our ability to expand and grow our business in accordance with current plans and to meet long-term capital requirements beyond this 12-month period will depend on many factors, including the rate, if any, at which our cash flow increases and the availability of public and private debt and equity financing, including our ability to secure bank lines of credit. We cannot be certain that additional financing, if required, will be available on terms favorable to us, if at all.

      At December 31, 2004, our net debt (excluding finance leases) was £1,206 million compared to net debt of £1,361 million at December 31, 2003. Net debt is defined as all short-term, medium-term and long-term borrowing, less all cash and liquid resources. Liquid resources comprise short-term deposits of less than one year and investments that are readily realizable and held on a short-term basis. Short-term, medium-term and long-term borrowing amounted to £1,819 million at December 31, 2004, compared to £1,922 million at December 31, 2003. At December 31, 2004, cash and liquid resources were £613 million, compared to £561 million at December 31, 2003.

      The following table summarizes the maturity of our borrowings and our obligations under non-cancelable operating leases.

		At December 31, 2004
								Two to		After
				Less Than		One to		Five		Five
		Total		One Year		Two Years		Years		Years
		£m		£m		£m		£m		£m
Gross borrowings:
	Bank loans, overdrafts and commercial paper		169		107		—		62		—
	Variable rate loan notes		—		—		—		—		—
	Bonds		1,650		—		130		671		849
Lease obligations			1,051		115		101		250		585
Total			2,870		222		231		983		1,434

      The group had capital commitments for fixed assets, including finance leases already under contract, of £6 million. There are contingent liabilities in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries and associates. In addition there are contingent liabilities in respect of legal claims. None of these claims or guarantees is expected to result in a material gain or loss.

      The Group does not have any off-balance sheet arrangements, as defined by the SEC Final Rule 67 (FR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations”, that have or are reasonably likely to have a material current or future effect on the Group’s financial position or results of operations.

      The group is committed to a quarterly fee of 0.125% on the unused amount of the group’s bank facility.

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Borrowings

      We have in place a $1.85 billion term revolving credit facility, which matures in July 2009. At December 31, 2004, approximately $1.23 billion was available under this facility. This included allocations to refinance short-term borrowings not directly drawn under the facility. The credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31:

      We must maintain the ratio of our profit before interest and tax to our net interest payable at no less than 3:1; and

      We must maintain the ratio of our net debt to our EBITDA, which we explain below, at no more than 4:1.

      The covenants provide for the exclusion from the ratio calculations of specified amounts of internet related expenditures. “EBITDA” refers to earnings before interest, taxes, depreciation and amortization. We are currently in compliance with these covenants.

Treasury Policy

      We hold financial instruments for two principal purposes: to finance our operations and to manage the interest rate and currency risks arising from our operations and from our sources of financing.

      We finance our operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets. We borrow principally in US dollars, sterling and euro at both floating and fixed rates of interest, using derivatives, where appropriate, to generate the desired effective currency profile and interest rate basis. The derivatives used for this purpose are principally interest rate swaps, interest rate caps and collars, currency swaps and forward foreign exchange contracts. For a more detailed discussion of our borrowing and use of derivatives, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

Related Parties

      There were no significant or unusual related party transactions in 2004, 2003 or 2002. Refer to note 30 in “Item 17. Financial Statements.”.

Accounting Principles

      The following summarizes the principal differences between UK GAAP and US GAAP in respect of our financial statements. For further details refer to note 34 in “Item 17. Financial Statements”.

      Prior to January 1, 1998, under UK GAAP, goodwill was written off to the profit and loss reserve in the year of acquisition. Under US GAAP, as well as UK GAAP from January 1, 1998, goodwill is recognized as an asset and amortization expense is recorded over useful lives ranging between 3 and 20 years. Under US GAAP, goodwill arising from acquisitions completed subsequent to July 1, 2001 is no longer amortized, however it is tested for impairment at the reporting unit level at least annually or more frequently when a triggering event occurs. In addition, amortization for all goodwill balances ceased as of January 1, 2002 under US GAAP. Intangible assets under UK GAAP are recognized only when they may be disposed of without also disposing of the business to which they relate, and for that reason it is rare that intangible assets are separately identified and recorded apart from goodwill. Under US GAAP, there is no similar requirement with respect to acquired intangible assets, and they should be recognized separately from goodwill when they arise from separate contractual or legal rights or can be separately identified and be sold, transferred, licensed, rented or exchanged regardless of intent. Under US GAAP, intangible assets such as publishing rights, non-compete agreements, software, databases, patents and non-contractual customer relationships such as advertising relationships have been recognized and are being amortized over a range of useful lives between 2 and 25 years. The difference in goodwill and intangible assets also creates a difference in the gain or loss recognized on the disposal of a business due to amortization expense taken with respect to the goodwill prior to adoption of SFAS 142 and intangible assets, as UK GAAP requires that goodwill which had not been

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capitalized and amortized be removed from the profit and loss reserve upon disposal and factored into the gain or loss on disposal calculation.

      Under UK GAAP, the Group reviews the recoverability of goodwill where there is a triggering event to indicate a potential impairment or where there has been a previous impairment. These reviews are based on estimated discounted future cash flows from operating activities compared with the carrying value of goodwill, and any impairment is recognized on the basis of such comparison. Under US GAAP, a two stage impairment test is required at least annually under SFAS 142, which was adopted by the Group as of January 1, 2002. The Group performed the transitional impairment test under SFAS 142 by comparing the carrying value of each reporting unit with its fair value as determined by discounted future cash flows. The Group also completed the annual impairment tests required by SFAS 142 at the end of 2004, 2003 and 2002.

      Under UK GAAP, FRS 19, “Deferred Taxation”, which was adopted for the year ended December 31, 2002 requires a form of full provision to be made for deferred taxes. Deferred taxes are to be accounted for on all timing differences with deferred tax assets recognized to the extent that they are more likely than not recoverable against future taxable profits. Deferred tax assets not considered recoverable are adjusted for through a separate valuation allowance in the balance sheet. Under US GAAP, deferred taxes are accounted for in accordance with SFAS 109, “Accounting for Income Taxes” with a full provision also made for deferred taxes on all timing differences and a valuation allowance established for the amount of the deferred tax assets not considered recoverable. This is similar to the treatment required under FRS 19. The primary differences relate to the deferred tax on intangible assets, which are not recorded under UK GAAP and changes in estimates in respect of deferred tax balances relating to business combinations in prior years, which are required to be adjusted against goodwill under US GAAP. Deferred tax may also arise in relation to timing differences of other adjustments required under US GAAP.

      Under UK GAAP, there are no specific criteria, which must be fulfilled in order to record derivative contracts such as interest rate swaps, currency swaps and forward currency contracts as a hedging instrument. Accordingly, based upon our intention and stated policy with respect to entering into derivative transactions, they have been recorded as hedging instruments for UK GAAP. This means that unrealized gains and losses on these instruments are typically deferred and recognized when realized. Under US GAAP, we have adopted SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and its related guidance. During 2003 and 2002, our derivative contracts did not meet the prescribed criteria for hedge accounting, and have been recorded at market value at each period end, with changes in their fair value being recorded in the profit and loss account. In 2004 the Group met the prescribed designation requirements and hedge effectiveness tests under US GAAP for certain of its derivative contracts. As a result, the movements in the fair value of the effective portion of fair value hedges and net investment hedges have been offset in earnings and other comprehensive income respectively by the corresponding movement in the fair value of the underlying bond or asset.

      Finance lease rentals are capitalised at the net present value of the total amount of rentals payable under the leasing agreement (excluding finance charges) and depreciated over the period of the lease (if in respect of property) or the useful economic life of the asset (if in respect of plant and equipment). Finance charges are written off over the period of the lease in reducing amounts in relation to the written down carrying cost. Operating lease rentals are charged to the profit and loss on a straight-line basis over the duration of each lease term.

      Under UK GAAP, the cost of providing pension benefits is expensed over the average expected remaining service lives of eligible employees, using long-term actuarial assumptions. Under US GAAP, the annual pension costs comprise the estimated cost of benefits accruing in the period, and actuarial assumptions are adjusted annually to reflect current market and economic conditions. Additionally, under US GAAP, if the fair value of a pension plan’s assets is below the plan’s accumulated benefit obligation, a minimum pension liability is required to be recognized in the balance sheet. Unrecognized gains or losses outside the 10% corridor are spread over the employees’ remaining service lifetimes.

      Under UK GAAP, no compensation costs associated with non-qualified stock option plans are recognized if the exercise price of the option at the date of grant is equal to or greater than the market value on that date.

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Under US GAAP, we have adopted the fair value method of accounting for options. Compensation expense is determined based upon the fair value at the grant date, and has been estimated using the Black Scholes model. Compensation cost is recognized over the service life of the awards, which is normally equal to the vesting period. Compensation expense is also recognized under US GAAP with respect to UK qualified non-compensatory plans, such as the Save as You Earn option plan and the Worldwide Save for Shares plan, as these plans offer employees a discount of greater than 5% of market value at the date of grant.

      For a further explanation of the differences between UK GAAP and US GAAP see note 34 to the consolidated financial statements.

Recent U.S. Accounting Pronouncements

      In December 2003, the FASB issued FIN 46R “Consolidation of Variable Interest Entities — an interpretation of ARB No. 51”, which clarifies the application of the consolidation rules to certain variable interest entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns, or both. The effective date for public companies is the end of the first reporting period ending after March 15, 2004, except that all public companies must, at a minimum, apply the provisions to entities that were previously considered “special-purpose entities” by the end of the first reporting period ending after December 15, 2003. The adoption of FIN 46R did not have a material impact on the financial position, cash flows or results of the Group under US GAAP as at December 31, 2004.

      In May 2004, the FASB issued FSP No. 106-2 (“FSP 106-2”), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Medicare Act”). The Medicare Act was enacted December 8, 2003. FSP 106-2 supersedes FSP 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” and provides authoritative guidance on accounting for the federal subsidy specified in the Medicare Act. The Medicare Act provides for a federal subsidy equal to 28% of certain prescription drug claims for sponsors of retiree health care plans with drug benefits that are at least actuarially equivalent to those to be offered under Medicare Part D, beginning in 2006. The adoption of FSP 106-2 did not have a material impact on the financial position, cash flows or results of the Group under US GAAP as at December 31, 2004.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Group is currently evaluating the effect that the adoption of SFAS 151 will have on its consolidated results of operations and financial condition but does not expect SFAS 151 to have a material impact.

      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non monetary Assets — An Amendment of APB Opinion No. 29, Accounting for Non monetary Transactions” (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for non monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Non monetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after

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June 15, 2005. The Group is currently evaluating the effect that the adoption of SFAS 153 will have but does not expect it to have a material impact.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Group is currently evaluating the impact of adoption of SFAS 123(R) will have, but because it already applies the requirements SFAS 123 it does not expect adoption of the new standard to have a material impact.

Recent UK and International Accounting Pronouncements

      In December, 2003, UITF 38, “Accounting for ESOP trusts”, was issued by the Urgent Issues Task Force of the UK Accounting Standards Board. The consensus is that parent company shares held in trust should be treated as treasury shares and deducted from shareholders’ funds rather than being held as fixed asset investments. The Group adopted UITF 38 in 2004 and has re-stated the 2003 and 2002 comparatives accordingly (seen notes 24 and 34 in “Item 17. Financial Statements”).

      FRS 20 (IFRS 2), “Share-based payment”, was issued by the ASB on April 7, 2004. It is effective for listed entities for accounting periods beginning on or after January 2005. It deals with the accounting for transactions where an entity obtains goods or services from other parties (including employees or suppliers) in consideration for the entity’s equity instruments (including shares or share options) or cash-settled amounts based on the value of the entity’s equity instruments. It represents a significant change from current practice in the UK under UITF Abstract 17, where the charge is based on the intrinsic value of the share option (fair value of the share at the date of grant less exercise price). Use of the fair value of share options is expected to generally result in higher charges in the profit and loss account for share compensation. We are currently considering the impact of this standard.

      The following Financial Reporting Standards have recently been issued by the ASB. These accounting standards all mirror International Accounting Standards and will be adopted by the group as part of the transition to IFRS as noted below:

•  FRS 21 (IAS 10), “Events after the balance sheet date”;

•  FRS 22 (IAS 33), “Earnings per share”;

•  FRS 23 (IAS 21), “The effects of changes in foreign exchange rates”;

•  FRS 24 (IAS 29), “Financial reporting in hyperinflationary economies”;

•  FRS 25 (IAS 32), “Financial instruments; presentation and disclosure”;

•  FRS 26 (IAS 39), “Financial instruments; measurement”.

      In common with other listed companies governed by the law of an EU member state, for financial years beginning on or after January 1, 2005 the Group will be required to prepare its financial statements in accordance with international accounting standards adopted at the European level (endorsed IAS’s or IFRS’s). This requirement will therefore first be applicable to the Group’s financial statements for the year ended December 31, 2005.

      Full details of the impact of IFRS on the Group’s 2004 financial statements are available on our website, www.pearson.com/ifrs. The information on this website is not incorporated by reference into this report.

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ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

      We are managed by a board of directors and a chief executive who reports to the board and manages through a management committee. We refer to the executive director members of the board of directors, the most senior executives from each of our three main operating divisions and the chairman of the board of directors as our “senior management”.

      The following table sets forth information concerning senior management, as of April 2005.

Name	Age		Position
Dennis Stevenson		59	Chairman
Marjorie Scardino		58	Chief Executive
David Bell		58	Director for People and Chairman of the FT Group
Terry Burns		61	Non-executive Director
Patrick Cescau		56	Non-executive Director
Rona Fairhead		43	Chief Financial Officer
Susan Fuhrman		61	Non-executive Director
John Makinson		50	Chairman and Chief Executive Officer, Penguin Group
Reuben Mark		66	Non-executive Director
Vernon Sankey		55	Non-executive Director
Rana Talwar		57	Non-executive Director

      Dennis Stevenson was appointed a non-executive director in 1986 and became chairman in 1997. He is a member of our treasury committee and chairman of the nomination committee. He is also chairman of HBOS plc and a non-executive director of Manpower Inc. in the US. On February 27, 2005 Pearson announced that Dennis intends to retire later in the year.

      Marjorie Scardino joined the board and became chief executive in January 1997. She is a member of our nomination committee. She was chief executive of The Economist Group from 1993 until joining Pearson. She is also a non-executive director of Nokia Corporation.

      David Bell became a director in March 1996. He is chairman of the FT Group, having been chief executive of the Financial Times from 1993 to 1998. In July 1998, he was appointed our director for people with responsibility for the recruitment, motivation, development and reward of employees across the Pearson Group. He is also a non-executive director of VITEC Group plc and chairman of the International Youth Foundation.

      Terry Burns became a non-executive director in May 1999 and our senior independent director in February 2004. He currently serves on the audit, nomination and personnel committees. He was the UK government’s chief economic advisor from 1980 until 1991 and Permanent Secretary of HM Treasury from 1991 until 1998. He is non-executive chairman of Abbey National plc and Glas Cymru Limited and a non-executive director of Banco Santander Central Hispana and The British Land Company PLC.

      Patrick Cescau became a non-executive director in April 2002. He joined our audit committee in January this year, and is also a member of the nomination committee. He joined Unilever in 1973, latterly serving as Finance Director until January 2001, at which time he was appointed Director of Unilever’s Foods Division. He is currently chairman of Unilever.

      Rona Fairhead became a director and chief financial officer in June 2002. She had served as deputy finance director from October 2001. From 1996 until 2001, she worked at ICI plc, where she served as executive vice president, group control and strategy, and as a member of the executive committee from 1998.

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Prior to that, she worked for Bombardier Inc. in finance, strategy and operational roles. She is also a non-executive director of HSBC Holdings plc.

      Susan Fuhrman became a non-executive director in July 2004. She is a member of our nomination committee. Susan is dean of Penn Graduate school of Education at the University of Pennsylvania. She is a member of the Board of Trustees of the Carnegie Foundation for the Advancement of Teaching, and a member of the Council for Corporate and School Partnerships of the Coca-Cola Foundation.

      John Makinson became chairman of the Penguin Group in May 2001 and its chief executive officer in June 2002. He was appointed chairman of Interactive Data in December 2002. He served as Pearson Finance Director from March 1996 until June 2002. From 1994 to 1996 he was managing director of the Financial Times, and prior to that he founded and managed the investor relations firm Makinson Cowell. He is also a non-executive director of George Weston Limited in Canada.

      Reuben Mark became a non-executive director in 1988 and currently serves on the audit and nomination committees and as chairman of the personnel committee. He became chief executive of the Colgate Palmolive Company in 1984, and chairman in 1986. He has held these positions since then. He is also a director of Time Warner Inc.

      Vernon Sankey became a non-executive director in 1993 and currently serves as chairman of the audit committee and as a member of the treasury and nomination committees. He was previously chief executive of Reckitt & Colman plc and is chairman of Photo-Me International plc. He is also a non-executive director of Taylor Woodrow plc and Zurich Financial Services AG.

      Rana Talwar became a non-executive director in March 2000 and currently serves on the personnel, nomination and treasury committees. He is currently chairman of Sabre Capital. He served as group chief executive of Standard Chartered plc from 1998 until 2001, and was at Citicorp from 1969 to 1997, where he held a number of senior international management roles.

Compensation of Senior Management

      It is the role of the personnel committee to approve the remuneration and benefits packages of the executive directors, the chief executives of the principal operating companies and other members of the Pearson Management Committee, as well as to ensure senior management receives the development they need and that succession plans are being made. The committee also notes the remuneration for those executives with base pay over a certain level, representing approximately the top 50 executives of the company.

Remuneration Policy

      Pearson seeks to generate a performance culture by developing programs that support its business goals and rewarding their achievement. It is the company’s policy that total remuneration (base compensation plus short-term and long-term incentives) should reward both short and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional company performance.

      The company’s policy is that base compensation should provide the appropriate rate of remuneration for the job, taking into account relevant recruitment markets and business sectors and geographic regions. Benefit programs should ensure that Pearson retains a competitive recruiting advantage.

      Share ownership is encouraged throughout the company. Equity-based reward programs align the interests of directors, and employees in general, with those of shareholders by linking rewards with Pearson’s financial success.

      The main elements of remuneration are base salary and other emoluments, annual bonus with bonus share matching, and long-term incentives in the form of restricted shares or options.

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      Total remuneration is made up of fixed and performance-linked elements. Consistent with its policy, the committee places considerable emphasis on the performance-linked elements of remuneration that comprise annual bonus, bonus share matching and long-term incentives.

Base Salary

      Our policy is that the base salaries of the executive directors should be competitive with those of directors and executives in similar positions in comparable companies. We use a range of companies of comparable size and global reach in different sectors including the media sector in the UK and selected media companies in North America to make this comparison. We use these companies because they represent the wider executive talent pool from which we might expect to recruit externally and the pay market to which we might be vulnerable if our salaries were not competitive.

      Our policy is to review salaries annually.

Other Emoluments

      Other emoluments may include benefits such as company car, healthcare, and where relevant, amounts paid in respect of housing costs.

      It is the company’s policy that its benefit programs should be competitive in the context of the local labor market, but as an international company we recognize the requirements, circumstances and mobility of individual executives.

Annual Bonus

      The committee establishes the annual bonus plans for the executive directors, chief executives of the company’s principal operating companies and other members of the Pearson Management Committee, including performance measures and targets and the amount of bonus that can be earned. The performance targets relate to the company’s main drivers of business performance at both the corporate and operating company level.

      For 2005, the performance measures for Pearson plc are sales, growth in underlying adjusted earnings per share, cash flow and working capital as a ratio to sales. For subsequent years, the measures will be set at the time.

      For 2005, the committee reviewed the target annual bonus opportunity for the CEO, based on an assessment of market practice by Towers Perrin, and increased it from 75% to 100% of base salary.

      The committee is satisfied with the CEO’s resulting target total direct compensation relative to the market and the increase in the proportion of her compensation that is performance-related. The target annual incentive opportunity for the other executive directors and other members of the Pearson Management Committee remains 75% of salary. The maximum bonus for performance in excess of target remains in all cases, including the CEO, 150% of salary.

      The committee may award individual discretionary bonuses.

      The committee will continue to review the bonus plans on an annual basis and to revise the bonus limits and targets in light of the current conditions.

      In the UK, bonuses do not form part of pensionable earnings. In the US, bonuses up to 50% of base salary are pensionable under the supplemental executive retirement plan, consistent with US market practice.

Bonus Share Matching

      The company encourages executive directors and other senior executives to hold Pearson shares in many ways.

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      The annual bonus share matching plan permits executive directors and senior executives around the Group to invest up to 50% of any after tax annual bonus in Pearson shares. If these shares are held and the company’s adjusted earnings per share increase in real terms by at least 3% per annum, the company will match them on a gross basis of one share for every two held after three years, and another one for two originally held (i.e. a total of one-for-one) after five years.

The Long-Term Incentive Plan

      Executive directors, senior and other executives and managers are eligible to participate in Pearson’s long-term incentive plan introduced in 2001. The plan consists of two parts: stock options and/or restricted stock. The aim is to give the committee a range of tools with which to link corporate performance to management’s long-term reward in a flexible way. The principles underlying it are as follows:

•  the Personnel Committee establishes guidelines that set out the maximum expected value of awards each year using an economic valuation methodology for fixing the relative values of both option grants and restricted stock awards;

•  the maximum expected value of awards for executive directors is based on assessment of market practice for comparable companies;

•  no more than 10% of Pearson equity will be issued, or be capable of being issued, under all Pearson’s share plans in any ten-year period commencing in January 1997;

•  awards of restricted stock are satisfied using existing shares.

      For stock options, within this overall 10% limit, up to 1.5% of new issue equity may be placed under option under the plan in any year, subject to the company’s earnings per share performance. No options may be granted unless the company’s adjusted earnings per share increase in real terms by at least 3% per annum over the three-year period prior to grant.

      The vesting of restricted stock is normally dependent on the satisfaction of a stretching corporate performance target over a three-year period.

Shareholding Policy

      As previously noted, in line with the policy of encouraging widespread employee ownership, the company encourages executive directors, as well as other senior management, to build up a substantial shareholding in the company. However, we do not think it is appropriate to specify a particular relationship of shareholding to salary.

Service Agreements

      Executive directors have rolling service agreements with the company. Other than by termination in accordance with the terms of these agreements, employment continues until retirement.

      The terms of the agreements permit the company to terminate these agreements by giving 12 months’ notice, although there may be circumstances when a longer notice period may be justified. The agreements also specify the compensation payable by way of liquidated damages in circumstances where the company terminates agreements without notice or cause. The compensation payable in these circumstances is typically 100% of annual salary, 100% of other benefits, and a proportion of potential bonus.

      For health reasons, Peter Jovanovich stood down as a director of the company on January 31, 2005, but remains entitled to contractual short- and long-term disability and other benefits. These arrangements are set out in an agreement dated January 28, 2005 between the company and Mr Jovanovich. The major terms of this agreement are set forth in “Item 10. Additional Information — material contracts”.

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Retirement Benefits

      We describe the retirement benefits for each of the executive directors.

      Executive directors participate in the approved pension arrangements set up for Pearson employees. Marjorie Scardino, John Makinson, Rona Fairhead and Peter Jovanovich will also receive benefits under unapproved arrangements because of the cap on the amount of benefits that can be provided from the approved arrangements in the US and the UK.

      The pension arrangements for all the executive directors include life insurance cover while in employment, and entitlement to a pension in the event of ill-health or disability. A pension for their spouse and/or dependents is also available on death.

      In the US, the approved defined benefit arrangement is the Pearson Inc. Pension Plan. This plan provides a lump sum convertible to a pension on retirement.

      The lump sum accrued at 6% of capped compensation until December 31, 2001 when further benefit accruals ceased. Normal retirement is age 65 although early retirement is possible subject to a reduction for early payment. No increases are guaranteed for pensions in payment. There is a spouse’s pension on death in service and the option to provide a death in retirement pension by reducing the member’s pension.

      The approved defined contribution arrangement in the US is a 401(k) plan. At retirement, the account balances will be used to provide benefits. In the event of death before retirement, the account balances will be used to provide benefits for dependants.

      In the UK, the approved scheme is the Pearson Group Pension Plan and executive directors participate in the Final Pay section. Normal retirement age is 62 but, subject to company consent, retirement is possible after age 50. The accrued pension is reduced on retirement prior to age 60. Pensions in payment are guaranteed to increase each year at 5% or the increase in the Index of Retail Prices, if lower. Pensions for a member’s spouse, dependent children and/or nominated financial dependent are payable in the event of death.

Marjorie Scardino

      Marjorie Scardino participates in the Pearson Inc. Pension Plan and the approved 401(k) plan. Additional pension benefits will be provided through an unfunded unapproved defined contribution plan and a funded defined contribution plan approved by the UK Inland Revenue as a corresponding scheme to replace part of the unfunded plan. The account balance of the unfunded unapproved defined contribution plan is determined by reference to the value of a notional cash account that increases annually by a specified notional interest rate. This plan provides the opportunity to convert a proportion of this notional cash account into a notional share account reflecting the value of a number of Pearson ordinary shares. The number of shares in the notional share account is determined by reference to the market value of Pearson shares at the date of conversion.

David Bell

      David Bell is a member of the Pearson Group Pension Plan. He is eligible for a pension of two-thirds of his final base salary at age 62 due to his long service but early retirement with a reduced pension before that date is possible, subject to company consent.

Rona Fairhead

      Rona Fairhead is a member of the Pearson Group Pension Plan. Her pension accrual rate is 1/30th of pensionable salary per annum, restricted to the earnings cap introduced by the Finance Act 1989. The company also contributes to a Funded Unapproved Retirement Benefits Scheme (FURBS) on her behalf. In the event of death before retirement, the proceeds of the FURBS account will be used to provide benefits for her dependants.

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Peter Jovanovich

      Peter Jovanovich is a member of the Pearson Inc. Pension Plan and the approved 401(k) plan. He also participates in an unfunded, unapproved Supplemental Executive Retirement Plan (SERP) that provides an annual accrual of 2% of final average earnings, less benefits accrued in the Pearson Inc. Pension Plan and US Social Security. He ceased to build up further benefits in the SERP at December 31, 2002. Additional defined contribution benefits are provided through a funded, unapproved 401(k) excess plan and an unfunded, unapproved arrangement. In the event of death while in receipt of disability benefits, the account balances in the defined contribution arrangements will be used to provide benefits for dependants. The SERP arrangement provides a spouse’s pension on death while in receipt of disability benefits and the option of a death in retirement pension by reducing the member’s pension.

John Makinson

      John Makinson is a member of the Pearson Group Pension Plan under which his pensionable salary is restricted to the earnings cap. The company ceased contributions on 31 December 2001 to his FURBS arrangement. During 2002 it set up an Unfunded Unapproved Retirement Benefits Scheme (UURBS) for him. The UURBS tops up the pensions payable from the Pearson Group Pension Plan and the closed FURBS to target a pension of two-thirds of a revalued base salary on retirement at age 62. The revalued base salary is defined as £450,000 effective at June 1, 2002, increased at January 1, each year by reference to the increase in the Index of Retail Prices. In the event of his death a pension from the Pearson Group Pension Plan, the FURBS and the UURBS will be paid to his spouse or nominated financial dependant. Early retirement is possible from age 50, with company consent. The pension is reduced to reflect the shorter service, and before age 60, further reduced for early payment.

Chairman’s Remuneration

      Our policy is that the chairman’s pay should be set at a level that is competitive with those of chairmen in similar positions in comparable companies.

      He is not entitled to an annual bonus, retirement or other benefits. He is eligible to participate in the company’s worldwide save for shares plan on the same terms as all other eligible employees.

      For 2004, the committee’s view was that, taking into account the remuneration of chairmen in comparable positions, the appropriate total pay level was £425,000 per year.

      Having been informed of the committee’s view, the chairman indicated that he thought it was not appropriate for him to receive an increase of this magnitude in cash — a view that the committee accepted. Instead, the committee recommended to the board that the chairman’s salary should be £325,000 for 2004, an increase of £50,000, and that he should receive a one-off restricted share award of 30,000 shares. This award is linked to the company’s share price and will not be released to him unless the Pearson share price reaches £9.00 within a maximum period of three years.

      For 2005, the committee recommended to the board that the chairman’s salary should be increased towards the appropriate total pay level of £425,000 previously noted and that this increase should be delivered in Pearson shares purchased in the market at the prevailing share price. No awards of performance-related restricted shares will be granted. Full details will be set out in the report on directors’ remuneration for 2005.

Non-executive Directors

      Fees for non-executive directors are determined by the full board having regard to market practice and within the restrictions contained in the company’s articles of association. Non-executive directors receive no other pay or benefits (other than reimbursement for expenses incurred in connection with their directorship of the company) and do not participate in the company’s equity-based incentive plans.

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      For 2004, the non-executive directors received an annual fee of £35,000 each. Two non-UK based directors were paid a supplement of £7,000 per annum. The non-executive directors who chaired the personnel and audit committees each received an additional fee of £5,000 per annum.

      In the case of Patrick Cescau, his fee was paid over to his employer. For those non-executive directors who retained their fees personally, £10,000 of the total fee, or all of the fee in the case of Rana Talwar, was payable in the form of Pearson shares which the non-executive directors have committed to retain for the period of their directorships.

      For 2005, the chairman and the executive directors of the board reviewed the level and structure of non-executive directors’ fees, which had not been changed since January 2000. After reviewing external benchmarks, they agreed an increase in the basic fee, an increase in the fee for the committee chairmen, the introduction of separate fees for committee membership and the senior independent director and the replacement of the fee for non-UK based directors with a fee for overseas meetings. One-third of the basic fee will be paid in Pearson shares. Full details will be set out in the report on directors’ remuneration for 2005.

      Non-executive directors serve Pearson under letters of appointment and do not have service contracts. There is no entitlement to compensation on the termination of their directorships.

Remuneration of Senior Management

      Excluding contributions to pension funds and related benefits, senior management remuneration for 2004 was as follows:

	Salaries/Fees		Bonus(1)		Other(2)		Total
	£’000		£’000		£’000		£’000
Chairman
Dennis Stevenson		325		—		—		325
Executive directors
Marjorie Scardino		645		831		62		1,538
David Bell		375		483		16		874
Rona Fairhead		390		503		14		907
Peter Jovanovich		473		571		8		1,052
John Makinson		460		119		212		791
Senior management as a group		2,668		2,507		312		5,487

(1)  For Marjorie Scardino, David Bell and Rona Fairhead, bonuses were related to the performance of Pearson plc.

      In the case of Peter Jovanovich and John Makinson, part of their bonuses related to the performance of Pearson Education and Penguin Group respectively and part to the performance of Pearson plc.

      For Pearson plc, growth in adjusted earnings per share at constant exchange rates and average working capital as a ratio to sales were above maximum, and growth in underlying sales and operating cash conversion were above target but below maximum.

      For Pearson Education, average working capital as a ratio to sales and operating cash conversion were above maximum, and sales and operating margin were above target but below maximum.

      For Penguin Group, growth in underlying sales, operating margin, working capital as a ratio to sales and operating cash conversion were below threshold.

      In the case of Pearson plc and Pearson Education, cash received in 2004 in relation to the outstanding receivable due from the TSA contract in 2002 was not included for bonus purposes.

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(2)  Other emoluments include company car and healthcare benefits and, in the case of Marjorie Scardino, include £37,955 in respect of housing costs. John Makinson is entitled to a location and market premium in relation to the management of the business of the Penguin Group in the US. He received £184,517 for 2004.

Share Options of Senior Management

      This table sets forth for each director the number of share options held as of December 31, 2004 as well as the exercise price, rounded to the nearest whole penny/cent, and the range of expiration dates of these options.

	Number of					Exercise		Earliest
Director	Options		(1)			Price		Exercise Date		Expiry Date
Dennis Stevenson		3,556		b			494.8p		01/08/11		01/02/12
Total		3,556					—
Marjorie Scardino		176,556		a	*		974p		14/09/01		14/09/08
		5,660		a	*		1090p		14/09/01		14/09/08
		2,839		b			687p		01/08/05		01/02/06
		2,224		b			425p		01/08/06		01/02/07
		37,583		c			1373p		08/06/02		08/06/09
		37,583		c			1648p		08/06/02		08/06/09
		37,583		c			1922p		08/06/02		08/06/09
		36,983		c			2764p		03/05/03		03/05/10
		36,983		c			3225p		03/05/03		03/05/10
		41,550		d	*		1421p		09/05/02		09/05/11
		41,550		d	*		1421p		09/05/03		09/05/11
		41,550		d	*		1421p		09/05/04		09/05/11
		41,550		d			1421p		09/05/05		09/05/11
Total		540,194					—
David Bell		20,496		a	*		974p		14/09/01		14/09/08
		184		b	*		913p		01/08/04		01/02/05
		202		b	*		957p		01/08/04		01/02/05
		272		b			696p		01/08/05		01/02/06
		444		b			425p		01/08/06		01/02/07
		1,142		b			494.8p		01/08/07		01/02/08
		18,705		c			1373p		08/06/02		08/06/09
		18,705		c			1648p		08/06/02		08/06/09
		18,705		c			1922p		08/06/02		08/06/09
		18,686		c			2764p		03/05/03		03/05/10
		18,686		c			3225p		03/05/03		03/05/10
		16,350		d	*		1421p		09/05/02		09/05/11
		16,350		d	*		1421p		09/05/03		09/05/11
		16,350		d	*		1421p		09/05/04		09/05/11
		16,350		d			1421p		09/05/05		09/05/11
Total		181,627					—

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	Number of					Exercise		Earliest
Director	Options		(1)			Price		Exercise Date		Expiry Date
Rona Fairhead		1,904		b			494.8p		01/08/07		01/02/08
		19,997		d	*		822p		01/11/02		01/11/11
		19,998		d	*		822p		01/11/03		01/11/11
		20,005		d			822p		01/11/04		01/11/11
Total		61,904					—
Peter Jovanovich		8,250		a	*		758p		12/09/00		12/09/07
		102,520		a	*		677p		12/09/00		12/09/07
		32,406		c			1373p		08/06/02		08/06/09
		32,406		c			1648p		08/06/02		08/06/09
		32,406		c			1922p		08/06/02		08/06/09
		33,528		c			2764p		03/05/03		03/05/10
		33,528		c			3225p		03/05/03		03/05/10
		31,170		d	*	$	21.00		09/05/02		09/05/11
		31,170		d	*	$	21.00		09/05/03		09/05/11
		31,170		d	*	$	21.00		09/05/04		09/05/11
		31,170		d		$	21.00		09/05/05		09/05/11
		19,998		d	*	$	11.97		01/11/02		01/11/11
		19,998		d	*	$	11.97		01/11/03		01/11/11
		20,004		d		$	11.97		01/11/04		01/11/11
Total		459,724					—
John Makinson		20,160		a	*		487p		20/04/98		20/04/05
		36,736		a	*		584p		08/08/99		08/08/06
		73,920		a	*		677p		12/09/00		12/09/07
		30,576		a	*		974p		14/09/01		14/09/08
		4,178		b			425p		01/08/10		01/02/11
		21,477		c			1373p		08/06/02		08/06/09
		21,477		c			1648p		08/06/02		08/06/09
		21,477		c			1922p		08/06/02		08/06/09
		21,356		c			2764p		03/05/03		03/05/10
		21,356		c			3225p		03/05/03		03/05/10
		19,785		d	*		1421p		09/05/02		09/05/11
		19,785		d	*		1421p		09/05/03		09/05/11
		19,785		d	*		1421p		09/05/04		09/05/11
		19,785		d			1421p		09/05/05		09/05/11
Total		351,853					—

(1)  Shares under option are designated as: a executive; b worldwide save for shares; c premium priced; and d long-term incentive; and * where options are exercisable.

a Executive

Subject to any performance condition being met, executive options become exercisable on the third anniversary of the date of grant and lapse if they remain unexercised at the tenth.

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Options granted prior to 1996 are not subject to performance conditions representing market best practice at that time.

The exercise of options granted since 1996 is subject to a real increase in the company’s adjusted earnings per share over any three-year period prior to exercise.

b Worldwide save for shares

The acquisition of shares under the worldwide save for shares plan is not subject to the satisfaction of a performance target.

c Premium priced

Subject to the performance conditions being met, Premium Priced Options (PPOs) become exercisable on the third anniversary of the date of grant and lapse if they remain unexercised at the tenth.

PPOs were granted in three tranches. For these to become exercisable, the Pearson share price has to stay above the option price for 20 consecutive days within three, five and seven years respectively. In addition, for options to be exercisable, the company’s adjusted earnings per share have to increase in real terms by at least 3% per annum over the three-year period prior to exercise.

d       Long-term incentive

Options granted in 2001 were based on pre-grant earnings per share growth of 75% against a target of 16.6% over the period 1997 to 2000 and are not subject to further performance conditions on exercise.

Long-term incentive options granted on May 9, 2001 become exercisable in tranches on the first, second, third and fourth anniversary of the date of grant and lapse if they remain unexercised at the tenth. The fourth tranche lapses if any of the options in the first, second or third tranche are exercised prior to the fourth anniversary of the date of grant.

Long-term incentive options granted on November 1, 2001 become exercisable in tranches on the first, second and third anniversary of the date of grant and lapse if they remain unexercised at the tenth.

(2)  In addition to the above listed options both Marjorie Scardino and Peter Jovanovich participate in the Pearson US Employee Stock Purchase Plan saving the maximum amount of US$12,000 per annum.

Share Ownership of Senior Management

      The table below sets forth the number of ordinary shares and restricted shares held by each of our directors as at March 31, 2005. Additional information with respect to share options held by, and bonus awards for, these persons is set out above in “Remuneration of Senior Management” and “Share Options for Senior Management”. The total number of ordinary shares held by senior management as of March 31, 2005 was 571,754 representing less than 1% of the issued share capital on March 31, 2005.

As at March 31, 2005	Ordinary Shares(1)		Restricted Shares(2)
Dennis Stevenson		168,190		30,000
Marjorie Scardino		145,044		975,648
David Bell		84,106		455,969
Terry Burns		4,432		—
Patrick Cescau		—		—
Rona Fairhead		15,660		444,803
Susan Fuhrman		992		—
John Makinson		124,127		511,184
Reuben Mark		15,245		—
Vernon Sankey		4,287		—
Rana Talwar		9,671		—

(1)  Amounts include shares acquired by individuals under the annual bonus share matching plan and amounts purchased in the market by individuals.

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(2)  Restricted shares comprise awards made under the reward, annual bonus share matching and long-term incentive plans. The number of shares shown represents the maximum number of shares which may vest, subject to the performance conditions being fulfilled.

Employee Share Ownership Plans

Worldwide Save for Shares & US Employee Share Purchase Plans

      In 1998, we introduced a worldwide save for shares plan. Under this plan, our employees around the world have the option to save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the commencement of the employee’s participation in the plan.

      In the United States, this plan operates as a stock purchase plan under Section 423 of the US Internal Revenue Code of 1986. This plan was introduced in 2000 following Pearson’s listing on the New York Stock Exchange. Under it, participants save a portion of their monthly salary over six month periods, at the end of which they have the option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period.

Board Practices

      Our board currently comprises the chairman, who is part-time, four executive directors and six non-executive directors. Our articles of association provide that at every annual general meeting, one-third of the board of directors, or the number nearest to one-third, shall retire from office. The directors to retire each year are the directors who have been longest in office since their last election or appointment. A retiring director is eligible for re-election. If at any annual general meeting, the place of a retiring director is not filled, the retiring director, if willing, is deemed to have been re-elected, unless at or prior to such meeting it is expressly resolved not to fill the vacated office, or unless a resolution for the re-election of that director has been put to the meeting and lost. Our articles of association also provide that every director be subject to re-appointment by shareholders at the next annual general meeting following their appointment.

      Details of our approach to corporate governance and an account of how we comply with NYSE requirements can be found on our website (www.pearson.com/investor/corpgov.htm).

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

Audit Committee

      Vernon Sankey chairs this committee and Terry Burns, Patrick Cescau and Reuben Mark are members. The committee provides the board with a vehicle to appraise our financial management and reporting and to assess the integrity of our accounting procedures and financial controls. Vernon Sankey is also the designated audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission. Our internal and external auditors have direct access to the committee to raise any matter of concern and to report the results of work directed by the committee. The committee reports to the full board of directors.

Personnel Committee

      This committee is chaired by Reuben Mark and its other members are Terry Burns and Rana Talwar. All three are non-executive directors. The committee meets regularly to decide the remuneration and benefits of the executive directors and the chief executives of our three operating divisions. The committee also recommends the chairman’s remuneration to the board of directors for its decision and reviews management development and succession plans.

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Nomination Committee

      This committee is chaired by Dennis Stevenson and comprises Marjorie Scardino and all of the non-executive directors. The committee meets from time to time as necessary to consider the appointment of new directors.

Treasury Committee

      This committee is chaired by Dennis Stevenson and also comprises Rona Fairhead, Vernon Sankey and Rana Talwar. The committee sets the policies for our treasury department and reviews its procedures on a regular basis.

Employees

      The average numbers of persons employed by us during each of the three fiscal years ended 2004 were as follows:

•  33,389 in fiscal 2004

•  30,868 in fiscal 2003, and

•  30,359 in fiscal 2002.

      We, through our subsidiaries, have entered into collective bargaining agreements with employees in various locations. Our management has no reason to believe that we would not be able to renegotiate any such agreements on satisfactory terms. We encourage employees to contribute actively to the business in the context of their particular job roles and believe that the relations with our employees are generally good.

      The table set forth below shows for 2004 the average number of persons employed in each of our operating divisions in the United Kingdom, the United States, other locations and in total.

Business Unit	UK		US		Other		Total
Pearson Education		2,071		16,133		4,080		22,284
FT Group		1,709		1,352		2,594		5,655
The Penguin Group		1,067		2,026		992		4,085
Other		792		572		1		1,365
Total Pearson		5,639		20,083		7,667		33,389

ITEM 7.     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

      To our knowledge, as of March 31, 2005, the only beneficial owners of 3% or more of our issued and outstanding ordinary share capital were The Capital Group Companies Inc. which owned 120,639,432 ordinary shares representing 15.0% of our outstanding ordinary shares, Franklin Resources Inc. which owned 96,437,794 ordinary shares representing 12.0% of our outstanding ordinary shares and Legal and General which owned 24,046,759 ordinary shares representing 3.0% of our outstanding ordinary shares. On March 31, 2005, record holders with registered addresses in the United States held 20,196,877 ADRs, which represented 2.5% of our outstanding ordinary shares. Because some of these ADRs are held by nominees, these numbers may not accurately represent the number of beneficial owners in the United States.

      Loans and equity advanced to joint ventures and associates during the year and as at December 31, 2004 are shown in notes 13 and 14 in “Item 17. Financial Statements.”. Amounts due from joint ventures and associates are set out in note 17 and dividends receivable from joint ventures and associates are set out in notes 13 and 14 in “Item 17. Financial Statements”. There were no other related party transactions in 2004.

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ITEM 8.     FINANCIAL INFORMATION

      The financial statements filed as part of this Annual Report are included on pages F-1 through F-69 hereof.

      Other than those events described in note 31 in “Item 17. Financial Statements” of this Form 20-F and seasonal fluctuations in borrowings, there has been no significant change to our financial condition or results of operations since December 31, 2003. Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements of the educational book business. Assuming no acquisitions or disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December.

      Our policy with respect to dividend distributions is described in response to “Item 3. Key Information” above.

Legal Proceedings

      We and our subsidiaries are defendants in a number of legal proceedings including, from time to time, government and arbitration proceedings, which are incidental to our and their operations. We do not expect that the outcome of pending proceedings, either individually or in the aggregate, will have a significant effect on our financial position or profitability nor have any such proceedings had any such effect in the recent past. To our knowledge, there are no material proceedings in which any member of senior management or any of our affiliates is a party adverse to us or any of our subsidiaries or in respect of which any of those persons has a material interest adverse to us or any of our subsidiaries.

ITEM 9.     THE OFFER AND LISTING

      The principal trading market for our ordinary shares is the London Stock Exchange. Our ordinary shares also trade in the United States in the form of ADSs evidenced by ADRs under a sponsored ADR facility with The Bank of New York as depositary. We established this facility in March 1995 and amended it in August 2000 in connection with our New York Stock Exchange listing. Each ADS represents one ordinary share.

      The ADSs trade on the New York Stock Exchange under the symbol “PSO”.

      The following table sets forth the highest and lowest middle market quotations, which represent the average of closing bid and asked prices, for the ordinary shares, as derived from the Daily Official List of the London Stock Exchange and the average daily trading volume on the London Stock Exchange:

•  on an annual basis for our five most recent fiscal years,

•  on a quarterly basis for our most recent quarter and two most recent fiscal years, and

•  on a monthly basis for the six most recent months.

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			Ordinary Shares
							Average Daily
Reference Period			High		Low		Trading Volume
							(Ordinary
			(In pence)				shares)
Five Most Recent Fiscal Years
	2004			682		579		6,219,200
	2003			680		430		6,631,800
	2002			922		505		6,164,500
	2001			1,726		645		5,245,000
	2000			2,302		1,470		2,686,700
Most Recent Quarter and Two Most Recent Fiscal Years
2005 First quarter				662		608		5,626,100
2004 Fourth quarter				640		590		5,020,800
		Third quarter		657		579		5,864,300
		Second quarter		682		623		6,993,900
		First quarter		657		584		7,039,600
2003 Fourth quarter				680		579		6,786,300
		Third quarter		639		550		6,160,400
		Second quarter		606		497		6,402,900
		First quarter		604		430		7,182,800
Most Recent Six Months
		May 2005		666		635		7,486,700
		April 2005		655		628		6,085,700
		March 2005		647		626		7,654,100
		February 2005		662		623		4,800,100
		January 2005		638		608		4,124,200
		December 2004		630		603		3,122,200

ITEM 10.     ADDITIONAL INFORMATION

Memorandum and Articles of Association

      We summarize below the material provisions of our memorandum and articles of association, as amended, which have been filed as an exhibit to our annual report on Form 20-F for the year ended December 31, 2003. The summary below is qualified entirely by reference to the Memorandum and Articles of Association. We have multiple business objectives and purposes and are authorized to do such things as the board may consider to further our interests or incidental or conducive to the attainment of our objectives and purposes.

Directors’ Powers

      Our business shall be managed by the board of directors and the board may exercise all such of our powers as are not required by law or by the Articles of Association to be exercised by resolution of the shareholders in general meeting.

Interested Directors

      A director shall not be disqualified from contracting with us by virtue of his or her office or from having any other interest, whether direct or indirect, in any contract or arrangement entered into by or on behalf of us. An interested director must declare the nature of his or her interest in any contract or arrangement entered into by or on behalf of us in accordance with the Companies Act 1985. Provided that the director has declared his interest and acted in accordance with law, no such contract or arrangement shall be avoided and no

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director so contracting or being interested shall be liable to account to us for any profit realized by him from the contract or arrangement by reason of the director holding his office or the fiduciary relationship thereby established. A director may not vote on any contract or arrangement or any other proposal in which he or she has, together with any interest of any person connected with him or her, an interest which is, to his or her knowledge, a material interest, otherwise than by virtue of his or her interests in shares, debentures or other securities of or otherwise in or through us. If a question arises as to the materiality of a director’s interest or his or her entitlement to vote and the director does not voluntarily agree to abstain from voting, that question will be referred to the chairman of the board or, if the chairman also is interested, to a person appointed by the other directors who is not interested. The ruling of the chairman or that other person, as the case may be, will be final and conclusive. A director will not be counted in the quorum at a meeting in relation to any resolution on which he or she is prohibited from voting.

      Notwithstanding the foregoing, a director will be entitled to vote, and be counted in the quorum, on any resolution concerning any of the following matters:

•  the giving of any guarantee, security or indemnity in respect of money lent or obligations incurred by him or her or by any other person at the request of or for the benefit of us or any of our subsidiaries;

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

•  any proposal relating to us or any of our subsidiaries where we are offering securities in which a director is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which a director is to participate;

•  any proposal relating to an arrangement for the benefit of our employees or any of our subsidiaries that does not award him or her any privilege or benefit not generally awarded to the employees to whom such arrangement relates; and

•  any proposal concerning insurance that we propose to maintain or purchase for the benefit of directors or for the benefit of persons, including directors.

      Where proposals are under consideration concerning the appointment of two or more directors to offices or employment with us or any company in which we are interested, these proposals may be divided and considered separately and each of these directors, if not prohibited from voting under the proviso of the fourth clause above, will be entitled to vote and be counted in the quorum with respect to each resolution except that concerning his or her own appointment.

Borrowing Powers

      The board of directors may exercise all powers to borrow money and to mortgage or charge our undertaking, property and uncalled capital and to issue debentures and other securities, whether outright or as collateral security for any of our or any third party’s debts, liabilities or obligations. The board of directors must restrict the borrowings in order to secure that the aggregate amount of undischarged monies borrowed by us (and any of our subsidiaries), but excluding any intra-group debts, shall not at any time exceed a sum equal to twice the aggregate of the adjusted capital and reserves, unless the shareholders in general meeting sanction an excession of this limitation.

Other Provisions Relating to Directors

      Under the articles of association, directors are paid out of our funds for their services as we may from time to time determine by ordinary resolution and, in the case of non-executive directors, up to an aggregate of £500,000 or such other amounts as resolved by the shareholders at a general meeting. Directors currently are not required to be qualified by owning our shares. While the Companies Act 1985 states that no director may be appointed after he reaches the age of 70, our articles of association provide for the reappointment, after retirement, of directors attaining the age of 70. This is permissible under the Companies Act 1985.

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Annual General Meetings and Extraordinary General Meetings

      Shareholders’ meetings may be either annual general meetings or extraordinary general meetings. However, the following matters are ordinarily transacted at an annual general meeting:

•  sanctioning or declaring dividends;

•  consideration of the accounts and balance sheet;

•  ordinary reports of the board of directors and auditors and any other documents required to be annexed to the balance sheet;

•  as holders of ordinary shares vote for the election of one-third of the members of the board of directors at every annual general meeting, the appointment or election of directors in the place of those retiring by rotation or otherwise;

•  appointment or reappointment of, and determination of the remuneration of, the auditors; and

•  the renewal, limitation, extension, variation or grant of any authority of or to the board, pursuant to the Companies Act 1985, to allot securities.

      Business transacted at an extraordinary general meeting may also be transacted at an annual general meeting.

      We hold a general meeting as our annual general meeting within fifteen months after the date of the preceding annual general meeting, at a place and time determined by the board. The board may call an extraordinary general meeting at any time and for any reason. The board must convene an extraordinary general meeting if requested to do so by shareholders holding not less than one-tenth of our issued share capital.

      Three shareholders present in person and entitled to vote will constitute a quorum for any general meeting. If a quorum for a meeting convened at the request of shareholders is not present within fifteen minutes of the appointed time, the meeting will be dissolved. In any other case, the general meeting will be adjourned to the same day in the next week, at the same time and place, or to a time and place that the chairman fixes. If at that rescheduled meeting a quorum is not present within fifteen minutes from the time appointed for holding the meeting, the shareholders present in person or by proxy will be a quorum. The chairman or, in his absence, the deputy chairman or any other director nominated by the board, will preside as chairman at every general meeting. If no director is present at the general meeting or no director consents to act as chairman, the shareholders present shall elect one of their number to be chairman of the meeting.

Ordinary Shares

      Certificates representing ordinary shares are issued in registered form and, subject to the terms of issue of those shares, are issued following allotment or receipt of the form of transfer bearing the appropriate stamp duty by our registrar, Lloyds Bank Registrars, the Causeway, Worthing, West Sussex BN99 6DA, United Kingdom, telephone number +44-1903-502-541.

Share Capital

      Any share may be issued with such preferred, deferred or other special rights or other restrictions as we may determine by way of a shareholders’ vote in general meeting. Subject to the Companies Act 1985, any shares may be issued on terms that they are, or at our or the shareholders’ option are, liable to be redeemed on such terms and in such manner as we, before the issue of the shares, may by special resolution of the shareholders, determine.

      There are no provisions in the Articles of Association which discriminate against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares.

      Subject to the terms of the shares which have been issued, the directors may from time to time make calls upon the shareholders in respect of any moneys unpaid on their shares, provided that (subject to the

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terms of the shares so issued) no call on any share shall be payable at less than fourteen clear days from the last call. The directors may, if they see fit, receive from any shareholder willing to advance the same, all and any part of the moneys uncalled and unpaid upon any shares held by him.

Changes in Capital

      We may from time to time, by ordinary resolution:

•  consolidate and divide our share capital into shares of a larger amount than its existing shares; or

•  sub-divide all of or any of our existing shares into shares of smaller amounts than is fixed by the Memorandum of Association, subject to the Companies Act 1985; or

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

      We may, from time to time, by ordinary resolution increase our share capital and, by special resolution, decrease our share capital, capital redemption reserve fund and any share premium account in any way.

Voting Rights

      Every holder of ordinary shares present in person at a meeting of shareholders has one vote on a vote taken by a show of hands. On a poll, every holder of ordinary shares who is present in person or by proxy has one vote for every ordinary share of which he or she is the holder. Voting at any meeting of shareholders is by a show of hands unless a poll is properly demanded before the declaration of the results of a show of hands. A poll may be demanded by:

•  the chairman of the meeting;

•  at least three shareholders present in person or by proxy and entitled to vote;

•  any shareholder or shareholders present in person or by proxy representing not less than one-tenth of the total voting rights of all shareholders having the right to vote at the meeting; or

•  any shareholder or shareholders present in person or by proxy holding shares conferring a right to vote at the meeting being shares on which the aggregate sum paid up is equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

Dividends

      Holders of ordinary shares are entitled to receive dividends out of our profits that are available by law for distribution, as we may declare by ordinary resolution, subject to the terms of issue thereof. However, no dividends may be declared in excess of an amount recommended by the board of directors. The board may pay interim dividends to the shareholders as it deems fit. We may invest or otherwise use all dividends left unclaimed for six months after having been declared for our benefit, until claimed. All dividends unclaimed for a period of twelve years after having been declared will be forfeited and revert to us.

      The directors may, with the sanction of a resolution of the shareholders, offer any holders of ordinary shares the right to elect to receive ordinary shares credited as fully paid, in whole or in part, instead of cash in respect of such dividend.

      The directors may deduct from any dividend payable to any shareholder all sums of money (if any) presently payable by that shareholder to us on account of calls or otherwise in relation to our shares.

Liquidation Rights

      In the event of our liquidation, after payment of all liabilities, our remaining assets would be used to repay the holders of ordinary shares the amount they paid for their ordinary shares. Any balance would be divided among the holders of ordinary shares in proportion to the nominal amount of the ordinary shares held by them.

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Other Provisions of the Articles of Association

      Whenever our capital is divided into different classes of shares, the special rights attached to any class may, unless otherwise provided by the terms of the issue of the shares of that class, be varied or abrogated, either with the written consent of the holders of three-fourths of the issued shares of the class or with the sanction of an extraordinary resolution passed at a separate meeting of these holders.

      In the event that a shareholder or other person appearing to the board of directors to be interested in ordinary shares fails to comply with a notice requiring him or her to provide information with respect to their interest in voting shares pursuant to section 212 of the Companies Act 1985, we may serve that shareholder with a notice of default. After service of a default notice, that shareholder shall not be entitled to attend or vote at any general meeting or at a separate meeting of holders of a class of shares or on a poll until he or she has complied in full with our information request.

      If the shares described in the default notice represent at least one-fourth of 1% in nominal value of the issued ordinary shares, then the default notice may additionally direct that in respect of those shares:

•  we will not pay dividends (or issue shares in lieu of dividends); and

•  we will not register transfers of shares unless the shareholder is not himself in default as regards supplying the information requested and the transfer, when presented for registration, is in such form as the board of directors may require to the effect that after due and careful inquiry, the shareholder is satisfied that no person in default is interested in any of the ordinary shares which are being transferred or the transfer is an approved transfer, as defined in our articles of association.

      No provision of our articles of association expressly governs the ordinary share ownership threshold above which shareholder ownership must be disclosed. Under the Companies Act 1985, any person who acquires, either alone or, in specified circumstances, with others:

•  a material interest in our voting share capital equal to or in excess of 3%; or

•  a non-material interest equal to or in excess of 10%,

      comes under an obligation to disclose prescribed particulars to us in respect of those ordinary shares. A disclosure obligation also arises where a person’s notifiable interests fall below the notifiable percentage, or where, above that level, the percentage of our voting share capital in which a person has a notifiable interest increases or decreases.

Limitations Affecting Holders of Ordinary Shares or ADSs

      Under English law and our memorandum and articles of association, persons who are neither UK residents nor UK nationals may freely hold, vote and transfer ordinary shares in the same manner as UK residents or nationals.

      With respect to the items discussed above, applicable UK law is not materially different from applicable US law.

Material Contracts

      The following summaries are not intended to be complete and reference is made to the contracts themselves, which are included, or incorporated by reference, as exhibits to this annual report. We have entered into the following contracts outside the ordinary course of business during the two year period immediately preceding the date of this annual report:

Issuance of $350,000,000 4.70% Guaranteed Senior Notes due 2009 and $400,000,000 5.70% Guaranteed Senior Notes due 2014

      Our wholly-owned subsidiary, Pearson Dollar Finance plc, issued $350 million principal amount of 4.70% senior notes due 2009 and $400 million principal amount of 5.70% senior notes due 2014, in each case

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fully and unconditionally guaranteed by Pearson plc, under an indenture dated May 25, 2004 between Pearson Dollar Finance plc, Pearson plc and The Bank of New York, as trustee. The first semi-annual interest payment was made on December 1, 2004. Pearson Dollar Finance may redeem the notes at any time, in whole or in part, at its option.

      The indenture describes the circumstances that would be considered events of default. If an event of default occurs, other than an insolvency or bankruptcy of Pearson Dollar Finance plc, Pearson plc or a principal subsidiary of Pearson plc (as defined in the indenture), the holders of at least 25% of the principal amount of the then outstanding notes may declare the notes, along with accrued but unpaid interest and other amounts described in the indenture, as immediately due and payable. In the event of an insolvency or bankruptcy of Pearson Dollar Finance plc, Pearson plc or a principal subsidiary of Pearson plc (as defined in the indenture), the principal of all outstanding notes shall become due and payable immediately.

      The indenture limits our ability to create liens to secure certain types of debt intended to be listed or traded on an exchange.

Issuance of $300,000,000 4.625% Senior Notes due 2018

      We issued $300 million principal amount of 4.625% senior notes due 2018 under an indenture dated June 23, 2003 between us and The Bank of New York, as trustee. The first semi-annual interest payment was made on December 15, 2003. We may redeem the notes at any time, in whole or in part, at our option.

      The indenture describes the circumstances that would be considered events of default. If an event of default occurs, other than the insolvency or bankruptcy of us or a principal subsidiary (as defined in the indenture), the holders of at least 25% of the principal amount of the then outstanding notes may declare the notes, along with accrued, but unpaid, interest and other amounts described in the indenture, as immediately due and payable.

      The indenture limits our ability to create liens to secure certain types of debt intended to be listed or traded on an exchange.

Agreement to Sell Shares of Recoletos Grupo de Comunicación, S.A. to Retos Cartera, S.A.

      We entered into an irrevocable undertaking on December 14, 2004 with Retos Cartera, S.A., with respect to the sale of our 79% stake in Recoletos Grupo de Comunicacion, S.A. Pursuant to the irrevocable undertaking, we agreed to sell our shares in Recoletos to Retos Cartera for the price set forth in its concurrent tender offer to all shareholders of Recoletos. On April 8, 2005, Retos Cartera successfully completed its tender for 100% of the shares of Recoletos, and paid us net cash proceeds of £372 million for our 79% stake.

      Retos Cartera also agreed to pay us additional deferred consideration in the event that it, or one of its affiliates, disposes of its shares in, or the assets of, Recoletos, for a period of 18 months after the closing of the tender offer. The obligation to pay deferred consideration is subject to certain limitations. The parties have made representations and warranties to each other that are customary for a transaction of this type. We have agreed to indemnify Retos Cartera for any breach of a representation or warranty, and both parties have agreed to be liable for losses associated with a breach of its obligations in the irrevocable undertaking.

Executive Employment Contracts

      We have entered into agreements with each of our executive directors pursuant to which such executive director is employed by us. These agreements describe the duties of such executive director and the compensation to be paid by us. See “Item 6. Directors, Senior Management & Employees — Compensation of Senior Management”. Each agreement may be terminated by us on 12 months’ notice or by the executive director on six months’ notice. In the event we terminate any executive director without giving the full 12 months’ advance notice, the executive director is entitled to receive liquidated damages equal to 12 months base salary and benefits together with a proportion of potential bonus.

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Agreement with Peter Jovanovich

      On January 28, 2005, we entered into a letter agreement with Peter Jovanovich with respect to his employment with Pearson Education and its affiliates. Due to poor health, Mr. Jovanovich terminated his employment with us. The letter agreement sets forth the terms of his disability leave and confirms his existing disability benefits, including benefits under our short term disability plan, long-term disability plan, and supplemental long-term disability plan. Under the terms of the agreement, Mr. Jovanovich will receive standard benefits (except awards under Pearson plc stock plans), and thereafter, will receive coverage under our medical, dental and vision plans and our life insurance plan, plus a payment for unused vacation days. We have agreed to continue to credit Mr. Jovanovich’s individual defined contribution arrangement. We also agreed to pay him his 2004 annual bonus. The value of Mr. Jovanovich’s disability package, and his total remuneration for our 2004 financial year, is included in “Item 6. Directors and Senior Management”.

Exchange Controls

      There are no UK government laws, decrees, regulations or other legislation which restrict or which may affect the import or export of capital, including the availability of cash and cash equivalents for use by us or the remittance of dividends, interest or other payments to nonresident holders of our securities, except as otherwise described under “ — Tax Considerations” below.

Tax Considerations

      The following is a discussion of the material US federal income tax considerations and UK tax considerations arising from the acquisition, ownership and disposition of ordinary shares and ADSs by a US holder. A US holder is:

•  an individual citizen or resident of the US,

•  a corporation created or organized in or under the laws of the United States or any of its political subdivisions, or

•  an estate or trust the income of which is subject to US federal income taxation regardless of its source.

      This discussion deals only with ordinary shares and ADSs that are held as capital assets by a US holder, and does not address tax considerations applicable to US holders that may be subject to special tax rules, such as:

•  dealers or traders in securities or currencies,

•  financial institutions or other US holders that treat income in respect of the ordinary shares or ADSs as financial services income,

•  insurance companies,

•  tax-exempt entities,

•  US holders that hold the ordinary shares or ADSs as a part of a straddle or conversion transaction or other arrangement involving more than one position,

•  US holders that own, or are deemed for US tax purposes to own, 10% or more of the total combined voting power of all classes of our voting stock,

•  US holders that have a principal place of business or “tax home” outside the United States, or

•  US holders whose “functional currency” is not the US dollar.

      For US federal income tax purposes, holders of ADSs will be treated as the owners of the ordinary shares represented by those ADSs.

      The discussion below is based upon current UK law and the provisions of the US Internal Revenue Code of 1986, or the Code, and regulations, rulings and judicial decisions as of the date of this Annual Report; any

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such authority may be repealed, revoked or modified, perhaps with retroactive effect, so as to result in tax consequences different from those discussed below. This discussion is also based on the Income Tax Treaty between the United Kingdom and the United States, which came into force in March 2003 (the “New Income Tax Treaty”). The discussions below regarding US residents are based on the articles of the New Income Tax Treaty.

      In addition, the following discussion assumes that The Bank of New York will perform its obligations as depositary in accordance with the terms of the depositary agreement and any related agreements.

      Because US and UK tax consequences may differ from one holder to the next, the discussion set out below does not purport to describe all of the tax considerations that may be relevant to you and your particular situation. Accordingly, you are advised to consult your own tax advisor as to the US federal, state and local, UK and other, including foreign, tax consequences of investing in the ordinary shares or ADSs. The statements of US and UK tax law set out below are based on the laws and interpretations in force as of the date of this Annual Report, and are subject to any changes occurring after that date.

UK Income Taxation of Distributions

      The United Kingdom does not impose dividend withholding tax on dividends paid to US holders.

US Income Taxation of Distributions

      Distributions that we make with respect to the ordinary shares or ADSs, other than distributions in liquidation and distributions in redemption of stock that are treated as exchanges, will be taxed to US holders as ordinary dividend income to the extent that the distributions do not exceed our current and accumulated earnings and profits. The amount of any distribution will equal the amount of the cash distribution. Distributions, if any, in excess of our current and accumulated earnings and profits will constitute a non-taxable return of capital to a US holder and will be applied against and reduce the US holder’s tax basis in its ordinary shares or ADSs. To the extent that these distributions exceed the tax basis of the US holder in its ordinary shares or ADSs, the excess generally will be treated as capital gain.

      Dividends that we pay will not be eligible for the dividends received deduction generally allowed to US corporations under Section 243 of the Code.

      In the case of distributions in pounds, the amount of the distributions generally will equal the US dollar value of the pounds distributed, determined by reference to the spot currency exchange rate on the date of receipt of the distribution by the US holder in the case of shares or by The Bank of New York in the case of ADSs, regardless of whether the US holder reports income on a cash basis or an accrual basis. The US holder will realize separate foreign currency gain or loss only to the extent that this gain or loss arises on the actual disposition of pounds received. For US holders claiming tax credits on a cash basis, taxes withheld from the distribution are translated into US dollars at the spot rate on the date of the distribution; for US holders claiming tax credits on an accrual basis, taxes withheld from the distribution are translated into US dollars at the average rate for the taxable year.

      A distribution by the Company to noncorporate shareholders before 2009 will be taxed as net capital gain at a maximum rate of 15%, provided certain holding periods are met, to the extent such distribution is treated as a dividend under U.S. federal income tax principles.

UK Income Taxation of Capital Gains

      Under the New Income Tax Treaty, each country generally may tax capital gains in accordance with the provisions of its domestic law. Under present UK law, a US holder that is not a resident, and, in the case of an individual, not ordinarily resident, in the United Kingdom for UK tax purposes and who does not carry on a trade, profession or vocation in the United Kingdom through a branch or agency to which ordinary shares or ADSs are attributable will not be liable for UK taxation on capital gains or eligible for relief for allowable losses, realized on the sale or other disposal (including redemption) of these ordinary shares or ADSs.

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US Income Taxation of Capital Gains

      Upon a sale or exchange of ordinary shares or ADSs to a person other than Pearson, a US holder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the US holder’s adjusted tax basis in the ordinary shares or ADSs. Any gain or loss recognized will be capital gain or loss and will be long-term capital gain or loss if the US holder has held the ordinary shares or ADSs for more than one year. Long-term capital gain of a noncorporate US holder is generally taxed at a maximum rate of 15%. This long-term capital gain rate is scheduled to expire in 2009.

      Gain or loss realized by a US holder on the sale or exchange of ordinary shares or ADSs generally will be treated as US-source gain or loss for US foreign tax credit purposes.

Estate and Gift Tax

      The current Estate and Gift Tax Convention, or the Convention, between the United States and the United Kingdom generally relieves from UK Inheritance Tax (the equivalent of US Estate and Gift Tax) the transfer of ordinary shares or of ADSs where the transferor is domiciled in the United States, for the purposes of the Convention. This relief will not apply if the ordinary shares or ADSs are part of the business property of an individual’s permanent establishment in the United Kingdom or pertain to the fixed base in the United Kingdom of a person providing independent personal services. If no relief is given under the Convention, inheritance tax may be charged on the amount by which the value of the transferor’s estate is reduced as a result of any transfer made by way of gift or other gratuitous transfer by an individual, in general within seven years of death, or on the death of an individual. In the unusual case where ordinary shares or ADSs are subject to both UK Inheritance Tax and US Estate or Gift Tax, the Convention generally provides for tax paid in the United Kingdom to be credited against tax payable in the United States or for tax paid in the United States to be credited against tax payable in the United Kingdom based on priority rules set forth in the Convention.

Stamp Duty

      No stamp duty or stamp duty reserve tax (SDRT) will be payable in the United Kingdom on the purchase or transfer of an ADS, provided that the ADS, and any separate instrument or written agreement of transfer, remain at all times outside the United Kingdom and that the instrument or written agreement of transfer is not executed in the United Kingdom. Stamp duty or SDRT is, however, generally payable at the rate of 1.5% of the amount or value of the consideration or, in some circumstances, the value of the ordinary shares, where ordinary shares are issued or transferred to a person whose business is or includes issuing depositary receipts, or to a nominee or agent for such a person.

      A transfer for value of the underlying ordinary shares will generally be subject to either stamp duty or SDRT, normally at the rate of 0.5% of the amount or value of the consideration. A transfer of ordinary shares from a nominee to its beneficial owner, including the transfer of underlying ordinary shares from the Depositary to an ADS holder, under which no beneficial interest passes is subject to stamp duty at the fixed rate of £5.00 per instrument of transfer.

Close Company Status

      We believe that the close company provisions of the UK Income and Corporation Taxes Act 1988 do not apply to us.

Documents on Display

      Copies of our Memorandum and Articles of Association, the material contracts described above and filed as exhibits to this Annual Report and certain other documents referred to in this Annual Report are available for inspection at our registered office at 80 Strand, London WC2R 0RL (c/o the Company Secretary), or, in the United States, at the registered office of Pearson Inc. at 1330 Avenue of the Americas, 7th Floor, New York, New York, during usual business hours upon reasonable prior request.

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ITEM 11.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Introduction

      Our principal market risks are changes in interest rates and currency exchange rates. Following evaluation of these positions, we selectively enter into derivative financial instruments to manage our risk exposure. For this purpose, we primarily use interest rate swaps, interest rate caps and collars, forward rate agreements, currency swaps and forward foreign exchange contracts. Managing market risks is the responsibility of the Chief Financial Officer, who acts pursuant to policies approved by our board of directors. A Treasury Committee of the board receives regular reports on our treasury activities, which outside advisers also review periodically.

      We have a policy of not undertaking any speculative transactions, and we hold the derivative and other financial instruments for purposes other than trading.

      We have formulated our policies for hedging exposures to interest rate and foreign exchange risk, and have used derivatives to ensure compliance with these policies. Although the majority of our derivative contracts were transacted without regard to existing US GAAP requirements on hedge accounting, during 2004 we qualified for hedge accounting under US GAAP on a limited number of our key derivative contracts.

      The following discussion addresses market risk only and does not present other risks that we face in the normal course of business, including country risk, credit risk and legal risk. See note 19 in “Item 17. Financial Statements” for discussion of treasury policy in these areas.

Interest Rates

      Our financial exposures to interest rates arise primarily from our borrowings, particularly those in US dollars. We manage our exposure by borrowing at fixed and variable rates of interest, and by entering into derivative instruments. Objectives approved by our board concerning the proportion of debt outstanding at fixed rates govern our use of these financial instruments.

      Our objectives are applied to core net debt, which is year-end borrowings net of year-end cash and liquid funds. Those objectives are that for between 40% and 65% of current core debt, the rate of interest should be fixed or capped for the next four years. Within this target range the proportion that is hedged is triggered by a formula based on historical interest rate frequencies.

      The principal method to hedge interest rate risk is to enter into an agreement to pay a fixed-rate and receive a variable rate, known as a swap. Under interest rate swaps, we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and variable-rate amounts calculated by reference to an agreed notional principal amount. The majority of these contracts are US dollar denominated, and some of them have deferred start dates, in order to maintain the desired risk profile as other contracts mature. The variable rates received are normally based on three-month and six-month LIBOR, and the dates on which these rates are set do not necessarily exactly match those of the hedged borrowings. We believe that our portfolio of these types of swaps is an efficient hedge of our portfolio of variable rate borrowings.

      In addition, from time to time we issue bonds or other capital market instruments to refinance existing debt. To avoid the rate on a single transaction unduly influencing our overall net interest expense, it is our normal practice to enter into a related derivative contract effectively converting the interest rate profile of the bond transaction to that of the debt which it is refinancing. Most often this is a variable interest rate denominated in US dollars. In several cases, the bond issue was denominated in a different currency than the debt being refinanced and we have entered into a related interest rate and currency swap in order to maintain an unchanged borrowing risk profile.

Currency Exchange Rates

      Although we are based in the United Kingdom, we have significant investments in overseas operations. The most significant currency in which we trade is the US dollar, followed by the euro and sterling.

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      Our policy is to manage the currency composition of our core borrowings in US dollars, euro and sterling in order to approximate the percentages of those currencies as reflected in our forecast operating profit. We use external borrowings and currency swaps to manage this exposure. This policy aims to dampen the impact of changes in foreign exchange rates on consolidated interest cover and earnings. While long-term core borrowing is now limited to US dollars, euro and sterling, we still borrow small amounts in other currencies, typically for seasonal working capital needs.

      At December 31, 2004 the split of aggregate net borrowings in core currencies was US dollar 88%, euro 7% and sterling 5%. We are also exposed to currency exchange rates in our cash transactions and our investments in overseas transactions. Cash transactions — typically for purchases, sales, interest or dividends — require cash conversions between currencies. Fluctuations in currency exchange rates affect the cash amounts that we pay or receive.

      Investments in overseas operations are consolidated for accounting purposes by translating values in one currency to another currency, in particular from US dollars to sterling. Fluctuations in currency exchange rates affect the currency values recorded in our accounts, particularly those in sterling, although they do not give rise to any realized gain or loss, nor to any currency cash flows.

Forward Foreign Exchange Contracts

      We use forward foreign exchange contracts where a specific major project or forecasted cash flow, including acquisitions and disposals, arises from a business decision that has used a specific foreign exchange rate. Our policy is to effect transactional conversions between currencies, for example to collect receivables or settle payables, at the relevant spot exchange rate.

      We seek to offset purchases and sales in the same currency, even if they do not occur simultaneously. In addition, our debt and cash portfolios management gives rise to temporary currency shortfalls and surpluses. Both of these activities require us to use short-dated swaps between currencies.

      Although we prepare our consolidated accounts in sterling, we have invested significant sums in overseas assets, particularly in the United States. Therefore, fluctuations in currency exchange rates, particularly between the US dollar and sterling, and also between the euro and sterling, are likely to affect shareholders’ funds and other accounting values.

Derivatives

      Under UK GAAP, the Group’s derivatives are recorded as hedging instruments. Amounts payable or receivable in respect of interest rate swaps are accrued with net interest payable over the period of the contract. Unrealized gains and losses on currency swaps and forward currency contracts are deferred and recognized when paid.

      Under US GAAP, the Group is required to record all derivative instruments on the balance sheet at fair value. Derivatives not classified as hedges are adjusted to fair value through earnings. Changes in fair value of the derivatives that the Group has designated and that qualify as effective hedges are recorded in either other comprehensive income or earnings. Any ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings.

      In 2004, unlike 2003 and 2002, the Group qualified for hedge accounting under US GAAP in respect of a number of its key derivative contracts. The remainder of our derivatives did not meet the prescribed designation requirements and hedge effectiveness tests under US GAAP, which are not a requirement to obtain hedge accounting under UK GAAP. Consequently the Group has recorded the changes in the fair values of these derivative contracts through earnings under US GAAP. In line with the Group’s treasury policy, none of these were trading instruments and each was transacted solely to match an underlying financial exposure.

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ITEM 12.     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

      Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

      None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

      Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

      An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2004 was carried out by us under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that Pearson’s disclosure controls and procedures have been designed to provide, and are effective in providing, reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. A controls system, no matter how well designed and operated cannot provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. We recently identified a US GAAP adjustment, to reflect the correct accounting treatment of incentives and fixed rental escalations under one of our leases, which we consider to be material. The US GAAP profit and loss account and shareholders’ funds for the financial years ended December 31, 2003 and 2002 have been restated accordingly. This restatement is discussed on page F-56 and has the effect of reducing our US GAAP profit for the 2003 and 2002 financial years by £14 million and £12 million pre tax (£10 million and £9 million post tax), respectively, and reducing the Company’s shareholders’ funds reported as of December 31, 2003 and 2002 by £26 million and £12 million pre tax (£19 million and £9 million post tax), respectively, from amounts previously reported. No adjustments are required in respect of the Company’s primary UK GAAP financial statements and no issues of governance arise as a consequence of making these adjustments. The Chief Executive Officer and Chief Financial Officer believe that the need for this restatement constitutes a significant control deficiency but not a material control weakness (as such terms are used in the US federal securities laws) for the period under review. This conclusion is based on the fact that control procedures have improved year on year leading to the identification and correction of the issues for the 2004 year end.

      Subsequent to the date of the most recent evaluation of our internal controls, there were no significant changes in our internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies or material weaknesses.

ITEM 16A.     AUDIT COMMITTEE FINANCIAL EXPERT

      The members of the Board of Directors of Pearson plc have determined that Vernon Sankey is an audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission.

ITEM 16B.     CODE OF ETHICS

      Pearson has adopted a code of ethics (the Pearson code of business conduct) which applies to all employees including the Chief Executive Officer and Chief Financial Officer and other senior financial

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management. This code of ethics is available on our website (www.pearson.com/investor/corpgov.htm). The information on our website is not incorporated by reference into this report.

ITEM 16C.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

      In 2003, the audit committee adopted a revised policy for auditor services. The policy requires all audit engagements to be approved by the audit committee. The policy permits the auditors to be engaged for other services provided the engagement is specifically approved in advance by the committee or alternatively meets the detailed criteria of specific pre-approved services and is notified to the committee.

      The Group Chief Financial Officer or Deputy Chief Financial Officer can procure pre-approved services, as defined in the audit committee’s policy for auditor services, of up to amount of £100,000 per engagement, subject to a cumulative limit of £500,000 per year. The limit of £100,000 will be subject to annual review by the audit committee. Where pre-approval has not been granted for a service or where the amount is above these limits, specific case by case approval must be obtained from the audit committee prior to the engagement of our auditor.

Auditors’ Remuneration	2004		2003
	£m		£m
Statutory audit and audit-related regulatory reporting services		4		3
Non-audit services		2		2
Non-audit services were as follows:
Tax compliance services		1		1
Tax advisory services		1		1

Note  Included in statutory audit fees are amounts relating to the parent company of £20,000 (2003: £20,000). Audit-related regulatory reporting fees are £225,000 (2003: £200,000). Non-audit fees in the UK in 2004 are £1,000,000 (2003: £341,000) and are in respect of tax advisory and tax compliance services and other advisory services. The remainder of the non-audit fees relate to overseas subsidiaries.

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

      Not applicable.

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

							Maximum number
					Total number of		of shares that
					units purchased		may yet be
					as part of publicly		purchased under
	Total number of		Average price		announced plans		the plans or
Period	shares purchased		paid per share		or programs		programs
April 1, 2004 - April 30, 2004		170,850		£6.65		N/A		N/A
May 1, 2004 - May 31, 2004		85,510		£6.75		N/A		N/A

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

PART III

ITEM 17.     FINANCIAL STATEMENTS

      The financial statements filed as part of this Annual Report are included on pages F-1 through F-69 hereof.

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ITEM 18.     FINANCIAL STATEMENTS

      We have elected to respond to Item 17.

ITEM 19.     EXHIBITS

1.1	Memorandum and Articles of Association of Pearson plc.†
2.1	Indenture dated June 23, 2003 between Pearson plc and The Bank of New York, as trustee.†
2.2	Indenture dated May 25, 2004 among Pearson Dollar Finance plc, as Issuer, Pearson plc, Guarantor, and the Bank of New York, as Trustee, Paying Agent and Calculation Agent.
4.1	Letter Agreement dated January 28, 2005 between Pearson plc and Peter Jovanovich.
4.2	Irrevocable undertakings in respect of an offer by Retos Cartera, for the shares of Recoletos Grupo de Communicación, dated December 14, 2004 between Pearson plc and Retos Cartera.
8.1	List of Significant Subsidiaries.
10	Consent of PricewaterhouseCoopers LLP.
12.1	Certification of Chief Executive Officer.
12.2	Certification of Chief Financial Officer.
13.1	Certification of Chief Executive Officer.
13.2	Certification of Chief Financial Officer.

†  Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2003 and filed May 7, 2004.

72

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Profit and Loss Account for the Year Ended December 31, 2004	F-3
Consolidated Balance Sheet as at December 31, 2004	F-4
Consolidated Cash Flow Statement for the Year Ended December 31, 2004	F-5
Statement of Total Recognized Gains and Losses for the Year Ended December 31, 2004	F-6
Reconciliation of Movements in Equity Shareholders’ Funds for the Year Ended December 31, 2004	F-6
Notes to the Accounts	F-8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Pearson plc:

      In our opinion, the accompanying consolidated balance sheets and the related consolidated profit and loss accounts, statements of total recognized gains and losses, reconciliations of movements in equity shareholders’ funds, and consolidated cash flow statements present fairly, in all material respects, the financial position of Pearson plc and its subsidiaries at 31 December 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended 31 December 2004, in conformity with accounting principles generally accepted in the United Kingdom. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      As discussed in note 1, the Company changed its method of accounting for employee share ownership trusts and employee share schemes in accordance with the accounting principles generally accepted in the United Kingdom. The change has been accounted for by restating comparative information at December 31, 2003 and 2002 and for the years then ended.

      Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 34, as restated, to the consolidated financial statements.

PricewaterhouseCoopers LLP

London, United Kingdom

June 27, 2005

F-2

CONSOLIDATED PROFIT AND LOSS ACCOUNT

YEAR ENDED 31 DECEMBER 2004

(All figures in £ millions)

	Note		2004			2003			2002
Sales (including share of joint ventures)				3,940			4,066			4,331
Less: share of joint ventures				(21	)		(18	)		(11	)
Sales of which		2a		3,919			4,048			4,320
Continuing operations				3,729			3,879			4,172
Discontinued operations		31		190			169			148
Group operating profit of which				221			226			194
Continuing operations				210			206			180
Discontinued operations		31		11			20			14
Share of operating profit of joint ventures and associates of which		2c/d		10			—			(51	)
Continuing operations				8			(2	)		(47	)
Discontinued operations		31		2			2			(4	)
Total operating profit		2b		231			226			143
Continuing operations
Profit/(loss) on sale of fixed assets and investments		4a		12			(2	)		(11	)
Loss on sale of subsidiaries and associates		4b		(3	)		(4	)		(45	)
Discontinued operations
Loss on sale of fixed assets and investments		4a		—			—			(2	)
Profit on sale of subsidiaries and associates		4b		—			12			18
Profit on sale of a subsidiary by an associate		4c		—			—			3
Non operating items				9			6			(37	)
Profit before interest and taxation				240			232			106
Net finance costs		5		(69	)		(80	)		(131	)
Profit/(loss) before taxation				171			152			(25	)
Taxation		7		(62	)		(75	)		(64	)
Profit/(loss) after taxation				109			77			(89	)
Equity minority interests				(21	)		(22	)		(22	)
Profit/(loss) for the financial year				88			55			(111	)
Dividends on equity shares		8		(201	)		(192	)		(187	)
Loss retained				(113	)		(137	)		(298	)
Basic earnings per share		9		11.1	p		6.9	p		(13.9	)p
Diluted earnings per share		9		11.0	p		6.9	p		(13.9	)p
Dividends per share		8		25.4	p		24.2	p		23.4	p

There is no difference between the profit/(loss) before taxation and the loss retained for the year stated above and their historical cost equivalents.

F-3

CONSOLIDATED BALANCE SHEET

AS AT 31 DECEMBER 2004

(All figures in £ millions)

							2003
		Note		2004			restated
Fixed assets
Intangible assets			11		2,890			3,260
Tangible assets			12		473			468
Investments: joint ventures			13
	Share of gross assets				9			7
	Share of gross liabilities				(2	)		(1	)
					7			6
Investments: associates			14		41			58
Investments: other			15		17			21
					3,428			3,813
Current assets
Stocks			16		676			683
Debtors			17		1,103			1,132
Deferred taxation			21		165			145
Investments					1			2
Cash at bank and in hand			18		613			561
					2,558			2,523
Creditors — amounts falling due within one year
Short-term borrowing			19		(107	)		(575	)
Other creditors			20		(1,168	)		(1,129	)
					(1,275	)		(1,704	)
Net current assets					1,283			819
Total assets less current liabilities					4,711			4,632
Creditors — amounts falling due after more than one year
Medium and long-term borrowing			19		(1,712	)		(1,347	)
Other creditors			20		(60	)		(45	)
					(1,772	)		(1,392	)
Provisions for liabilities and charges			22		(123	)		(152	)
Net assets					2,816			3,088
Capital and reserves
Called up share capital			23		201			201
Share premium account			24		2,473			2,469
Profit and loss account			24		(71	)		223
Equity shareholders’ funds					2,603			2,893
Equity minority interests					213			195
					2,816			3,088

The 2003 and 2002 comparatives have been restated for the adoption of UITF 38 (see note 24).

The company balance sheet is shown in note 32.

The financial statements were approved by the board of directors on 27 February 2005 and signed on its behalf by

Dennis Stevenson, Chairman Rona Fairhead, Chief financial officer

F-4

CONSOLIDATED CASH FLOW STATEMENT

YEAR ENDED 31 DECEMBER 2004

(All figures in £ millions)

						2003			2002
	Note		2004			restated			restated
Net cash inflow from operating activities		27		530			359			529
Dividends from joint ventures and associates				10			9			6
Interest received				13			11			11
Interest paid				(97	)		(86	)		(151	)
Debt issue costs				(1	)		(1	)		—
Dividends paid to equity minority interests				(2	)		(19	)		(1	)
Returns on investments and servicing of finance				(87	)		(95	)		(141	)
Taxation				(45	)		(44	)		(55	)
Purchase of tangible fixed assets				(125	)		(105	)		(126	)
Sale of tangible fixed assets				4			8			7
Purchase of investments				(1	)		(3	)		(3	)
Sale of investments				17			—			3
Capital expenditure and financial investment				(105	)		(100	)		(119	)
Purchase of subsidiaries		25		(35	)		(94	)		(87	)
Net cash acquired with subsidiaries				—			34			1
Purchase of joint ventures and associates				(10	)		(5	)		(40	)
Sale of subsidiaries		26		—			(4	)		3
Net overdrafts disposed with subsidiaries				1			1			(1	)
Sale of associates				24			57			920
Acquisitions and disposals				(20	)		(11	)		796
Equity dividends paid				(195	)		(188	)		(181	)
Net cash inflow/(outflow) before management of liquid resources and financing				88			(70	)		835
Liquid resources acquired				1			(85	)		(65	)
Collateral deposit reimbursed				—			—			22
Management of liquid resources				1			(85	)		(43	)
Issue of equity share capital				4			5			6
Purchase of own shares				(10	)		(1	)		(18	)
Capital element of finance leases				(2	)		(3	)		(5	)
Loan facility (repaid)/advanced				(42	)		1			(507	)
Bonds advanced				414			180			—
Bonds repaid				(456	)		(159	)		(167	)
Collateral deposit (placed)/reimbursed				(26	)		54			17
Net movement in other borrowings				59			(13	)		(7	)
Financing				(59	)		64			(681	)
Increase/(decrease) in cash in the year		27		30			(91	)		111

F-5

STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES

YEAR ENDED 31 DECEMBER 2004

(All figures in £ millions)

	Note		2004			2003			2002
Profit/(loss) for the financial year				88			55			(111	)
Other net gains and losses recognised in reserves
Exchange differences				(181	)		(254	)		(315	)
Taxation on exchange differences				5			—			5
Total recognised gains and losses relating to the year				(88	)		(199	)		(421	)
Prior year adjustment		24		37			—			209
Total recognised gains and losses				(51	)		(199	)		(212	)

Included within profit/(loss) for the financial year is a loss of £7m (2003: loss of £10m) relating to joint ventures and a profit of £15m (2003: profit of £13m) relating to associates.

RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS’ FUNDS

YEAR ENDED 31 DECEMBER 2004

(All figures in £ millions)

						2003			2002
	Note		2004			restated			restated
Profit for the financial year				88			55			(111	)
Dividends on equity shares				(201	)		(192	)		(187	)
				(113	)		(137	)		(298	)
Exchange differences net of taxation				(176	)		(254	)		(310	)
Goodwill written back on sale of subsidiaries and associates				—			—			144
Shares issued				4			5			6
Purchase of own shares				(10	)		(1	)		(18	)
Replacement options granted on acquisition of subsidiary				—			—			1
UITF 17 charge for the year				5			4			7
Net movement for the year				(290	)		(383	)		(468	)
Equity shareholders’ funds at beginning of the year				2,893			3,276			3,797
Prior year adjustment — UITF 38		24		—			—			(53	)
Equity shareholders’ funds at end of the year				2,603			2,893			3,276

Restatement

      The Company has restated its UK GAAP shareholders’ funds for the financial years ended December 31, 2003 and 2002 for adoption of UITF Abstract 38 “Accounting for ESOP trusts’. This has reduced shareholders’ funds as at December 31, 2003 and 2002 by £59 million and £62 million respectively (see note 24 in “Item 17. Financial Statements”).

      The Company has restated its US GAAP profit and loss account and shareholders’ funds for the financial years ended December 31, 2003 and 2002 to reflect a revised accounting treatment in respect of incentives and fixed rental escalations under one of its leases. Previously the incentive was recognized in the profit and loss account over the period during which the lease incentive was applicable until the lease returned to a market level. Additionally, future market-based rent increases were charged to the profit and loss account as they

F-6

became applicable under the terms of the lease. Both the lease incentives and market-based rent increases are now being charged to the profit and loss account over the entire term of the lease. Consequently, the profit reported under US GAAP for the 2003 and 2002 financial years has been reduced by £14 million and £12 million, respectively, on a pre-tax basis and £10 million and £9 million, respectively, on a post-tax basis and the shareholders’ funds reported as at December 31, 2003 and 2002 has been reduced by £19 million and £9 million, respectively, from amounts previously reported.

F-7

NOTES TO THE ACCOUNTS

1 ACCOUNTING POLICIES

      Accounting policies have been consistently applied except that UITF 38 ’Accounting for ESOP trusts’ and the revision of UITF 17 ‘Employee share schemes’ have been adopted in these statements. The adoption of these standards represents a change in accounting policy and the comparative figures have been restated accordingly. The effect of these changes in accounting policy is disclosed in note 24.

      a. Basis of accounting — The accounts are prepared under the historical cost convention and in accordance with the Companies Act and applicable accounting standards. A summary of the significant accounting policies is set out below.

      b. Basis of consolidation — The consolidated accounts include the accounts of all subsidiaries made up to 31 December. Where companies have become or ceased to be subsidiaries or associates during the year, the Group results include results for the period during which they were subsidiaries or associates.

      The results of the Group includes the Group’s share of the results of joint ventures and associates, and the consolidated balance sheet includes the Group’s interest in joint ventures and associates at the book value of attributable net assets and attributable goodwill.

      c. Goodwill — From 1 January 1998 goodwill, being either the net excess of the cost of shares in subsidiaries, joint ventures and associates over the value attributable to their net assets on acquisition or the cost of other goodwill by purchase, is capitalised and amortised through the profit and loss account on a straight-line basis over its estimated useful life not exceeding 20 years. Estimated useful life is determined after taking into account such factors as the nature and age of the business and the stability of the industry in which the acquired business operates, as well as typical life spans of the acquired products to which the goodwill attaches. Goodwill is subject to an impairment review at the end of the first full year following an acquisition, and at any other time if events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill arising on acquisitions before 1 January 1998 has been deducted from reserves and is charged or credited to the profit and loss account on disposal or closure of the business to which it relates.

      d. Sales — Sales represent the amount of goods and services, net of value added tax and other sales taxes, and excluding trade discounts and anticipated returns, provided to external customers and associates.

      Revenue from the sale of books is recognised when title passes. Anticipated returns are based primarily on historical return rates.

      Circulation and advertising revenue is recognised when the newspaper or other publication is published.

      Subscription revenue is recognised on a straight-line basis over the life of the subscription.

      Where a contractual arrangement consists of two or more separate elements that can be provided to customers either on a stand-alone basis or as an optional extra, such as the provision of supplementary materials with textbooks, revenue is recognised for each element as if it were an individual contractual arrangement.

      Revenue from multi-year contractual arrangements, such as contracts to process qualifying tests for individual professions and government departments, is recognised as performance occurs. Certain of these arrangements, either as a result of a single service spanning more than one reporting period or where the contract requires the provision of a number of services that together constitute a single project, are treated as long-term contracts with revenue recognised on a percentage of completion basis. Losses on contracts are recognised in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract.

F-8

NOTES TO THE ACCOUNTS (Continued)

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

      e. Pension costs — The regular pension cost of the Group’s defined benefit pension schemes is charged to the profit and loss account in accordance with SSAP 24 ‘Accounting for pension costs’ in order to apportion the cost of pensions over the service lives of employees in the schemes.

      Variations are apportioned over the expected service lives of current employees in the schemes. The pension cost of the Group’s defined contribution schemes is the amount of contributions payable for the year.

      f. Post-retirement benefits other than pensions — Post-retirement benefits other than pensions are accounted for on an accruals basis to recognise the obligation over the expected service lives of the employees concerned.

      g. Tangible fixed assets — The cost of tangible fixed assets other than freehold land is depreciated over estimated economic lives in equal annual amounts. Generally, freeholds are depreciated at 1% to 5% per annum, leaseholds at 2% per annum, or over the period of the lease if shorter, and plant and equipment at various rates between 5% and 33% per annum.

      h. Leases — Finance lease rentals are capitalised at the net present value of the total amount of rentals payable under the leasing agreement (excluding finance charges) and depreciated in accordance with policy g above. Finance charges are written off over the period of the lease in reducing amounts in relation to the written down carrying cost. Operating lease rentals are charged to the profit and loss account on a straight-line basis over the duration of each lease term.

      i. Fixed asset investments — Fixed asset investments are stated at cost less provisions for diminution in value.

      j. Share schemes — Shares held by employee share ownership trusts are shown at cost and recorded as a deduction in arriving at shareholders’ funds. The costs of funding and administering the trusts are charged to the profit and loss account in the period to which they relate. The fair market value of the shares at the date of grant, less any consideration to be received from the employee, is charged to the profit and loss account over the period to which the employee’s performance relates. Where awards are contingent upon future events (other than continued employment) an assessment of the likelihood of these conditions being achieved is made at the end of each reporting period and an appropriate adjustment to the charge is made.

      k. Stocks — Stocks and work in progress are stated at the lower of cost and net realisable value.

      l. Pre-publication costs — Pre-publication costs represent direct costs incurred in the development of educational programmes and titles prior to their publication. These costs are carried forward in stock where the title to which they relate has a useful life in excess of one year. These costs are amortised 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, with a higher proportion of the amortisation taken in the earlier years.

      m. Royalty advances — Advances of royalties to authors are included within debtors when the advance is paid less any provision required to bring the amount down to its net realisable value. The royalty advance is expensed at the contracted royalty rate as the related revenues are earned.

      n. Newspaper development costs — Revenue investment in the development of newspaper titles consists of measures to increase the volume and geographical spread of circulation. These measures include additional and enhanced editorial content, extended distribution and remote printing. These extra costs arising are expensed as incurred.

      o. Deferred taxation — Provision is made in full for deferred tax that arises from timing differences that have originated but not reversed by the balance sheet date on transactions or events that result in an obligation to pay more tax in the future. Deferred tax assets are recognised to the extent that it is regarded as more likely

F-9

NOTES TO THE ACCOUNTS (Continued)

than not that there will be taxable profits from which the underlying timing differences can be deducted. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax assets and liabilities are not discounted.

      p. Financial instruments — Interest and the premium or discount on the issue of financial instruments is taken to the profit and loss account so as to produce a constant rate of return over the period to the date of expected redemption.

      The Group uses derivative financial instruments to manage its exposure to interest rate and foreign exchange risks. These include interest rate swaps, currency swaps and forward currency contracts.

      Amounts payable or receivable in respect of interest rate derivatives are accrued with net interest payable over the period of the contract. Where the derivative instrument is terminated early, the gain or loss is spread over the remaining maturity of the original instrument. Where the underlying exposure ceases to exist, any termination gain or loss is taken to the profit and loss account. Foreign currency borrowings and their related derivatives are carried in the balance sheet at the relevant exchange rates at the balance sheet date. Gains or losses in respect of the hedging of overseas subsidiaries are taken to reserves. Gains or losses arising from foreign exchange contracts are taken to the profit and loss account in line with the transactions which they are hedging. Premiums paid on contracts designed to manage currency exposure on specific acquisitions or disposals are charged to the profit and loss account.

      The company participates in offset arrangements with certain banks whereby cash and overdraft amounts are offset against each other.

      q. Foreign currencies — Profit and loss accounts in overseas currencies are translated into sterling at average rates. Balance sheets are translated into sterling at the rates ruling at 31 December. Exchange differences arising on consolidation are taken directly to reserves. Other exchange differences are taken to the profit and loss account where they relate to trading transactions and directly to reserves where they relate to investments.

      The principal overseas currency for the Group is the US dollar. The average rate for the year against sterling was $1.83 (2003: $1.63) and the year end rate was $1.92 (2003: $1.79).

      r. Liquid resources — Liquid resources comprise short-term deposits of less than one year and investments which are readily realisable and held on a short-term basis.

      s. Retained profits of overseas subsidiaries and associates — No provision is made for any additional taxation, less double taxation relief, which would arise on the remittance of profits retained where there is no intention to remit such profits.

F-10

NOTES TO THE ACCOUNTS (Continued)

2a ANALYSIS OF SALES

	2004		2003		2002
	(All figures in £ millions)
Business sectors
Pearson Education		2,356		2,451		2,756
FT Group		587		588		578
The Penguin Group		786		840		838
Continuing operations		3,729		3,879		4,172
Discontinued operations		190		169		148
		3,919		4,048		4,320
Geographical markets supplied
United Kingdom		545		474		411
Continental Europe		300		294		271
North America		2,505		2,742		3,139
Asia Pacific		261		255		249
Rest of world		118		114		102
Continuing operations		3,729		3,879		4,172
Discontinued operations		190		169		148
		3,919		4,048		4,320

	2004							2003							2002
	Total		Inter-			Total		Total		Inter-			Total		Total		Inter-			Total
	by source		regional			sales		by source		regional			sales		by source		regional			sales
	(All figures in £ millions)
Geographical source of sales
United Kingdom		802		(57	)		745		751		(60	)		691		644		(25	)		619
Continental Europe		174		(1	)		173		166		—			166		156		(4	)		152
North America		2,499		(2	)		2,497		2,721		(2	)		2,719		3,144		(36	)		3,108
Asia Pacific		225		(2	)		223		230		(1	)		229		226		(2	)		224
Rest of world		93		(2	)		91		74		—			74		69		—			69
Continuing operations		3,793		(64	)		3,729		3,942		(63	)		3,879		4,239		(67	)		4,172
Discontinued operations		190		—			190		169		—			169		148		—			148
		3,983		(64	)		3,919		4,111		(63	)		4,048		4,387		(67	)		4,320

Note The table above analyses sales by the geographical region from which the products and services originate. Inter-regional sales are those made between Group companies in different regions.

      Included within sales for 2004 is an amount of £10m attributable to acquisitions made during the year.

F-11

NOTES TO THE ACCOUNTS (Continued)

2b     ANALYSIS OF TOTAL OPERATING PROFIT

	2004
	Results from			Integration		Goodwill			Goodwill		Operating
	operations			costs		amortisation			impairment		profit
	(All figures in £ millions)
Business sectors
Pearson Education		293			—		(174	)		—		119
FT Group		86					(20	)				66
The Penguin Group		54			—		(21	)		—		33
Continuing operations		433			—		(215	)		—		218
Discontinued operations		22			—		(9	)		—		13
		455			—		(224	)		—		231
Geographical markets supplied
United Kingdom		(26	)		—		(30	)		—		(56	)
Continental Europe		21			—		(2	)		—		19
North America		393			—		(177	)		—		216
Asia Pacific		31			—		(5	)		—		26
Rest of world		14			—		(1	)		—		13
Continuing operations		433			—		(215	)		—		218
Discontinued operations		22			—		(9	)		—		13
		455			—		(224	)		—		231

	2003
	Results from			Integration		Goodwill			Goodwill		Operating
	operations			costs		amortisation			impairment		profit
	(All figures in £ millions)
Business sectors
Pearson Education		313			—		(207	)		—		106
FT Group		58			—		(30	)		—		28
The Penguin Group		91			—		(21	)		—		70
Continuing operations		462			—		(258	)		—		204
Discontinued operations		28			—		(6	)		—		22
		490			—		(264	)		—		226
Geographical markets supplied
United Kingdom		(46	)		—		(31	)		—		(77	)
Continental Europe		1			—		(4	)		—		(3	)
North America		466			—		(218	)		—		248
Asia Pacific		33			—		(5	)		—		28
Rest of world		8			—		—			—		8
Continuing operations		462			—		(258	)		—		204
Discontinued operations		28			—		(6	)		—		22
		490			—		(264	)		—		226

F-12

NOTES TO THE ACCOUNTS (Continued)

	2002
	Results from			Integration			Goodwill			Goodwill			Operating
	operations			costs			amortisation			impairment			profit
	(All figures in £ millions)
Business sectors
Pearson Education		326			(7	)		(244	)		—			75
FT Group		51			—			(49	)		(10	)		(8	)
The Penguin Group		87			(3	)		(18	)		—			66
Continuing operations		464			(10	)		(311	)		(10	)		133
Discontinued operations		29			—			(19	)		—			10
		493			(10	)		(330	)		(10	)		143
Geographical markets supplied
United Kingdom		(72	)		(5	)		(9	)		—			(86	)
Continental Europe		11			—			(8	)		—			3
North America		495			(5	)		(288	)		—			202
Asia Pacific		31			—			(6	)		—			25
Rest of world		(1	)		—			—			(10	)		(11	)
Continuing operations		464			(10	)		(311	)		(10	)		133
Discontinued operations		29			—			(19	)		—			10
		493			(10	)		(330	)		(10	)		143

Note Discontinued operations relate to the disposal of the Group’s interest in Recoletos, see note 31. Included within operating profit for 2004 is an amount of £1m attributable to acquisitions made during the year.

2c     SHARE OF OPERATING LOSS OF JOINT VENTURES

	2004
	Results from			Goodwill		Operating
	operations			amortisation		profit/(loss)
	(All figures in £ millions)
Business sectors
Pearson Education		—			—		—
FT Group		(8	)		—		(8	)
The Penguin Group		1			—		1
Continuing operations		(7	)		—		(7	)

	2003
	Results from			Goodwill		Operating
	operations			amortisation		profit/(loss)
	(All figures in £ millions)
Business sectors
Pearson Education		—			—		—
FT Group		(11	)		—		(11	)
The Penguin Group		1			—		1
Continuing operations		(10	)		—		(10	)

F-13

NOTES TO THE ACCOUNTS (Continued)

	2002
	Results from			Goodwill		Operating
	operations			amortisation		profit/(loss)
	(All figures in £ millions)
Business sectors
Pearson Education		(1	)		—		(1	)
FT Group		(13	)		—		(13	)
The Penguin Group		1			—		1
Continuing operations		(13	)		—		(13	)

2d     SHARE OF OPERATING PROFIT/(LOSS) OF ASSOCIATES

	2004
	Results from		Goodwill		Operating
	operations		amortisation		profit
	(All figures in £ millions)
Business sectors
Pearson Education		1		—		1
FT Group		14		—		14
The Penguin Group		—		—		—
Continuing operations		15		—		15
Discontinued operations		2		—		2
		17		—		17

	2003
	Results from		Goodwill			Operating
	operations		amortisation			profit
	(All figures in £ millions)
Business sectors
Pearson Education		1		—			1
FT Group		14		(7	)		7
The Penguin Group		—		—			—
Continuing operations		15		(7	)		8
Discontinued operations		2		—			2
		17		(7	)		10

	2002
	Results from		Goodwill			Operating
	operations		amortisation			profit
	(All figures in £ millions)
Business sectors
Pearson Education		3		(1	)		2
FT Group		7		(43	)		(36	)
The Penguin Group		—		—			—
Continuing operations		10		(44	)		(34	)
Discontinued operations		—		(4	)		(4	)
		10		(48	)		(38	)

F-14

NOTES TO THE ACCOUNTS (Continued)

2e     ANALYSIS OF CAPITAL EMPLOYED

			2003
	2004		restated
	(All figures in
	£ millions)
Business sectors
Pearson Education		3,059		3,457
FT Group		198		256
The Penguin Group		593		591
Continuing operations		3,850		4,304
Discontinued operations		130		152
		3,980		4,456
Geographical location
United Kingdom		410		425
Continental Europe		58		62
North America		3,245		3,676
Asia Pacific		114		120
Rest of world		23		21
Continuing operations		3,850		4,304
Discontinued operations		130		152
		3,980		4,456

						2003
	Note		2004			restated
			(All figures in
			£ millions)
Reconciliation of capital employed to net assets
Capital employed				3,980			4,456
Add: deferred taxation		21		165			145
Less: provisions for liabilities and charges		22		(123	)		(152	)
Less: net debt excluding finance leases		27		(1,206	)		(1,361	)
Net assets				2,816			3,088

F-15

NOTES TO THE ACCOUNTS (Continued)

3 ANALYSIS OF CONSOLIDATED PROFIT AND LOSS ACCOUNT

	2004			2003			2002
	(All figures in £ millions)
Cost of sales		(1,866	)		(1,910	)		2,064
Gross profit		2,053			2,138			2,256
Distribution costs		(243	)		(239	)		(233	)
Administration and other expenses		(1,635	)		(1,724	)		(1,888	)
Other operating income		46			51			59
Net operating expenses		(1,832	)		(1,912	)		(2,062	)
Analysed as
Net operating expenses — before other items		(1,608	)		(1,655	)		(1,760	)
Net operating expenses — other items
— Integration costs		—			—			(10	)
— Goodwill amortisation		(224	)		(257	)		(282	)
— Goodwill impairment		—			—			(10	)
Net operating expenses		(1,832	)		(1,912	)		(2,062	)

Note Other items are all included in administration and other expenses. Included above are the following amounts in respect of discontinued operations: cost of sales £61m (2003: £53m), distribution costs £40m (2003: £33m) and administration and other expenses £66m (2003: £55m).

	2004		2003		2002
	(All figures in £ millions)
Other operating income
Income from other investments
Unlisted		—		4		2
Other operating income (mainly royalties, rights and commission income)		46		47		57
		46		51		59
Profit/(loss) before taxation is stated after charging
Amortisation of pre-publication costs		168		158		170
Depreciation		102		111		122
Operating lease rentals
— Plant and machinery		9		14		11
— Properties		97		113		101
— Other		13		9		13
Auditors’ remuneration
Statutory audit and audit-related regulatory reporting services		4		3		3
Non-audit services		2		2		3
Non-audit services were as follows
Tax compliance services		1		1		2
Tax advisory services		1		1		1

Note Included in statutory audit fees are amounts relating to the parent company of £20,000 (2003: £20,000). Audit-related regulatory reporting fees relating to the parent company are £225,000 (2003: £200,000) and £600,000 (2003: £nil) relating to overseas subsidiaries. Non-audit fees in the UK in 2004 are £1m (2003:

F-16

NOTES TO THE ACCOUNTS (Continued)

£341,000) and are in respect of tax advisory, tax compliance services and other advisory services. The remainder of the non-audit fees relate to overseas subsidiaries.

4a     PROFIT/(LOSS) ON SALE OF FIXED ASSETS AND INVESTMENTS

	2004			2003			2002
	(All figures in £ millions)
Net loss on sale of property		(4	)		(1	)		(3	)
Net gain/(loss) on sale of investments		16			(1	)		(8	)
Continuing operations		12			(2	)		(11	)
Discontinued operations		—			—			(2	)
		12			(2	)		(13	)
Taxation		(2	)		—			6

4b     PROFIT/(LOSS) ON SALE OF SUBSIDIARIES AND ASSOCIATES

	2004			2003			2002
	(All figures in £ millions)
Net loss on sale of subsidiaries and associates		(3	)		(4	)		(45	)
Continuing operations		(3	)		(4	)		(45	)
Discontinued operations		—			12			18
		(3	)		8			(27	)
Taxation		1			(3	)		(6	)

4c     PROFIT ON SALE OF A SUBSIDIARY BY AN ASSOCIATE

	2004		2003		2002
	(All figures in £ millions)
Net profit on sale of a subsidiary by an associate — discontinued operations		—		—		3

5 NET FINANCE COSTS

	Note		2004			2003			2002
			(All figures in £ millions)
Net interest payable
— Group		6		(70	)		(81	)		(94	)
— Associates				1			1			—
Early repayment of debt and termination of swap contracts				—			—			(37	)
Total net finance costs				(69	)		(80	)		(131	)

F-17

NOTES TO THE ACCOUNTS (Continued)

6 NET INTEREST PAYABLE — GROUP

	2004			2003			2002
	(All figures in £ millions)
Interest payable and similar charges
Bank loans, overdrafts, bonds and commercial paper
On borrowing repayable wholly within five years		(58	)		(60	)		(54	)
On borrowing repayable wholly or partly after five years		(32	)		(31	)		(51	)
Other borrowings
On borrowing repayable wholly within five years		(1	)		(2	)		—
		(91	)		(93	)		(105	)
Interest receivable and similar income
On deposits, liquid funds and other		21			12			11
Net interest payable		(70	)		(81	)		(94	)

7 TAXATION

	2004			2003			2002
	(All figures in £ millions)
Analysis of (charge)/benefit in the year
Current taxation
UK corporation tax for the year		10			(9	)		11
Adjustments in respect of prior years		(2	)		10			58
		8			1			69
Overseas tax for the year		(82	)		(59	)		(63	)
Adjustments in respect of prior years		27			3			—
Associates		(3	)		(5	)		(4	)
		(50	)		(60	)		2
Deferred taxation
Origination and reversal of timing differences
UK		(5	)		(4	)		(11	)
Overseas		(30	)		(54	)		(56	)
Adjustments in respect of prior years		23			43			1
		(12	)		(15	)		(66	)
Taxation		(62	)		(75	)		(64	)

F-18

NOTES TO THE ACCOUNTS (Continued)

      The current tax charge for the year is different from the standard rate of corporation tax in the UK (30%). The differences are explained below:

	2004			2003			2002
	(All figures in £ millions)
Profit before tax		171			152			(25	)
Expected charge at UK corporation tax rate of 30% (2003: 30%)		(51	)		(46	)		8
Effect of overseas tax rates		7			8			11
Effect of tax losses		(9	)		(5	)		(7	)
Timing differences		35			64			55
Non-deductible goodwill amortisation		(61	)		(90	)		(111	)
Adjustments in respect of prior years and other items		29			9			46
Current tax (charge)/benefit for the year		(50	)		(60	)		2

	2004			2003			2002
	(All figures in percentages)
Tax rate reconciliation
UK tax rate		30.0			30.0			30.0
Effect of overseas tax rates		1.4			1.3			2.8
Other items		(1.1	)		(0.1	)		—
Tax rate reflected in adjusted earnings		30.3			31.2			32.8

Note The current tax charge on profit before tax will continue to be affected by the fact that there is only partial tax relief available on the goodwill amortisation charged in the accounts. The charge will also be affected by the utilisation of tax losses and by the impact of other timing differences, in both cases mainly in the United States.

In both 2004 and 2003 the tax charge was materially affected by adjustments in respect to prior years; it is not practicable to forecast the possible effect of such items in future years as this will depend on progress in agreeing the Group’s tax returns with the tax authorities.

The total charge in future years will also be affected by any changes to corporation tax rates and/or any other relevant legislative changes in the jurisdictions in which the Group operates and by the mix of profits between the different jurisdictions.

8 DIVIDENDS ON EQUITY SHARES

	2004				2003				2002
	Pence				Pence				Pence
	per share		£m		per share		£m		per share		£m
Interim paid		9.7		76		9.4		73		9.1		72
Final proposed		15.7		125		14.8		119		14.3		115
Dividends for the year		25.4		201		24.2		192		23.4		187

Note Dividends in respect of the company’s shares held by employee share trusts (see note 24) have been waived.

F-19

NOTES TO THE ACCOUNTS (Continued)

9 EARNINGS/(LOSS) PER SHARE

		2004				2003				2002
				Earnings/				Earnings/					Earnings/
				(loss)				(loss)					(loss)
				per share				per share					per share
	Note	£m		(p)		£m		(p)		£m			(p)
Profit/(loss) for the financial year			88		11.1		55		6.9		(111	)		(13.9	)
Diluted earnings/(loss)			88		11.0		55		6.9		(111	)		(13.9	)
Weighted average number of shares (millions)
— for basic earnings and adjusted earnings			795.6				794.4				796.3
Effect of dilutive share options			1.1				0.9				—
Weighted average number of shares (millions)
— for diluted earnings			796.7				795.3				796.3

10a     EMPLOYEE INFORMATION

      The details of the emoluments of the directors of Pearson plc are shown on pages 46 to 57.

	2004		2003		2002
	(All figures in £ millions)
Staff costs
Wages and salaries		1,023		1,027		1,106
Social security costs		105		99		106
Post-retirement costs		68		62		59
		1,196		1,188		1,271

	UK		US		Other		Total
Average number employed 2004
Pearson Education		2,071		16,133		4,080		22,284
FT Group		1,709		1,352		2,594		5,655
The Penguin Group		1,067		2,026		992		4,085
Other		792		572		1		1,365
		5,639		20,083		7,667		33,389

	UK		US		Other		Total
Average number employed 2003
Pearson Education		1,443		14,438		4,097		19,978
FT Group		1,885		1,397		2,362		5,644
The Penguin Group		1,223		2,115		980		4,318
Other		414		513		1		928
		4,965		18,463		7,440		30,868

F-20

NOTES TO THE ACCOUNTS (Continued)

	UK		US		Other		Total
Average number employed 2002
Pearson Education		1,326		14,459		4,250		20,035
FT Group		1,914		1,140		2,169		5,223
The Penguin Group		1,305		2,167		890		4,362
Other		204		534		1		739
		4,749		18,300		7,310		30,359

10b     PENSIONS

      SSAP 24 accounting The Group operates 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 being held independently of the Group. Pension costs are assessed in accordance with the advice of independent qualified actuaries. The UK scheme is a hybrid scheme with both defined benefit and defined contribution sections but, predominantly, consisting of defined benefit liabilities. There are a number of defined contribution schemes, principally overseas. The cost of the schemes is as follows:

	2004		2003		2002
	(All figures in £ millions)
UK Group scheme
Regular pension cost
— Defined benefit sections		10		10		11
— Defined contribution sections		8		7		7
Variation cost		9		6		—
		27		23		18
Other schemes
Defined benefit schemes		6		7		6
Defined contribution schemes		29		27		30
		35		34		36
		62		57		54

Note From 1 January 2003 the UK Group scheme only offers defined contribution benefits to new joiners. The main US defined benefit scheme was closed to the majority of active members in 2001. The changes to these schemes will give rise to a reduction in defined benefit and an increase in defined contribution costs.

      Included in the balance sheet, there is a pension provision of £19m (2003: £29m) as measured in accordance with SSAP 24 (see note 22).

F-21

NOTES TO THE ACCOUNTS (Continued)

      A full actuarial valuation of the UK Group scheme was performed as at 1 January 2004 using the projected unit method of valuation. The market value of the assets of the scheme at 1 January 2004 was £1,091m. The major assumptions used to determine the SSAP 24 charge are as follows:

	UK Group
	scheme
	(All figures in
	percentages)
Inflation		2.75
Rate of increase in salaries		4.75
Rate of increase for pensions in payment and deferred pensions		2.0 to 4.5
Return on investments		7.1
Level of funding		95

      The funding policy differs from the accounting policy to the extent that more conservative assumptions are used for funding purposes. In particular, the deficit measured on the funding assumptions was £137m (compared to £56m on the SSAP 24 assumptions). Please refer to page F-23 for further details of the funding of the scheme.

      The next full actuarial valuation of the UK Group scheme for funding purposes is due to be carried out as at 1 January 2006. The date of the most recent valuation of the US plan was 1 January 2004.

      FRS 17 disclosures The disclosures required under the transitional arrangements of FRS 17 for the Group’s defined benefit schemes and the UK Group hybrid scheme are set out below. The disclosures for the UK Group hybrid scheme are in respect of both the defined benefit and defined contribution sections.

      For the purpose of these disclosures, the latest full actuarial valuations of the UK Group scheme and other schemes have been updated by independent actuaries to 31 December 2004. The assumptions used are shown below. Weighted average assumptions have been shown for the other schemes.

	2004				2003				2002
	UK Group		Other		UK Group		Other		UK Group		Other
	scheme		schemes		scheme		schemes		scheme		schemes
	(All figures in percentages)
Inflation		2.80		3.00		2.75		3.00		2.25		3.00
Rate of increase in salaries		4.80		4.50		4.75		4.50		4.25		4.50
Rate of increase for pensions in payment and deferred pensions		2.80–4.00		—		2.75–4.00		—		2.25–4.00		—
Rate used to discount scheme liabilities		5.40		5.85		5.50		6.10		5.70		6.75

F-22

NOTES TO THE ACCOUNTS (Continued)

      The assets of the UK Group scheme and the expected rate of return on these assets, and the assets of the other defined benefit schemes and the expected rate of return on these assets shown as a weighted average, are as follows:

	Long-term					Long-term					Long-term
	rate of return					rate of return					rate of return
	expected at		Value at			expected at		Value at			expected at		Value at
	31 Dec 2004		31 Dec 2004			31 Dec 2003		31 Dec 2003			31 Dec 2002		31 Dec 2002
	%		£m			%		£m			%		£m
UK Group scheme
Equities		7.50		638			7.75		589			8.00		472
Bonds		4.75		276			5.00		262			4.75		284
Properties		6.25		113			6.50		107			6.50		112
Other		6.25		174			6.50		133			6.50		108
Total market value of assets				1,201					1,091					976
Present value of scheme liabilities				(1,495	)				(1,316	)				(1,189	)
Deficit in the scheme				(294	)				(225	)				(213	)
Related deferred tax asset				88					68					64
Net pension liability				(206	)				(157	)				(149	)
Other schemes
Equities		8.50		45			9.00		41			9.75		33
Bonds		5.50		26			6.00		25			6.00		23
Other		3.75		2			2.80		1			2.75		1
Total market value of assets				73					67					57
Present value of scheme liabilities				(102	)				(104	)				(96	)
Deficit in the schemes				(29	)				(37	)				(39	)
Related deferred tax asset				10					13					14
Net pension liability				(19	)				(24	)				(25	)

Note The measurement of the deficit in the scheme for FRS 17 follows a different approach to SSAP 24. The FRS 17 measurement date is 31 December 2004. Although the rise in stock markets in 2004 increased the market value of the UK Group scheme assets, this is more than offset by the increase in the present value of the UK Group scheme liabilities. This increase has largely been caused by use of the 1 January 2004 formal funding valuation and the change in both economic and mortality assumptions used for FRS 17 purposes since 31 December 2003. This has resulted in an increased deficit in the UK Group scheme under FRS 17.

F-23

NOTES TO THE ACCOUNTS (Continued)

				Defined
	UK Group			benefit						Defined			2004
	scheme			other			Sub-total			contribution			Total
	(All figures in £ millions)
Operating charge
Current service cost		(24	)		(1	)		(25	)		(29	)		(54	)
Past service cost		—			—			—			—			—
Total operating charge		(24	)		(1	)		(25	)		(29	)		(54	)
Other finance income/(charge)
Expected return on pension scheme assets		73			5			78			—			78
Interest on pension scheme liabilities		(70	)		(6	)		(76	)		—			(76	)
Net finance credit/(charge)		3			(1	)		2			—			2
Net profit and loss impact		(21	)		(2	)		(23	)		(29	)		(52	)
Statement of total recognised gains and losses
Actual return less expected return on pension scheme assets		60			2			62
Experience (losses)/gains arising on the scheme liabilities		(62	)		1			(61	)
Changes in assumptions underlying the present value of the scheme liabilities		(76	)		(4	)		(80	)
Exchange differences		—			2			2
Actuarial (loss)/gain		(78	)		1			(77	)
Movement in deficit during the year
Deficit in scheme at beginning of the year		(225	)		(37	)		(262	)
Current service cost		(24	)		(1	)		(25	)
Past service cost		—			—			—
Contributions		30			9			39
Other finance charge		3			(1	)		2
Actuarial (loss)/gain		(78	)		1			(77	)
Deficit in scheme at end of the year		(294	)		(29	)		(323	)
Related deferred tax asset		88			10			98
Net pension deficit		(206	)		(19	)		(225	)

      Following the 1 January 2004 actuarial valuation for funding purposes, the Group has agreed to pay contributions of 14.8% of pensionable salaries, plus contributions in respect of the Money Purchase 2003 section introduced with effect from 1 January 2003, in respect of future service benefits. Further, the Group has agreed to pay contributions of £10m in respect of 2004, £15m in respect of 2005 and £21m in respect of each year from 2006 to 2013 to fund the past service deficit revealed by the funding valuation.

F-24

NOTES TO THE ACCOUNTS (Continued)

				Defined
	UK Group			benefit						Defined			2003
	scheme			other			Sub-total			contribution			Total
	(All figures in £ millions)
Operating charge
Current service cost		(20	)		(1	)		(21	)		(27	)		(48	)
Past service cost		—			(1	)		(1	)		—			(1	)
Total operating charge		(20	)		(2	)		(22	)		(27	)		(49	)
Other finance income/(charge)
Expected return on pension scheme assets		65			5			70			—			70
Interest on pension scheme liabilities		(66	)		(7	)		(73	)		—			(73	)
Net finance charge		(1	)		(2	)		(3	)		—			(3	)
Net profit and loss impact		(21	)		(4	)		(25	)		(27	)		(52	)
Statement of total recognised gains and losses
Actual return less expected return on pension scheme assets		80			8			88
Experience losses arising on the scheme liabilities		(1	)		(8	)		(9	)
Changes in assumptions underlying the present value of the scheme liabilities		(95	)		(6	)		(101	)
Exchange differences		—			3			3
Actuarial loss		(16	)		(3	)		(19	)
Movement in deficit during the year
Deficit in scheme at beginning of the year		(213	)		(39	)		(252	)
Current service cost		(20	)		(1	)		(21	)
Past service cost		—			(1	)		(1	)
Contributions		25			9			34
Other finance charge		(1	)		(2	)		(3	)
Actuarial loss		(16	)		(3	)		(19	)
Deficit in scheme at end of the year		(225	)		(37	)		(262	)
Related deferred tax asset		68			13			81
Net pension deficit		(157	)		(24	)		(181	)

      The contribution rate for 2003 for the UK Group scheme was 17.1% of pensionable salaries, plus £1m in respect of the new Money Purchase section introduced with effect from 1 January 2003. In addition, a one-off contribution of £5m was paid into this scheme to improve the funding position.

F-25

NOTES TO THE ACCOUNTS (Continued)

				Defined
	UK Group			benefit						Defined			2002
	scheme			other			Sub-total			contribution			Total
	(All figures in £ millions)
Operating charge
Current service cost		(19	)		(3	)		(22	)		(30	)		(52	)
Past service cost		—			(1	)		(1	)		—			(1	)
Total operating charge		(19	)		(4	)		(23	)		(30	)		(53	)
Other finance income/(charge)
Expected return on pension scheme assets		73			5			78			—			78
Interest on pension scheme liabilities		(68	)		(6	)		(74	)		—			(74	)
Net finance charge		5			(1	)		4			—			4
Net profit and loss impact		(14	)		(5	)		(19	)		(30	)		(49	)
Statement of total recognised gains and losses
Actual return less expected return on pension scheme assets		(165	)		(11	)		(176	)
Experience losses arising on the scheme liabilities		17			(1	)		16
Changes in assumptions underlying the present value of the scheme liabilities		3			(4	)		(1	)
Exchange differences		—			2			2
Actuarial loss		(145	)		(14	)		(159	)
Movement in deficit during the year
Deficit in scheme at beginning of the year		(73	)		(34	)		(107	)
Current service cost		(19	)		(3	)		(22	)
Past service cost		—			(1	)		(1	)
Contributions		19			14			33
Other finance charge		5			(1	)		4
Actuarial loss		(145	)		(14	)		(159	)
Deficit in scheme at end of the year		(213	)		(39	)		(252	)
Related deferred tax asset		64			14			78
Net pension deficit		(149	)		(25	)		(174	)

      The contribution rate for 2002 for the UK Group scheme was 17.1% of pensionable salaries.

      The experience gains and losses of both the UK Group scheme and other schemes are shown below:

	2004		2003		2002
History of experience gains and losses
Difference between the actual and expected return on scheme assets		£62m		£88m		£(176)m
As a percentage of year end assets		5%		8%		(17)%
Experience gains and (losses) on scheme liabilities		£(61)m		£(9)m		£16m
As a percentage of year end liabilities		(4)%		(1)%		1%
Total amount recognised in statement of total recognised gains and losses		£(77)m		£(19)m		£(159)m
As a percentage of year end liabilities		(5)%		(1)%		(12)%

F-26

NOTES TO THE ACCOUNTS (Continued)

      If the above amounts had been recognised in the financial statements, the Group’s net assets and profit and loss reserve at 31 December 2004 would be as follows:

	2004			2003
	(All figures in
	£ millions)
Net assets excluding pension liability (see note below)		2,835			3,117
FRS 17 pension liability		(225	)		(181	)
Net assets including FRS 17 pension liability		2,610			2,936
Profit and loss reserve excluding pension reserve (see note below)		(52	)		252
FRS 17 pension reserve		(225	)		(181	)
Profit and loss reserve including FRS 17 pension reserves		(277	)		71

Note The net assets and profit and loss reserve exclude the pension liability of £19m (2003: £29m) included within provisions (see note 22).

10c OTHER POST-RETIREMENT BENEFITS

      UITF 6 accounting The Group provides certain healthcare and life assurance benefits principally for retired US employees and their dependents. These plans are unfunded. Retirees are eligible for participation in the plans if they meet certain age and service requirements. Plans that are available vary depending on the business division in which the retiree worked. Plan choices and retiree contributions are dependent on retirement date, business division, option chosen and length of service. The valuation and costs relating to other post-retirement benefits are assessed in accordance with the advice of independent qualified actuaries. The cost of the benefits and the major assumptions used, based on a valuation with a measurement date of 31 December 2003, are as follows:

	2004		2003		2002
	(All figures in £ millions)
Other post-retirement benefits		6		5		5

	(All figures in
	percentages)
Inflation	3.0
Initial rate of increase in healthcare rates	12.0
Ultimate rate of increase in healthcare rates (2008)	5.0
Rate used to discount scheme liabilities	6.1

      Included in the balance sheet, there is a post-retirement medical benefits provision of £51m (2003: £51m). In accordance with UITF 6, the cost of post-retirement benefits, and related provisions, are based on the equivalent US GAAP standard, FAS 106 (see note 22).

      FRS 17 disclosures The disclosures required under the transitional arrangements of FRS 17 are set out below. For the purpose of these disclosures the valuation of the schemes has been updated to 31 December 2004 using the assumptions listed below.

	2004		2003		2002
	(All figures in percentages)
Inflation		3.00		3.00		3.00
Initial rate of increase in healthcare rates		12.00		12.00		12.00
Ultimate rate of increase in healthcare rates (2009; 2008; 2007)		5.00		5.00		5.00
Rate used to discount scheme liabilities		5.85		6.10		6.75

F-27

NOTES TO THE ACCOUNTS (Continued)

	2004			2003			2002
	(All figures in £ millions)
The value of the unfunded liability is as follows:
Present value of unfunded liabilities		(58	)		(61	)		(63	)
Related deferred tax asset		20			21			22
Net post-retirement healthcare liability		(38	)		(40	)		(41	)
Operating charge
Current service cost		(1	)		(1	)		(1	)
Past service cost		—			—			—
Total operating charge		(1	)		(1	)		(1	)
Other finance charge
Interest on pension scheme liabilities		(3	)		(4	)		(4	)
Net finance charge		(3	)		(4	)		(4	)
Net profit and loss impact		(4	)		(5	)		(5	)
Statement of total recognised gains and losses
Experience gains arising on the scheme liabilities		5			3			3
Changes in assumptions underlying the present value of the scheme liabilities		(5	)		(6	)		(7	)
Exchange differences		4			6			5
Actuarial gain		4			3			1
Movement in deficit during the year
Deficit in scheme at beginning of the year		(61	)		(63	)		(63	)
Current service cost		(1	)		(1	)		(1	)
Contributions		3			4			4
Other finance charge		(3	)		(4	)		(4	)
Actuarial gain		4			3			1
Deficit in scheme at end of the year		(58	)		(61	)		(63	)
Related deferred tax asset		20			21			22
Net post-retirement deficit		(38	)		(40	)		(41	)

The experience gains and losses for the schemes are shown below:

	2004			2003			2002
History of experience gains and losses
Experience gains on scheme liabilities		£5	m		£3	m		£3	m
As a percentage of year end liabilities		9	%		5	%		4	%
Total amount recognised in statement of total recognised gains and losses		£4	m		£3	m		£1	m
As a percentage of year end liabilities		7	%		5	%		2	%

F-28

NOTES TO THE ACCOUNTS (Continued)

      If the above amounts had been recognised in the financial statements, the Group’s net assets and profit and loss reserves at 31 December 2004 would be as follows:

	2004			2003
	(All figures in
	£ millions)
Net assets excluding post-retirement healthcare liability (see note below)		2,867			3,139
FRS 17 post-retirement healthcare liability		(38	)		(40	)
Net assets including FRS 17 post-retirement healthcare liability		2,829			3,099
Profit and loss reserve excluding post-retirement healthcare reserve (see note below)		(20	)		274
FRS 17 post-retirement healthcare reserve		(38	)		(40	)
Profit and loss reserve including FRS 17 post-retirement healthcare reserve		(58	)		234

Note The net assets and profit and loss reserve exclude the post-retirement healthcare liability of £51m (2003: £51m) included within provisions (see note 22).

11 INTANGIBLE FIXED ASSETS

	Goodwill
	(All figures in
	£ millions)
Cost
At 31 December 2002		4,487
Exchange differences		(321	)
Additions		157
Disposals		(99	)
At 31 December 2003		4,224
Exchange differences		(245	)
Additions		33
Disposals		—
At 31 December 2004		4,012
Amortisation
At 31 December 2002		(877	)
Exchange differences		75
Provided in the year		(257	)
Disposals		95
At 31 December 2003		(964	)
Exchange differences		66
Provided in the year		(224	)
Disposals		—
At 31 December 2004		(1,122	)
Net carrying amount
At 31 December 2003		3,260
At 31 December 2004		2,890

F-29

NOTES TO THE ACCOUNTS (Continued)

12 TANGIBLE FIXED ASSETS

							Assets in
	Freehold and			Plant and			course of
	leasehold property			equipment			construction			Total
	(All figures in £ millions)
Cost
At 31 December 2002		319			750			20			1,089
Exchange differences		(19	)		(33	)		(3	)		(55	)
Reclassifications		1			9			(10	)		—
Owned by subsidiaries acquired		5			19			—			24
Owned by subsidiaries disposed		(2	)		(6	)		—			(8	)
Capital expenditure		12			77			15			104
Disposals		(15	)		(63	)		—			(78	)
At 31 December 2003		301			753			22			1,076
Exchange differences		(9	)		(27	)		—			(36	)
Reclassifications		—			14			(14	)		—
Owned by subsidiaries acquired		1			4			—			5
Owned by subsidiaries disposed		(4	)		—			—			(4	)
Additions		14			103			10			127
Disposals		(13	)		(44	)		—			(57	)
At 31 December 2004		290			803			18			1,111
Depreciation
At 31 December 2002		(104	)		(482	)		—			(586	)
Exchange differences		10			27			—			37
Provided in the year		(16	)		(95	)		—			(111	)
Owned by subsidiaries acquired		—			(14	)		—			(14	)
Owned by subsidiaries disposed		1			4			—			5
Disposals		7			54			—			61
At 31 December 2003		(102	)		(506	)		—			(608	)
Exchange differences		4			19			—			23
Provided in the year		(16	)		(86	)		—			(102	)
Owned by subsidiaries acquired		—			(4	)		—			(4	)
Owned by subsidiaries disposed		4			—			—			4
Disposals		6			43			—			49
At 31 December 2004		(104	)		(534	)		—			(638	)
Net book value
At 31 December 2003		199			247			22			468
At 31 December 2004		186			269			18			473

      Freehold and leasehold property — Net book value includes freehold of £109m (2003: £120m) and short leases of £77m (2003: £79m).

      Capital commitments — The Group had capital commitments for fixed assets, including finance leases, already under contract amounting to £6m at 31 December 2004 (2003: £1m).

F-30

NOTES TO THE ACCOUNTS (Continued)

      Other notes — The net book value of Group tangible fixed assets includes £3m (2003: £5m) in respect of assets held under finance leases. Depreciation on these assets charged in 2004 was £2m (2003: £2m).

13 JOINT VENTURES

	2004				2003
	Valuation		Book value		Valuation		Book value
	(All figures in £ millions)
Unlisted joint ventures		7		7		6		6

Note The valuations of unlisted joint ventures are directors’ valuations as at 31 December 2004. If realised at these values there would be an estimated liability for taxation of £nil (2003: £nil). The Group had no capital commitments to subscribe for further capital or loan stock.

	Share					Total
	of equity		Reserves			net assets
	(All figures in £ millions)
Summary of movements
At 31 December 2003		75		(69	)		6
Exchange differences		1		—			1
Additions		10		(2	)		8
Dividends (including tax credits) from joint ventures		—		(1	)		(1	)
Retained loss for the year		—		(7	)		(7	)
At 31 December 2004		86		(79	)		7

	2004					2003					2002
	Operating			Total		Operating			Total		Operating			Total
	loss			net assets		loss			net assets		loss			net assets
	(All figures in £ millions)
Business sectors
Pearson Education		—			—		—			—		(1	)		—
FT Group		(8	)		2		(11	)		2		(13	)		3
The Penguin Group		1			5		1			4		1			4
		(7	)		7		(10	)		6		(13	)		7
Geographical markets supplied and location of net assets
United Kingdom		1			4		1			4		1			4
Continental Europe		(8	)		3		(11	)		2		(13	)		3
North America		—			—		—			—		(1	)		—
		(7	)		7		(10	)		6		(13	)		7

	2004			2003			2002
	(All figures in £ millions)
Reconciliation to retained loss
Operating loss of joint ventures		(7	)		(10	)		(13	)
Taxation		—			—			—
Retained loss for the year		(7	)		(10	)		(13	)

F-31

NOTES TO THE ACCOUNTS (Continued)

14 ASSOCIATES

	2004				2003
	Valuation		Book value		Valuation		Book value
	(All figures in £ millions)
Listed associates		53		9		27		9
Unlisted associates		175		32		192		49
		228		41		219		58

Note Principal associates are listed in note 34. The valuations of unlisted associates are directors’ valuations as at 31 December 2004. If realised at these values there would be an estimated liability for taxation of £nil (2003: £nil). The Group had no capital commitments to subscribe for further capital or loan stock.

	Share															Total
	of equity			Loans			Reserves			Total			Goodwill			net assets
	(All figures in £ millions)
Summary of movements
At 31 December 2002		64			1			9			74			32			106
Exchange differences		1			1			—			2			(1	)		1
Disposals		(16	)		—			(5	)		(21	)		(24	)		(45	)
Loan repayment		—			(2	)		—			(2	)		—			(2	)
Retained profit for the year		—			—			5			5			—			5
Goodwill amortisation		—			—			—			—			(7	)		(7	)
At 31 December 2003		49			—			9			58			—			58
Exchange differences		(1	)		—			1			—			—			—
Additions		1			—			—			1			—			1
Disposals		(24	)		—			—			(24	)		—			(24	)
Retained profit for the year		—			—			6			6			—			6
At 31 December 2004		25			—			16			41			—			41

F-32

NOTES TO THE ACCOUNTS (Continued)

	2004					2003						2002
	Operating		Total			Operating			Total			Operating			Total
	profit		net assets			profit			net assets			loss			net assets
	(All figures in £ millions)
Business sectors
Pearson Education		1		5			1			4			2			8
FT Group		14		33			7			30			(37	)		98
Continuing operations		15		38			8			34			(35	)		106
Discontinued operations		2		3			2			24			(3	)		—
		17		41			10			58			(38	)		106
Geographical markets supplied and location of net assets/(liabilities)
United Kingdom		9		19			10			20			11			9
Continental Europe		1		13			2			39			(1	)		92
North America		4		(1	)		(3	)		(7	)		(45	)		(5	)
Rest of world		1		7			1			6			—			10
Continuing operations		15		38			10			58			(35	)		106
Discontinued operations		2		3			—			—			(3	)		—
		17		41			10			58			(38	)		106

	2004			2003			2002
	(All figures in £ millions)
Reconciliation to retained profit
Operating profit of associates (before goodwill amortisation)		17			17			10
Interest		1			1			—
Profit on sale of subsidiaries		—			—			3
Taxation		(3	)		(5	)		(4	)
Dividends (including tax credits) from unlisted associates		(9	)		(8	)		(7	)
Retained profit for the year		6			5			2

      The aggregate of the Group’s share in its associates is shown below:

	2004			2003			2002
	(All figures in £ millions)
Sales		290			234			141
Fixed assets		22			24			28
Current assets		102			116			130
Liabilities due within one year		(75	)		(70	)		(76	)
Liabilities due after one year or more		(8	)		(12	)		(8	)
Net assets		41			58			74

F-33

NOTES TO THE ACCOUNTS (Continued)

15 OTHER FIXED ASSET INVESTMENTS

					2003
	2004				restated
	Valuation		Book value		Valuation		Book value
	(All figures in £ millions)
Unlisted other fixed asset investments		17		17		21		21

Note The valuations of unlisted investments are directors’ valuations as at 31 December 2004. If realised at valuation there would be an estimated liability for taxation of £nil (2003: £nil). Other fixed asset investments have been restated for the adoption of UITF 38 (see note 24).

	Total
	(All figures in
	£ millions)
Cost
At 31 December 2002 restated		60
Exchange differences		(3	)
Additions		3
Disposals		(1	)
At 31 December 2003 restated		59
Exchange differences		(2	)
Additions		1
Disposals		(25	)
At 31 December 2004		33
Provision
At 31 December 2002 restated		(38	)
Provided during the year		—
At 31 December 2003 restated		(38	)
Exchange differences		1
Provision written back in the year		4
Disposals		17
At 31 December 2004		(16	)
Net book value
At 31 December 2003 restated		21
At 31 December 2004		17

16 STOCKS

	2004		2003
	(All figures in £
	millions)
Raw materials		27		24
Work in progress		36		30
Finished goods		261		270
Pre-publication costs		352		359
		676		683

F-34

NOTES TO THE ACCOUNTS (Continued)

Note The replacement cost of stocks is not materially different from book value.

17 DEBTORS

	2004		2003
	(All figures in
	£ millions)
Amounts falling due within one year
Trade debtors		785		822
Associates		1		1
Joint ventures		1		—
Royalty advances		116		110
Other debtors		53		61
Prepayments and accrued income		45		38
		1,001		1,032
Amounts falling due after more than one year
Royalty advances		70		83
Other debtors		31		16
Prepayments and accrued income		1		1
		102		100
		1,103		1,132

18 CASH AT BANK AND IN HAND

	2004				2003
	Group		Company		Group		Company
	(All figures in £ millions)
Cash, bank current accounts and overnight deposits		371		—		309		—
Certificates of deposit and commercial paper		5		—		8		—
Term bank deposits		237		87		244		75
		613		87		561		75

19 FINANCIAL INSTRUMENTS

      Treasury policy The Group holds financial instruments for two principal purposes: to finance its operations and to manage the interest rate and currency risks arising from its operations and its sources of finance.

      The Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets. The Group borrows principally in US dollars, euros and sterling, at both floating and fixed rates of interest, using derivatives, where appropriate, to generate the desired effective currency profile and interest rate basis.

      The derivatives used for this purpose are principally interest rate swaps, interest rate caps and collars, currency swaps and forward foreign exchange contracts. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity and refinancing risk, counterparty risk and foreign currency risk. These risks are managed by the chief financial officer under policies approved by the board, which are summarised below. These policies have remained unchanged, except as disclosed, since the beginning of 2003. A treasury committee of the board receives reports on the Group’s treasury activities, policies and procedures,

F-35

NOTES TO THE ACCOUNTS (Continued)

which are reviewed periodically by a group of external professional advisers. The treasury department is not a profit centre and its activities are subject to internal audit.

      Interest rate risk The Group’s exposure to interest rate fluctuations on its borrowings is managed by borrowing on a fixed rate basis and by entering into interest rate swaps, interest rate caps and forward rate agreements. Since October 2002 the Group’s policy objective has been to set a target proportion of its forecast borrowings (taken at the year end, with cash netted against floating rate debt) to be hedged (i.e. fixed or capped) over the next four years within a 40% to 65% range. At the end of 2004 that ratio was 61%. A 1% change in the Group’s variable rate US dollar, euro and sterling interest rates would have a £5m effect on profit before tax.

      Liquidity and refinancing risk The Group’s objective is to procure continuity of funding at a reasonable cost. To do this it seeks to arrange committed funding for a variety of maturities from a diversity of sources. The Group’s policy objective has been that the weighted average maturity of its core gross borrowings (treating short-term advances as having the final maturity of the facilities available to refinance them) should be between three and 10 years. At the end of 2004 the average maturity of gross borrowings was six years and non-banks provided £1,650m (91%) of them (up from 4.9 years and 89% respectively at the beginning of the year). The Group believes that ready access to different funding markets also helps to reduce its liquidity risk, and that published credit ratings and published financial policies improve such access. All of the Group’s credit ratings remained unchanged during the year. The long-term ratings are Baa1 from Moody’s and BBB+ from Standard & Poor’s, and the short-term ratings are P2 and A2 respectively. The Group strives to maintain a rating of at least BBB+/ Baa1 over the long term. The Group will also continue to use internally a range of ratios to monitor and manage its finances. These include interest cover, net debt to operating profit, net debt to enterprise value and cash flow to debt measures. The Group also maintains undrawn committed borrowing facilities. At the end of 2004 these amounted to £641m and their weighted average maturity was 4.5 years.

      Counterparty risk The Group’s risk of loss on deposits or derivative contracts with individual banks is managed in part through the use of counterparty limits. These limits, which take published credit limits (among other things) into account, are approved by the Chief Financial Officer. In addition, for certain longer-dated, higher-value derivative contracts, specifically, a currency swap that transforms a major part of the 6.125% eurobonds due 2007 into a US dollar liability, the Group has entered into mark-to-market agreements whose effect is to reduce significantly the counterparty risk of the relevant transactions.

      Currency risk Although the Group is based in the UK, it has its most significant investment in overseas operations. The most significant currency for the Group is the US dollar, followed by the euro and sterling. The Group’s policy on routine transactional conversions between currencies (for example, the collection of receivables, and the settlement of payables or interest) remains that these should be affected at the relevant spot exchange rate. No unremitted profits are hedged with foreign exchange contracts as the company judges it inappropriate to hedge non-cash flow transnational exposure with cash flow instruments. However, the Group does seek to create a “natural hedge” through its policy of aligning approximately the currency composition of its core borrowings in US dollars, euros and sterling with the split between those currencies of its forecast operating profit. This policy aims to dampen the impact of changes in foreign exchange rates on consolidated interest cover and earnings. Long-term core borrowing is limited to these three major currencies. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. At the year end the split of aggregate net borrowings in its three core currencies was US dollar 88%, euro 7% and sterling 5%.

      Short-term debtors and creditors have been excluded from all the following disclosures, other than currency risk disclosures as set out in table e.

F-36

NOTES TO THE ACCOUNTS (Continued)

a.     Maturity of borrowings and other financial liabilities

      The maturity profile of the Group’s borrowings and other financial liabilities is shown below:

	2004				2003
	Group		Company		Group		Company
	(All figures in £ millions)
Maturity of borrowings
Short-term
Bank loans and overdrafts		107		139		119		262
9.5% Sterling Bonds 2004		—		—		108		—
4.625% Euro Bonds 2004		—		—		348		348
Total due within one year, or on demand		107		139		575		610
Medium and long-term
Loans or instalments thereof repayable:
From one to two years		130		—		85		—
From two to five years		733		541		582		443
After five years not by instalments		849		640		680		680
Total due after more than one year		1,712		1,181		1,347		1,123
Total borrowings		1,819		1,320		1,922		1,733

Note At 31 December 2004 £61m (2003: £85m) of debt, including commercial paper, currently classified from two to five years would be repayable within one year if refinancing contracts were not in place. The short-term bank loans and overdrafts of the Group are lower than those of the company because of bank offset arrangements.

	2004						2003
	Group		Group other				Group		Group other
	finance		financial		Group		finance		financial		Group
	leases		liabilities		total		leases		liabilities		total
	(All figures in £ millions)
Maturity of other financial liabilities
Amounts falling due:
In one year or less or on demand		2		4		6		3		5		8
In more than one year but not more than two years		1		19		20		1		14		15
In more than two years but not more than five years		1		9		10		1		7		8
In more than five years		—		25		25		—		21		21
		4		57		61		5		47		52

F-37

NOTES TO THE ACCOUNTS (Continued)

b. Borrowings by instrument

	2004				2003
	Group		Company		Group		Company
	(All figures in £ millions)
Unsecured
9.5% Sterling Bonds 2004		—		—		108		—
4.625% Euro Bonds 2004		—		—		348		348
7.375% US Dollar notes 2006		130		—		139		—
6.125% Euro Bonds 2007		390		390		343		343
10.5% Sterling Bonds 2008		100		100		100		100
4.7% US Dollar Bonds 2009		181		—		—		—
7% Global Dollar Bonds 2011		260		260		278		278
7% Sterling Bonds 2014		226		226		235		235
5.7% US Dollar Bonds 2014		207		—		—		—
4.625% US Dollar notes 2018		156		156		167		167
Bank loans and overdrafts and commercial paper		169		188		204		262
Total borrowings		1,819		1,320		1,922		1,733

c. Undrawn committed borrowing facilities

	2004		2003
	(All figures in
	£ millions)
Expiring within one year		—		—
Expiring between one and two years		—		950
Expiring in more than two years		641		—
		641		950

Note All of the above committed borrowing facilities incur commitment fees at market rates. In addition to the above facilities, there are a number of short-term overdrafts that are utilised in the normal course of the business.

d. Currency and interest rate risk profile

	2004
							Fixed rate borrowings
									Weighted
							Weighted		average
			Total		Total		average		period for
			variable		fixed		interest		which rate is
	Borrowings		rate		rate		rate		fixed —
	£m		£m		£m		%		years
Currency and interest rate risk profile of borrowings
US dollar		1,332		830		502		5.8		2.4
Sterling		201		91		110		8.9		6.4
Euro		284		160		124		5.6		1.5
Other currencies		2		2		—		—		—
		1,819		1,083		736

F-38

NOTES TO THE ACCOUNTS (Continued)

	2003
							Fixed rate borrowings
									Weighted
							Weighted		average
			Total		Total		average		period for
			variable		fixed		interest		which rate is
	Borrowings		rate		rate		rate		fixed —
	£m		£m		£m		%		years
Currency and interest rate risk profile of borrowings
US dollar		1,427		864		563		5.9		3.2
Sterling		201		61		140		8.0		9.0
Euro		292		166		126		5.3		1.7
Other currencies		2		2		—		—		—
		1,922		1,093		829

Note The figures shown in the tables above take into account interest rate, currency swaps and forward rate contracts entered into by the Group. Variable rate borrowings bear interest at rates based on relevant national LIBOR equivalents.

	2004
	Other		Total		Total
	financial		fixed		no interest
	liabilities		rate		paid
	(All figures in £ millions)
Currency and interest rate risk profile of other financial liabilities
US dollar		40		10		30
Sterling		8		3		5
Euro		11		—		11
Other currencies		2		1		1
		61		14		47

Note The US dollar fixed rate liability is fixed for 7 years at a rate of 6.3%. The sterling fixed rate liability is fixed for 2 years at a rate of 6.9%. The other currencies fixed rate liability is fixed for 3 years at a rate of 5.0%.

	2003
	Other		Total		Total
	financial		fixed		no interest
	liabilities		rate		paid
	(All figures in £ millions)
Currency and interest rate risk profile of other financial liabilities
US dollar		35		4		31
Sterling		5		1		4
Euro		12		—		12
		52		5		47

F-39

NOTES TO THE ACCOUNTS (Continued)

	2004
							Other
	US dollar		Sterling		Euro		currencies		Total
	(All figures in £ millions)
Currency and interest rate risk profile of financial assets
Cash at bank and in hand		170		52		72		77		371
Short-term deposits		7		89		125		21		242
Other financial assets		33		12		3		1		49
		210		153		200		99		662
Fixed rate		5		3		—		1		9
Floating rate		189		140		195		95		619
No interest received		16		10		5		3		34
		210		153		200		99		662

Note The US dollar fixed rate asset is fixed for 11 years at a rate of 8.2%. The sterling fixed rate asset is fixed for 5 years at a rate of 7.0%. The other currencies fixed rate asset is fixed for 7 years at a rate of 2.0%.

	2003
							Other
	US dollar		Sterling		Euro		currencies		Total
	(All figures in £ millions)
Currency and interest rate risk profile of financial assets
Cash at bank and in hand		150		54		40		65		309
Short-term deposits		112		20		104		16		252
Other financial assets		44		7		7		1		59
		306		81		151		82		620
Fixed rate		6		2		—		—		8
Floating rate		259		72		144		78		553
No interest received		41		7		7		4		59
		306		81		151		82		620

e. Currency exposures

      The table below shows the extent to which Group companies have monetary assets and liabilities in currencies other than their local currency.

	2004
	Net foreign monetary assets/(liabilities)
									Other
	US dollar			Sterling			Euro		currencies		Total
	(All figures in £ millions)
Functional currency of entity
US dollar		—			1			—		5		6
Sterling		(6	)		—			9		3		6
Euro		—			—			—		—		—
Other currencies		20			(1	)		—		—		19
		14			—			9		8		31

F-40

NOTES TO THE ACCOUNTS (Continued)

	2003
	Net foreign monetary assets/(liabilities)
								Other
	US dollar		Sterling			Euro		currencies		Total
	(All figures in £ millions)
Functional currency of entity
US dollar		—		3			—		6		9
Sterling		20		—			7		6		33
Euro		—		—			—		5		5
Other currencies		5		(8	)		5		—		2
		25		(5	)		12		17		49

f. Fair values of financial assets and financial liabilities

      The table below shows the book value and the fair value of the Group’s financial assets and financial liabilities:

	2004						2003
	Book			Fair			Book			Fair
	value			value			value			value
	(All figures in £ millions)
Primary financial instruments held or issued to finance the Group’s operations
Other financial assets		49			49			59			59
Other financial liabilities		(61	)		(61	)		(52	)		(52	)
Cash at bank and in hand		371			371			309			309
Short-term deposits		242			242			252			252
Short-term borrowings		(107	)		(107	)		(575	)		(619	)
Medium and long-term borrowings		(1,712	)		(1,817	)		(1,347	)		(1,553	)
Derivative financial instruments held to manage the interest rate and currency profile
Interest rate swaps		—			23			—			(4	)
Currency swaps		—			11			—			26

Note Other financial assets, other financial liabilities, cash at bank and in hand, short-term deposits and short-term borrowings: the fair value approximates to the carrying value due to the short maturity periods of these financial instruments. Medium and long-term borrowings: the fair value is based on market values or, where these are not available, on the quoted market prices of comparable debt issued by other companies. Interest rate swaps: the fair value of interest rate swaps is based on market values. At 31 December 2004 the notional principal value of these swaps was £2,824m (2003: £2,394m). Currency swaps: the fair value of these contracts is based on market values. At 31 December 2004 the Group had £368m (2003: £1,096m) of such contracts outstanding.

F-41

NOTES TO THE ACCOUNTS (Continued)

g. Hedges

      The Group’s policy on hedges is explained on page F-35. The table below shows the extent to which the Group has off-balance sheet (unrecognised) gains and losses in respect of financial instruments used as hedges at the beginning and end of the year. It also shows the amount of such gains and losses which have been included in the profit and loss account for the year and those gains and losses which are expected to be included in next year’s or later profit and loss accounts.

							Unrecognised
	Unrecognised			Unrecognised			total net
	gains			losses			gains/(losses)
	(All figures in £ millions)
Gains and losses on hedges at 31 December 2003		82			(60	)		22
Gains and losses arising in previous years that were recognised in 2004		(19	)		—			(19	)
Gains and losses arising before 31 December 2003 that were not recognised in 2004		63			(60	)		3
Gains and losses arising in 2004 that were not recognised in 2004		10			21			31
Unrecognised gains and losses on hedges at 31 December 2004		73			(39	)		34
Of which:
Gains and losses expected to be recognised in 2005		1			(2	)		(1	)
Gains and losses expected to be recognised in 2006 or later		72			(37	)		35

20 OTHER CREDITORS

	2004		2003
	(All figures in
	£ millions)
Amounts falling due within one year
Trade creditors		349		407
Taxation		91		55
Social security and other taxes		14		4
Other creditors		75		85
Accruals and deferred income		512		456
Obligations under finance leases		2		3
Dividends		125		119
		1,168		1,129
Amounts falling due after more than one year
Other creditors		37		34
Accruals and deferred income		21		9
Obligations under finance leases		2		2
		60		45

F-42

NOTES TO THE ACCOUNTS (Continued)

21 DEFERRED TAXATION

	(All figures in
	£ millions)
Summary of movements
At 31 December 2003		145
Exchange differences		(9	)
Transfers		41
Net release in the year		(12	)
At 31 December 2004		165

	2004			2003
	(All figures in
	£ millions)
Deferred taxation derives from
Capital allowances		(31	)		(21	)
Tax losses carried forward		150			168
Taxation on unremitted overseas earnings		(2	)		(4	)
Other timing differences		48			2
		165			145
Deferred taxation not provided
Relating to gains subject to roll-over relief		—			1

Note The Group has calculated deferred tax not provided on rolled over gains in 2004, taking into account the indexation allowance which would be deductible on a disposal of the asset into which the gain was rolled. The recovery of the deferred tax asset relating to tax losses carried forward is dependent on future taxable profits arising mainly in the US. The Group regularly reviews its projections of these future taxable profits to ensure that recoverability of the asset is still foreseeable.

F-43

NOTES TO THE ACCOUNTS (Continued)

22 PROVISIONS FOR LIABILITIES AND CHARGES

	Post-			Deferred						Reorganis-
	retirement			consideration			Integration			ations			Leases			Other			Total
	(All figures in £ millions)
At 31 December 2002		92			11			17			19			18			8			165
Exchange differences		(13	)		—			—			(1	)		(1	)		1			(14	)
Subsidiaries acquired		4			—			—			—			—			—			4
Transfers		—			1			3			(4	)		—			—			—
Deferred consideration arising on acquisitions		—			24			—			—			—			—			24
Released		—			—			—			—			(1	)		(1	)		(2	)
Provided		62			—			—			8			3			1			74
Utilised		(65	)		(7	)		(11	)		(10	)		(5	)		(1	)		(99	)
At 31 December 2003		80			29			9			12			14			8			152
Exchange differences		(7	)		(2	)		(1	)		(1	)		(1	)		—			(12	)
Arising on acquisitions		1			(3	)		—			—			—			—			(2	)
Released		—			(2	)		—			(1	)		—			(1	)		(4	)
Provided		68			—			—			5			—			6			79
Utilised		(72	)		(1	)		(3	)		(8	)		(3	)		(3	)		(90	)
At 31 December 2004		70			21			5			7			10			10			123

Note

a	Post-retirement provisions are in respect of pensions, £19m (2003: £29m) and post-retirement medical benefits, £51m (2003: £51m).
b	Integration. During the year, £3m of this balance has been utilised, primarily in relation to properties, severance and IT systems. The remaining provision should be utilised in the next two years.
c	Reorganisations. £5m has been provided during the year and £8m utilised mainly in respect of redundancies.
d	Lease commitments. These relate primarily to onerous lease contracts, acquired as part of the purchase of subsidiaries, which have various expiry dates up to 2010. The provision is based on current occupancy estimates.

F-44

NOTES TO THE ACCOUNTS (Continued)

23 SHARE CAPITAL

	Number
	of shares
	(000’s)		£m
Ordinary shares of 25p each
Authorised
At 31 December 2003		1,178,000		295
At 31 December 2004		1,182,000		296
Called up, allotted and fully paid
At 31 December 2002		801,662		200
Issued under share option and employee share schemes		726		1
At 31 December 2003		802,388		201
Issued under share option and employee share schemes		862		—
At 31 December 2004		803,250		201

Note The consideration received in respect of shares issued during the year was £4m (2003: £5m).

			Number				Original
	When		of shares				subscription
	granted		(000’s)		Price (p)		exercise period
Options outstanding at 31 December 2003
Worldwide Save for Shares plans		1996		9		517		2003 — 04
		1997		39		530		2004 — 05
		1998		319		687		2003 — 06
		1999		137		913 — 926		2004 — 07
		2000		169		688 — 1,644		2003 — 08
		2001		350		957 — 1,096		2004 — 09
		2002		573		696		2005 — 10
		2003		2,273		425 — 426		2006 — 11
				3,869
Discretionary share option plans		1994		148		567 — 635		1997 — 04
		1995		154		487 — 606		1998 — 05
		1996		248		584 — 654		1999 — 06
		1997		1,023		677 — 758		2000 — 07
		1998		1,637		847 — 1,090		2001 — 08
		1999		3,260		1,081 — 1,922		2002 — 09
		2000		8,510		64 — 3,224		2000 — 10
		2001		13,437		822 — 1,421		2002 — 11
				28,417

F-45

NOTES TO THE ACCOUNTS (Continued)

			Number				Original
	When		of shares				subscription
	granted		(000’s)		Price (p)		exercise period
Options outstanding at 31 December 2004
Worldwide Save for Shares plans		1997		5		530		2004 — 05
		1998		46		687		2005 — 06
		1999		118		913 — 926		2004 — 07
		2000		52		1,277 — 1,481		2005 — 08
		2001		303		957 — 1,096		2004 — 09
		2002		474		696		2005 — 10
		2003		1,978		425 — 426		2006 — 11
		2004		878		495 — 518		2007 — 12
				3,854
Discretionary share option plans		1995		116		487 — 545		1998 — 05
		1996		195		584 — 654		1999 — 06
		1997		943		677 — 758		2000 — 07
		1998		1,483		847 — 1,090		2001 — 08
		1999		2,950		1,081 — 1,922		2002 — 09
		2000		5,432		64 — 3,224		2000 — 10
		2001		11,206		822 — 1,421		2002 — 11
				22,325

Note The subscription prices have been rounded up to the nearest whole penny. The figures include replacement options granted to employees of Dorling Kindersley and the Family Education Network following their acquisition. The discretionary share option plans include all options granted under the Pearson Executive Share Option Plans, the Pearson Reward Plan, the Pearson Special Share Option Plan and the Pearson Long Term Incentive Plan.

F-46

NOTES TO THE ACCOUNTS (Continued)

24 RESERVES

	Share		Profit
	premium		and loss
	account		account
	(All figures in
	£ millions)
Summary of movements
At 31 December 2002 restated		2,465		611
Exchange differences net of taxation		—		(254	)
Premium on issue of equity shares		4		—
Loss retained for the year		—		(137	)
Purchase of own shares		—		(1	)
UITF 17 charge for the year		—		4
At 31 December 2003 restated		2,469		223
Analysed as
Joint ventures and associates				(60	)
Group excluding joint ventures and associates				283
Summary of movements
At 31 December 2003 restated		2,469		223
Exchange differences net of taxation		—		(176	)
Premium on issue of equity shares		4		—
Loss retained for the year		—		(113	)
Purchase of own shares		—		(10	)
UITF 17 charge for the year		—		5
At 31 December 2004		2,473		(71	)
Analysed as
Joint ventures and associates				(63	)
Group excluding joint ventures and associates				(8	)

Note Cumulative goodwill relating to acquisitions made prior to 1998, which was deducted from reserves, amounts to £915m (2003: £961m). Included in exchange differences are exchange gains of £nil (2003: £74m) arising on borrowings denominated in, or swapped into, foreign currencies designated as hedges of net investments overseas.

Prior year adjustment

      UITF Abstract 38 ‘Accounting for ESOP trusts’ and the revision of UITF Abstract 17 ‘Employee share schemes’ were issued on 15 December 2003 and these revisions have been applied for the first time in 2004. Under UITF 38 own shares held in treasury or through an ESOP trust are recorded at cost and shown as a deduction in arriving at shareholders’ funds. Previously these shares were recorded at cost less provision for impairment and shown as a fixed asset investment with impairment charges being taken to the profit and loss account. Under the revised UITF 17, employee share scheme charges to the profit and loss account are now always calculated as the intrinsic value of the award and spread over the performance period. The intrinsic value is the difference between the fair value of shares at the date of grant and the amount paid by the employee to exercise the rights to those shares irrespective of the cost of shares purchased to fund the award.

F-47

NOTES TO THE ACCOUNTS (Continued)

      The reclassification of own shares from fixed asset investments to equity has reduced net assets by £59m at 31 December 2003 (1 January 2003: £62m). The reversal of prior year impairments taken on the cost of shares held in trust (£37m) has been shown as a prior year adjustment in the statement of total recognised gains and losses. The amendment to UITF 17 in respect of the calculation of share scheme charges has had no material effect on the profit and loss account.

      Included within own shares are shares held by the Pearson Employee Share Trust and Pearson plc Employee Share Ownership Trusts. Together they hold 6.9 million (2003: 7.5 million) Pearson plc ordinary shares which had a market value of £43m at 31 December 2004 (2003: £46m). These shares have been acquired by the trusts, using funds provided by Pearson plc, to meet obligations under various executive and employee option and restricted share plans. Under these plans the participants become entitled to shares after a specified number of years and subject to certain performance criteria being met. Pearson aims to hedge its liability under the plans by buying shares through the trusts to meet the anticipated future liability. Dividends on the shares held by the trusts have been waived. The amount of dividend waived on the ESOP shares was £2m (2003: £2m).

      The Group operates a worldwide Save As You Earn scheme together with a similar scheme for US employees that allows the grant of share options at a discount to the market price of the option granted. The Group has made use of the exemption under UITF 17 not to recognise any compensation charge in respect of these options.

F-48

NOTES TO THE ACCOUNTS (Continued)

25 ACQUISITIONS

      All acquisitions have been consolidated applying acquisition accounting principles.

a. Acquisition of subsidiaries

	2004			2003
	(All figures in
	£ millions)
Tangible fixed assets		1			10
Stocks		2			—
Debtors		3			32
Creditors		(2	)		(95	)
Provisions		1			(4	)
Deferred taxation		—			(15	)
Net cash and short-term deposits acquired		—			34
		5			(38	)
Equity minority interests		(7	)		(8	)
Net liabilities acquired at fair value		(2	)		(46	)
Fair value of consideration
Cash		(33	)		(87	)
Deferred cash consideration		—			(24	)
Costs provided for		(1	)		—
Net prior year adjustments		3			—
Total consideration		(31	)		(111	)
Goodwill arising		33			157
Acquisition fair values
Book value of net liabilities acquired		(3	)		(32	)
Fair value adjustments		1			(14	)
Fair value to the Group		(2	)		(46	)

Note The fair value adjustments above relate to acquisitions made in both 2003 and 2004. They include adjustments to provisions and accruals and an adjustment to a pension scheme liability. The fair value adjustments relating to 2004 acquisitions are provisional and will be finalised in the 2005 financial statements.

b. Cash flow from acquisitions

	2004		2003		2002
	(All figures in £ millions)
Cash — current year acquisitions		33		87		74
Deferred payments for prior year acquisitions and other items		2		7		13
Net cash outflow		35		94		87

F-49

NOTES TO THE ACCOUNTS (Continued)

26 DISPOSALS

a. Disposal of subsidiaries

	2004			2003			2002
	(All figures in £ millions)
Intangible fixed assets		—			(4	)		(41	)
Tangible fixed assets		—			(3	)		—
Stocks		—			(2	)		(3	)
Debtors		(4	)		(9	)		(2	)
Creditors		—			10			(3	)
Provisions		—			—			1
Net overdraft/(cash)		1			1			(1	)
Equity minority interest		—			—			3
Net assets disposed of		(3	)		(7	)		(46	)
Proceeds received		2			1			11
Deferred consideration		—			2			—
Costs		(2	)		(1	)		(7	)
Net prior year adjustments		—			1			(3	)
Loss on sale		(3	)		(4	)		(45	)

b. Cash flow from disposals

	2004			2003			2002
	(All figures in £ millions)
Cash — current year disposals		2			1			11
Costs paid		(2	)		(2	)		(3	)
Deferred receipts and payments from prior year disposals and other amounts		—			(3	)		(5	)
Net cash (outflow)/inflow		—			(4	)		3

F-50

NOTES TO THE ACCOUNTS (Continued)

27 NOTES TO CONSOLIDATED CASH FLOW STATEMENT

	2004									2003 restated									2002 restated
	Continuing			Discontinued			Total			Continuing			Discontinued			Total			Continuing			Discontinued		Total
	(All figures in £ millions)
a. Reconciliation of operating profit to net cash inflow from operating activities
Total operating profit		218			13			231			204			22			226			130			13		143
Share of operating profit of joint ventures and associates		(8	)		(2	)		(10	)		2			(2	)		—			50			1		51
Depreciation		95			7			102			104			7			111			114			8		122
Goodwill amortisation and impairment		215			9			224			251			6			257			278			14		292
(Increase)/decrease in stocks		(26	)		(1	)		(27	)		(8	)		—			(8	)		41			2		43
Increase in debtors		(10	)		(5	)		(15	)		(93	)		(3	)		(96	)		(111	)		—		(111	)
Increase/(decrease) in creditors		47			3			50			(71	)		3			(68	)		57			7		64
Decrease in operating provisions		(15	)		—			(15	)		(20	)		—			(20	)		(50	)		—		(50	)
Other and non-cash items		(10	)		—			(10	)		(44	)		1			(43	)		(29	)		4		(25	)
Net cash inflow from operating activities		506			24			530			325			34			359			480			49		529

													Debt due			Debt due
										Short-term			within			after			Finance
	Cash			Overdrafts			Sub-total			deposits			one year			one year			leases			Total
	(All figures in £ millions)
b. Analysis of net debt
At 31 December 2003		309			(23	)		286			252			(552	)		(1,347	)		(5	)		(1,366	)
Exchange differences		(5	)		2			(3	)		(9	)		37			50			—			75
Other non-cash items		—			—			—			—			—			—			(1	)		(1	)
Net cash flow		67			(37	)		30			(1	)		466			(415	)		2			82
At 31 December 2004		371			(58	)		313			242			(49	)		(1,712	)		(4	)		(1,210	)
At 31 December 2002		417			(77	)		340			158			(172	)		(1,734	)		(7	)		(1,415	)
Exchange differences		6			31			37			9			(40	)		111			—			117
Other non-cash items		—			—			—			—			(459	)		458			(1	)		(2	)
Net cash flow		(114	)		23			(91	)		85			119			(182	)		3			(66	)
At 31 December 2003		309			(23	)		286			252			(552	)		(1,347	)		(5	)		(1,366	)
At 31 December 2001		300			(60	)		240			93			(105	)		(2,607	)		(14	)		(2,393	)
Exchange differences		(15	)		4			(11	)		(2	)		(6	)		150			1			132
Acquired with subsidiary		—			—			—			24			—			—			—			24
Other non-cash items		—			—			—			—			(148	)		146			1			(1	)
Net cash flow		132			(21	)		111			43			87			577			5			823
At 31 December 2002		417			(77	)		340			158			(172	)		(1,734	)		(7	)		(1,415	)

Note Finance leases are included within other creditors in the balance sheet (see note 20).

F-51

NOTES TO THE ACCOUNTS (Continued)

	2004			2003			2002
	(All figures in £ millions)
c. Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash in the year		30			(91	)		111
(Increase)/decrease in net debt from management of liquid resources		(1	)		85			43
Decrease/(increase) in net debt from other borrowings		51			(63	)		664
Decrease in finance leases		2			3			5
Acquired with subsidiary		—			—			24
Other non-cash items		(1	)		(2	)		(1	)
Exchange differences		75			117			132
Movement in net debt in the year		156			49			978
Net debt at beginning of the year		(1,366	)		(1,415	)		(2,393	)
Net debt at end of the year		(1,210	)		(1,366	)		(1,415	)

28 CONTINGENT LIABILITIES

      There are contingent Group and company liabilities that arise in the normal course of business in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries and associates. In addition, there are contingent liabilities of the Group in respect of legal claims. None of these claims are expected to result in a material gain or loss to the Group.

29 COMMITMENTS UNDER LEASES

      At 31 December 2004 the Group had commitments under leases, other than finance leases, to make payments in 2005 as follows:

	Land and
	buildings		Other
	(All figures in
	£ millions)
For leases expiring
In 2005		7		4
Between 2006 and 2009		22		15
Thereafter		67		—
		96		19

30 RELATED PARTIES

      Joint ventures and associates — Loans and equity advanced to joint ventures and associates during the year and at the balance sheet date are shown in notes 13 and 14. Amounts falling due from joint ventures and associates are set out in note 17. Dividends receivable from joint ventures and associates are set out in notes 13 and 14.

      There were no other related party transactions in 2004.

31 POST BALANCE SHEET EVENTS

      In December 2004, Pearson announced its intention to dispose of its 79% interest in Recoletos Grupo de Comunicaciòn, 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 will close in the early part of 2005. In January 2005 Pearson sold its 22% stake in MarketWatch to Dow Jones & Co for $101m.

F-52

NOTES TO THE ACCOUNTS (Continued)

32 COMPANY BALANCE SHEET AS AT 31 DECEMBER 2004

						2003
	Note		2004			restated
			(All figures in
			£ millions)
Fixed assets
Investments: subsidiaries		33		7,134			6,343
				7,134			6,343
Current assets
Debtors:
Amounts due from subsidiaries — due within one year				674			1,394
Amounts due from subsidiaries — due after more than one year				288			944
Taxation				66			3
Other debtors				—			—
Cash at bank and in hand		18		87			75
				1,115			2,416
Creditors — amounts falling due within one year
Short-term borrowing		19		(139	)		(610	)
Amounts due to subsidiaries				(1,815	)		(2,860	)
Other creditors				(2	)		(1	)
Accruals and deferred income				(11	)		(16	)
Dividends		8		(125	)		(119	)
				(2,092	)		(3,606	)
Net current liabilities				(977	)		(1,190	)
Total assets less current liabilities				6,157			5,153
Creditors — amounts falling due after more than one year
Medium and long-term borrowing		19		(1,181	)		(1,123	)
Amounts due to subsidiaries				(440	)		(234	)
Provisions for liabilities and charges				(4	)		(2	)
				(1,625	)		(1,359	)
Net assets				4,532			3,794
Capital and reserves
Called up share capital		23		201			201
Share premium account		33		2,473			2,469
Special reserve		33		397			397
Other reserves		33		26			17
Profit and loss account		33		1,435			710
Equity shareholders’ funds				4,532			3,794

The 2003 comparatives have been restated for the adoption of UITF38 (see note 24).

The financial statements were approved by the board of directors on 27 February 2005 and signed on its behalf by

Dennis Stevenson, Chairman                                         Rona Fairhead, Chief Financial Officer

F-53

NOTES TO THE ACCOUNTS (Continued)

33     NOTES TO THE COMPANY BALANCE SHEET

	(All figures in
	£ millions)
Investment in subsidiaries
At 31 December 2002		6,422
External acquisition		15
Disposal to subsidiary		(22	)
Provision for diminution in value		(33	)
Revaluations		(39	)
At 31 December 2003		6,343
Subscription for share capital in subsidiary		915
Provision for diminution in value		(100	)
Revaluations		(24	)
At 31 December 2004		7,134

Note Shares are stated at cost less provisions for diminution in value or directors’ valuations.

	Share						Profit
	premium		Special		Other		and loss
	account		reserve		reserves		account			Total
	(All figures in £ millions)
Reserves
Summary of movements
At 31 December 2002		2,465		397		11		935			3,808
Exchange differences		—		—		—		(23	)		(23	)
Premium on issue of equity shares		4		—		—		—			4
Net amount received in respect of ESOP shares		—		—		6		—			6
Loss for the financial year		—		—		—		(10	)		(10	)
Dividends on equity shares		—		—		—		(192	)		(192	)
At 31 December 2003		2,469		397		17		710			3,593
Exchange differences		—		—		—		(20	)		(20	)
Premium on issue of equity shares		4		—		—		—			4
Net amount received in respect of ESOP shares		—		—		9		—			9
Profit for the financial year		—		—		—		946			946
Dividends on equity shares		—		—		—		(201	)		(201	)
At 31 December 2004		2,473		397		26		1,435			4,331

Note The special reserve represents the cumulative effect of cancellation of the company’s share premium account. As permitted by section 230(4) of the Companies Act 1985, only the Group’s profit and loss account has been presented.

34. SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

      The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United Kingdom (“UK GAAP”), which differ in certain significant

F-54

NOTES TO THE ACCOUNTS (Continued)

respects from generally accepted accounting principles in the United States of America (“US GAAP”). Such differences involve methods for measuring the amounts shown in the financial statements.

      The following is a summary of the adjustments to consolidated profit for the financial year and consolidated shareholders’ funds that would have been required in applying the significant differences between UK and US GAAP.

Reconciliation of consolidated profit/(loss) for the financial year

					Year ended December 31
								Restated
		Note			2004			2003			2002
					£m			£m			£m
Profit/(loss) for the financial year under UK GAAP						88			55			(111	)
US GAAP adjustments:
	Goodwill amortization and impairment		(i	)		215			251			270
	Intangible amortization		(i	)		(81	)		(103	)		(119	)
	Discontinued operations		(ii	)		9			1			17
	Disposal adjustments		(iii	)		3			(6	)		(3	)
	Pensions and other post-retirement benefits		(iv	)		(18	)		(3	)		7
	Deferred taxation		(v	)		(2	)		(27	)		1
	Leases		(vi	)		(16	)		(16	)		(9	)
	Options		(vii	)		(32	)		(30	)		(46	)
	Derivatives		(viii	)		(23	)		35			187
	Capitalized costs		(ix	)		—			—			1
	Acquisition adjustments		(x	)		—			—			(2	)
	Partnerships and associates		(xi	)		1			5			42
	Interest in own shares		(xiii	)		—			—			—
	Minority interests		(xiv	)		(3	)		(4	)		(7	)
	Other					(5	)		—			—
	Taxation effect of US GAAP adjustments		(v	)		46			15			(18	)
Total US GAAP adjustments						94			118			321
Profit for the financial year under US GAAP						182			173			210
	Cumulative effect of change in accounting principle (less (benefit from) applicable taxes £(9)m)		(iv	)		—			—			(21	)
Profit for the financial year under US GAAP after cumulative effect of change in accounting principle						182			173			189
Profit from continuing operations (less charge for applicable taxes 2004: £11m, 2003: £71m, 2002: £67m)						166			160			216
Profit/(loss) from discontinued operations (less charge for applicable taxes 2004: £6m, 2003: £22, 2002: £12m)						16			16			(5	)
Loss on disposal of discontinued operations (less charge for/(benefit from) applicable taxes 2004: £nil, 2003: £2m, 2002 £(4)m)						—			(3	)		(1	)
Profit for the financial year under US GAAP						182			173			210
	Cumulative effect of change in accounting principle (less (benefit from) applicable taxes £(9)m)		(iv	)		—			—			(21	)
Profit for the financial year under US GAAP after cumulative effect of change in accounting principle						182			173			189

F-55

NOTES TO THE ACCOUNTS (Continued)

				Year ended December 31
							Restated
	Note			2004			2003			2002
Presentation of earnings per equity share under US GAAP		(xv	)
Earnings per equity share					(p	)		(p	)		(p	)
Basic:
Continuing operations					20.9			20.1			27.1
Discontinued operations					2.0			1.7			(0.8	)
Cumulative effect of change in accounting principle					—			—			(2.6	)
Total					22.9			21.8			23.7
Diluted:
Continuing operations					20.8			20.1			27.1
Discontinued operations					2.0			1.7			(0.8	)
Cumulative effect of change in accounting principle					—			—			(2.6	)
Total					22.8			21.8			23.7
Average shares outstanding (millions)					795.6			794.4			796.3
Dilutive effect of stock options (millions)					1.1			0.9			0.4
Average number of shares outstanding assuming dilution (millions)					796.7			795.3			796.7

F-56

NOTES TO THE ACCOUNTS (Continued)

Reconciliation of consolidated shareholders’ funds

					Year ended
					December 31
								Restated
		Note			2004			2003
					£m			£m
Shareholders’ funds under UK GAAP						2,603			2,893
US GAAP adjustments:
	Goodwill		(i	)		492			300
	Intangibles		(i	)		315			401
	Discontinued operations		(ii	)		67			58
	Disposal adjustments		(iii	)		—			(4	)
	Pensions and other post-retirement benefits		(iv	)		(276	)		(304	)
	Deferred taxation		(v	)		(6	)		29
	Leases		(vi	)		(47	)		(31	)
	Options		(vii	)		—			2
	Derivatives		(viii	)		11			21
	Capitalized costs		(ix	)		—			—
	Acquisition adjustments		(x	)		19			24
	Partnerships and associates		(xi	)		11			(5	)
	Ordinary dividends		(xii	)		125			119
	Interest in own shares		(xiii	)		—			—
	Minority interests		(xiv	)		(20	)		(18	)
	Other					(5	)		—
	Taxation effect of US GAAP adjustments		(v	)		(71	)		(152	)
Total US GAAP adjustments						615			440
Shareholders’ funds under US GAAP						3,218			3,333

Restatements

      The Company has restated its UK GAAP shareholders’ funds for the financial years ended December 31, 2003 and 2002 for the adoption of UITF Abstract 38 “Accounting for ESOP trusts”. This has reduced shareholders’ funds under UK GAAP as at December 31, 2003 and 2002 by £59 million and £62 million respectively (see note 24 in “Item 17. Financial Statements”).

      The Company has restated its US GAAP profit and loss account and shareholders’ funds for the financial years ended December 31, 2003 and 2002 to reflect the correct accounting treatment in respect of incentives and fixed rental escalations under one of its leases. Previously the incentives were recognized in the profit and loss account over the period during which the lease incentives were applicable until the lease returned to a market level. Additionally, fixed future market-based rent increases were charged to the profit and loss account as they became applicable under the terms of the lease. As required by US GAAP, both the lease incentives and fixed market-based rent increases are now being charged to the profit and loss account over the entire term of the lease. Consequently, the profit reported under US GAAP for the 2003 and 2002 financial years has been reduced by £14 million and £12 million, respectively, on a pre-tax basis and £10 million and £9 million, respectively, on a post-tax basis and the shareholders’ funds reported as at December 31, 2003 and 2002 has been reduced by £19 million and £9 million, respectively, from amounts previously reported.

F-57

NOTES TO THE ACCOUNTS (Continued)

      A summary of the principal differences and additional disclosures applicable to the Group are set out below:

     (i) Goodwill and intangibles

      Both UK GAAP and US GAAP require purchase consideration to be allocated to the net assets acquired at their fair value on the date of acquisition, with the difference between the consideration and the fair value of the identifiable net assets recorded as goodwill. Under UK GAAP, prior to the implementation of FRS 10 “Goodwill and Intangible Assets”, for periods ending prior to January 1, 1998, the Group has written off goodwill directly to the profit and loss reserve in the year of acquisition. If a subsidiary or a business is subsequently sold or closed, previously written off goodwill which was the result of the initial acquisition is taken into account in determining the profit or loss on sale or closure.

      For the purposes of US GAAP, all goodwill written off against reserves under UK GAAP has been reinstated as an asset on the balance sheet. Prior to July 1, 2001, goodwill was amortized over its estimated useful life. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (“SFAS”) 142, “Goodwill and Other Intangible Assets” which required that goodwill no longer be amortized. SFAS 142 was effective for the Group on January 1, 2002. As a result, goodwill is no longer subject to amortization subsequent to the date of adoption, but is subject to the impairment testing provisions of SFAS 142. The 2004, 2003 and 2002 US GAAP adjustments reverse the amortization expense recorded under UK GAAP.

      Under UK GAAP, the Group periodically reviews the recoverability of goodwill, not identified with impaired long-lived assets, based on estimated discounted future cash flows from operating activities compared with the carrying value of goodwill and recognizes any impairment on the basis of such comparison. Under US GAAP, the Group performed the transitional impairment test under SFAS 142 as of January 1, 2002 by comparing the carrying value of each reporting unit to its fair value as determined by discounted future cash flows. The Group has also completed the subsequent annual impairment tests required by SFAS 142.

      Under UK GAAP in order to recognize an intangible asset, the Group must be able to dispose of it without disposing of the business to which it relates. Accordingly under UK GAAP no acquired intangible assets have been recognized. Under US GAAP, acquired assets such as publishing rights, know-how, patents and advertising relationships have been recognized as intangible assets as required under SFAS 141 “Business Combinations” and are being amortized over a range of estimated useful lives of between 2 and 25 years. The identified intangibles have been valued based on independent appraisals and management evaluation and analysis.

     (ii) Discontinued operations

      Following a strategic review of the business, the Group approved and announced, in December 2004, its intention to dispose of 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 the share capital of Recoletos. The transaction was approved by the Spanish regulatory authorities in February 2005 and completed in April 2005 with the Group receiving net cash proceeds of £372 million. In accordance with the provisions of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” the results of Recoletos have been reclassified as a discontinued operation.

      Following the further deterioration in the corporate training market during 2002, management undertook a review of the FT Knowledge business. As a result of this review, in September 2002 the Board of Directors approved a plan to dispose of Forum and restructure the remaining parts of FT Knowledge. The sale of Forum to the Institute for International Research Support Services Inc (“IRR”) was completed in January 2003. In accordance with the provisions of SFAS 144, the results of the Forum Corporation have been reclassified as a discontinued operation.

F-58

NOTES TO THE ACCOUNTS (Continued)

      In connection with the decision to dispose of Forum in 2002, a loss on disposal was booked under US GAAP reflecting the excess of the carrying value of the investment over the disposal proceeds. The goodwill associated with the Forum business was deemed to be impaired under US GAAP prior to the sale of the business. The GAAP difference on the loss on sale reflects the difference in the carrying value of goodwill at the disposal date and provisions for future operating losses being removed from the disposal calculation under US GAAP.

      The operating profits, assets and liabilities in respect of discontinued operations under US GAAP are set out in the table below:

	2004			2003			2002
	£m			£m			£m
Total operating profit in respect of discontinued operations		21			27			22
Assets in respect of discontinued operations		413			402
Liabilities in respect of discontinued operations		(148	)		(147	)

     (iii) Disposal adjustments

      In 2004, 2003 and 2002 gains and losses were recognized under UK GAAP on the disposal of a number of the Group’s businesses and assets. Adjustments made to reconcile US GAAP and UK GAAP have an effect on the net assets of these businesses and, accordingly, a corresponding impact on the gain or loss on disposal.

      Under US GAAP, profits and losses from the sale of fixed assets or investments are included within operating profit. Under UK GAAP, the corresponding profits and losses are disclosed as non-operating (see note 4a of “Item 17. Financial Statements”). Under US GAAP, the profit on sale of fixed assets and investments was £14 million in 2004 (a loss of £7 million in 2003 and a loss of £15 million in 2002).

      Under UK GAAP, the full amount of any goodwill previously written off to reserves is accounted for as part of the calculation of profit or loss on disposal of an entity. This results in lower profits (or higher losses) on disposals of entities than under US GAAP, where these goodwill balances have been partially amortized. Additionally, under US GAAP, it is necessary to factor into the disposal calculation any cumulative translation adjustment associated with the business, whereas under UK GAAP this is not required.

      Differences can arise on the treatment of property disposals and sale and leaseback transactions. The timing of recognition of profits or losses on these transactions can differ between UK GAAP and US GAAP.

     (iv) Pensions and other post-retirement benefits

      The Group operates defined benefit pension plans for its employees and former employees throughout the world. The largest defined benefit scheme is a funded scheme operated in the UK.

      Under UK GAAP the cost of providing pension benefits is expensed over the average expected service lives of eligible employees in accordance with the provisions of Statement of Standard Accounting Practice (“SSAP”) 24 “Accounting for Pension Costs”. SSAP 24 aims to produce an estimate of cost based on long-term actuarial assumptions. Variations from the regular pension cost arising from, for example, experience deficiencies or surpluses, are charged or credited to the profit and loss account over the expected average remaining service lives of current employees in the schemes.

      Under US GAAP, the annual pension cost comprises the estimated cost of benefits accruing in the period as determined in accordance with SFAS 87 “Employers Accounting for Pensions”, which requires readjustment of the significant actuarial assumptions annually to reflect current market and economic conditions. Therefore, different assumptions are used in the SFAS 87 calculation of pensions. Additionally, under US GAAP, where an accumulated benefit obligation exists in excess of plan assets and a prepaid pension asset has been recognized, an additional minimum pension liability has been booked with the offset as a reduction to

F-59

NOTES TO THE ACCOUNTS (Continued)

equity. Under UK GAAP, there is no requirement to recognize a minimum pension liability in respect of the unfunded accumulated benefit obligation.

      Under SFAS 87, the Group has recognised an asset in respect of pensions and other post retirement benefits, the majority of which is attributable to prior acquisitions. The difference between this asset and the plans’ funded status (the difference between plan assets and liabilities) is held as unrecognised and spread over the employees’ remaining service lifetimes. However, the unrecognised amount attributable to actuarial gains and losses falling within a 10% corridor (i.e. 10% of the greater of the plan assets or plan liabilities) is deferred and not spread.

      In 2002, the Group elected to change the measurement date of its defined benefit plans under US GAAP from 30 September to 31 December. As a result the 2002 profit and loss charge under US GAAP for pension plans includes a pre-tax charge of £30 million reflecting the cumulative effect of this change in accounting principle.

     (v) Deferred taxation

      Under FRS 19 the recognition criteria for deferred tax assets changed resulting in the recognition of a deferred tax asset under UK GAAP in respect of US tax losses and other timing differences that are regarded as more likely than not to be recoverable against future profits. The adoption of FRS 19 also had an impact on capitalized goodwill since the restatement of deferred tax balances acquired had a corresponding effect upon the goodwill recognized on those acquisitions. A prior year adjustment was made in the 2002 financial statements to reflect the adoption of FRS 19 and comparative figures were restated.

      Under UK GAAP, a provision is recorded for deferred taxation under the liability method, at the expected applicable rates, to the extent that such taxation is more likely than not to crystallize in future periods. This means that the full potential liability is not necessarily provided. Additionally, deferred tax assets are recognized only when they are expected to be recoverable within the foreseeable future.

      Under US GAAP, deferred taxation is provided for on a full liability basis. Under the full liability method, deferred tax assets or liabilities are recognized for differences between the financial and taxation basis of assets and liabilities and for tax loss carry forwards at the statutory rate at each reporting date. A valuation allowance is established when it is more likely than not that some portion or all of the deferred taxation assets will not be realized. The reconciling items in 2004, 2003 and 2002 reflect the impact of recording the full provision and deferred tax assets, net of valuation allowance, and are summarized below:

				Stockholders						Stockholders
	Net income			equity			Net income			equity
							Restated
	2004			2004			2003			2003
	£m			£m			£m			£m
Tax effect of GAAP adjustments on:
Goodwill and intangible amortization		(23	)		(108	)		29			(128	)
Derivatives		38			(3	)		(21	)		(41	)
Options, pensions, disposals and other adjustments		31			40			7			17
Total taxation effect of US GAAP adjustments		46			(71	)		15			(152	)

      Income tax adjustments on the GAAP differences on goodwill and intangible amortization are calculated by reference to each specific acquisition. These adjustments arise on tax deductible goodwill and intangibles due to the different amortization periods adopted under the different GAAPs and due to the recognition of temporary differences between the tax base cost of intangibles and their book value at acquisition under US GAAP that are not recognized under UK GAAP. The net effect of the adjustments is to recognize a greater deferred tax liability under US GAAP.

F-60

NOTES TO THE ACCOUNTS (Continued)

      Adjustments to the deferred tax on derivatives are provided on the gross adjustment to the value of the derivatives at the balance sheet date with the movement on the tax adjustment shown as a reconciling item in the profit and loss account. Where related exchange gains and losses recognized in reserves for UK GAAP are taken to the profit and loss account under US GAAP then the related tax adjustment is also taken to the profit and loss account.

      The recognized deferred tax asset is based upon the expected future utilization of tax loss carryforwards and the reversal of other temporary differences. For financial reporting purposes, the Group has recognized a valuation allowance for those benefits for which realization does not meet the more likely than not criteria.

      The valuation allowance has been recognized in respect of the tax loss carryforwards. The Group continually reviews the adequacy of the valuation allowance and is recognizing these benefits only as reassessment indicates that it is more likely than not that the benefits will be realized.

      The deferred tax item in 2003 also incorporates the effect of a change in estimate in respect of deferred tax assets relating to a purchase business combination in prior years, which was recorded through the profit and loss account under UK GAAP, but which was required to be adjusted against goodwill under US GAAP.

     (vi) Leases

      UK GAAP defines a finance (capital) lease as one that transfers substantially all risks and rewards of ownership of an asset to the lessee. US GAAP sets out certain defined criteria, and if any one of the criteria are met, the lease must be treated as a capital lease. As a result, the Group has certain leases for which the classification is operating under UK GAAP and finance (capital) under US GAAP.

      Differences can also arise in respect of the timing of recognition of lease incentives and future fixed market-based rent escalations. Under UK GAAP lease incentives are recognized in the profit and loss account over the period until the lease rentals revert to a market level, and future market-based rental increases are recognized as they become applicable under the terms of the lease. Under US GAAP, both lease incentives and fixed market-based rent increases are recognized on a straight-line basis over the entire fixed term of the lease.

     (vii) Options

      Under UK GAAP, the Group does not recognize compensation costs under share option schemes that have not been approved by the Inland Revenue unless the exercise price is at a discount to the open market value at date of grant.

      Under US GAAP, the compensation expense associated with all stock-based awards is recognized in accordance with SFAS 123, “Accounting For Stock-Based Compensation”. Under SFAS 123, compensation expense is determined based upon the fair value at the grant date for awards, and has been estimated using the Black Scholes model. Such compensation cost is recognized over the service life of the awards. Under US GAAP, the total compensation charge for stock-based compensation schemes was £37m in 2004, £33m in 2003 and £53m in 2002. The fair value of Company options and the weighted average assumptions used in the

F-61

NOTES TO THE ACCOUNTS (Continued)

Black Scholes model for determining the fair values of options issued under the Company option schemes for each period ending December 31, 2004, 2003 and 2002 are as follows:

			Weighted				Weighted				Weighted
	Number		average		Number		average		Number		average
	granted		fair value		granted		fair value		granted		fair value
	2004		2004		2003		2003		2002		2002
											£
	(’000)		£		(’000)		£		(’000)
Fair value of company options		1,116		2.53		2,885		1.86		1,557		3.60
Fair value of shares granted under restricted share schemes:
Annual Bonus Share Matching Plan		53		5.42		108		5.41		50		9.03
Long Term Incentive Plan		2,413		4.54		1,711		5.21		3,194		5.67

	2004			2003			2002
Assumption for company options:
Risk free interest rate		4.78	%		3.90	%		5.19	%
Expected life (years)		3.34			3.55			4.05
Expected dividend yield		3.72	%		4.45	%		2.61	%
Expected volatility		37.32	%		47.96	%		49.18	%

      Under UK GAAP, compensation cost is charged to the income statement with the offsetting amount recorded as either a reduction of the own shares held as an asset on the balance sheet or a liability that is transferred to shareholders’ funds upon exercise or expiration of the option. Under US GAAP, compensation cost is charged to the income statement with the offsetting amount recorded directly to shareholders’ funds.

     (viii) Derivatives

      Under UK GAAP, the Group’s derivatives are recorded as hedging instruments. Amounts payable or receivable in respect of interest rate swaps are accrued with net interest payable over the period of the contract. Unrealized gains and losses on currency swaps and forward currency contracts are deferred and recognized when paid.

      Under US GAAP, the Group is required to record all derivative instruments on the balance sheet at fair value. Derivatives not classified as hedges are adjusted to fair value through earnings. Movements in the fair value of the effective portion of derivative instruments which qualify as either fair value hedges or net investment hedges have been offset in earnings and other comprehensive income respectively by the corresponding movement in the fair value of the underlying bond or asset. Any movements on the ineffective portion of derivatives that are classified as hedges are immediately recognized in earnings.

      In 2003 and 2002, the Group did not meet the prescribed designation requirements and hedge effectiveness tests under US GAAP for its derivative contracts, which are not a requirement to obtain hedge accounting under UK GAAP. Consequently, for those years, the Group has recorded the changes in the fair values of these derivative contracts through earnings under US GAAP. In line with the Group’s treasury policy, these are not trading instruments and are transacted solely to match underlying financial exposures. In 2004 the Group met the prescribed designation requirements and hedge effectiveness tests under US GAAP for certain of its derivative contracts. The movements in the fair value of the effective portion of qualifying fair value hedges and net investment hedges have been offset in earnings and other comprehensive income respectively by the corresponding movement in the fair value of the underlying bond or asset.

      The principal method the Group uses to manage its interest rate risk is to enter into swaps to pay a fixed rate and receive a floating rate. The majority of these contracts are US dollar denominated, and some of them have a deferred start date, in order to maintain the desired risk profile as other contracts mature. The variable rates received are normally based on 3 month and 6 month LIBOR, and the dates on which these rates are set

F-62

NOTES TO THE ACCOUNTS (Continued)

do not necessarily exactly match those of the borrowings that are being hedged. The Group believes that its portfolio of such swaps is an efficient economic hedge of its portfolio of variable rate borrowings.

     (ix) Capitalized Costs

      In earlier periods, the group has capitalized certain amounts under UK GAAP for purchased software, software licences and consulting services. Under US GAAP, certain of these costs cannot be capitalized and must be expensed as incurred. The resulting adjustment takes into consideration the treatment of these costs, as well as any depreciation taken in subsequent periods.

     (x) Acquisition adjustments

      Acquisition adjustments principally relate to restructuring provisions recognized under US GAAP in purchase accounting as an increase in goodwill under EITF 95-3 “Recognition of Liabilities in Connection with a Business Purchase Combination”. Under UK GAAP, these costs were treated as period costs and were recorded as exceptional items in the profit and loss account.

      Under US GAAP, consideration related to the acquisition of businesses contingent on achieving specific earnings levels in future periods is recorded only when the specified conditions are met and the consideration distributable, in accordance with SFAS 141 “Business Combinations.” Under UK GAAP, contingent consideration is treated as part of the purchase price on the date of acquisition.

      Under US GAAP, the Group cannot hedge the foreign-currency risk related to a purchase business combination because only direct costs of an acquisition are allowed to be included in the purchase price. Derivative gains and losses do not qualify as direct costs. As a result, gains relating to foreign-currency forward contracts are recorded in earnings under US GAAP. These are reflected as adjustments to the purchase price under UK GAAP.

     (xi) Partnerships and associates

      There is no difference under UK and US GAAP in the accounting for partnerships and associates. However, the accounts of partnerships and associates must be adjusted from UK to US GAAP, which has an impact on the results of the partnerships and associates, as well as the carrying value of the investment in these entities. Principal differences identified with respect to the Group’s investments in partnerships and associates include: goodwill amortization, pensions, derivatives, and goodwill impairment charges.

      Under US GAAP, in accordance with Accounting Principles Board Opinion (“APB”) No. 18, “The Equity Method of Accounting for Investments in Common Stock”, the Group periodically reviews its equity method investments for impairment. These reviews are performed to determine whether declines in market values of investments below their carrying values are deemed to be other than temporary.

     (xii) Ordinary dividends

      Under UK GAAP, ordinary dividends proposed are provided for in the year in respect of which they are recommended by the board of directors although approval of the final dividend will not take place until the Annual General Meeting subsequent to the year-end. Under US GAAP, such dividends are provided for in the year in which they are declared and approved by the board of directors.

     (xiii) Interest in own shares

      Under UK GAAP, following the adoption of UITF Abstract 38 ‘Accounting for ESOP trusts’, and also under US GAAP, own shares held in treasury or through an ESOP trust are recorded at cost and shown as a deduction from shareholders’ funds. As a result, there is no longer any GAAP difference in respect of interests in own shares.

F-63

NOTES TO THE ACCOUNTS (Continued)

     (xiv) Minority interests

      Minority interests represent the minority share of US GAAP adjustments.

     (xv) Presentation of earnings per equity share

      Under US GAAP an entity that reports a discontinued operation or cumulative effect of an accounting change must present basic and diluted EPS for those line items. Accordingly, the Group has presented EPS for income from continuing operations, discontinued operations, cumulative effect of an accounting change and net income.

     (xvi) Other disclosures required by US GAAP

     Cash flow information

      Under UK GAAP, the Consolidated Cash Flow Statements are presented in accordance with FRS 1, as revised, Cash Flow Statements. The statements prepared under FRS 1 present substantially the same information as that required under US GAAP as interpreted by SFAS 95 “Statement of Cash Flows.”

      The definition of “cash flow” differs between UK and US GAAP. Cash flow under UK GAAP represents increases or decreases in “cash”, which comprises cash in hand and repayable on demand and overdrafts. Under US GAAP, cash flow represents increases or decreases in “cash and cash equivalents”, which include short term, highly liquid investments with original maturities of less than 90 days, and exclude overdrafts.

      Under UK GAAP, cash flows are presented for operating activities; dividends received from partnerships and other associates; returns on investments and servicing of finance; taxation; capital expenditure and financial investment; acquisitions and disposals; equity dividends paid; management of liquid resources and financing. US GAAP requires the classification of cash flows as resulting from operating, investing and financing activities.

      Cash flows under UK GAAP in respect of interest received, interest paid, investment income and taxation would be included within operating activities under US GAAP. Capital expenditure and financial investment, dividends received from joint ventures and associates, and cash flows from acquisitions and disposals would be included within investing activities under US GAAP. Equity dividends paid would be included within financing activities under US GAAP. Management of liquid resources may be included within financing activities or the liquid resources may be considered a cash equivalent under US GAAP, depending on the nature of the liquid resources.

      A summary of the Group’s operating, investing and financing activities, classified in accordance with US GAAP, are as follows:

	2004			2003			2002
	£m			£m			£m
Net cash provided by operating activities		402			239			334
Net cash (used in)/provided by investing activities		(115	)		(102	)		689
Net cash used in financing activities		(226	)		(164	)		(819	)
Foreign exchange differences		(6	)		14			(14	)
Net (decrease)/increase in cash and cash equivalents		55			(13	)		190
Cash and cash equivalents under US GAAP at the beginning of the year		558			571			381
Cash and cash equivalents under US GAAP at the end of the year		613			558			571

F-64

NOTES TO THE ACCOUNTS (Continued)

     Discontinued operations

      The Group analyses turnover and operating profit between continuing and discontinued operations. Under US GAAP, for transactions occurring in 2004, 2003 and 2002, the operating results from discontinued operations have been accounted for under SFAS 144 and are shown on a separate line in the profit and loss statement below income from continuing operations, net of the related tax impact.

     Revenue Recognition

      Revenue from the sale of books is recognized when title passes, persuasive evidence of an arrangement exists, the fee is determinable and collectability is probable. A provision for sales returns is estimated on the basis of historical returns and recorded so as to allocate these returns to the same period as the original sales are recorded.

      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.

      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.

      The Group recognizes software revenue in accordance with the provisions of the Statement of Position 97-2, “Software Revenue Recognition,” as amended. The Group recognizes license revenue upon shipment of a product to the customer if a signed contractual agreement exists, the fee is fixed and determinable and collection of the resulting receivables is probable. For contracts with multiple elements, the Group allocates revenue to each component of the contract based on vendor-specific objective evidence of its fair value. Vendor-specific objective evidence of fair value is determined using the price charged when that element is sold separately.

      Any significant up-front fees are deferred and recognized ratably over the estimated service period. Revenues for hosting services are recognized monthly as the services are provided.

      The Group recognizes revenue related to hardware maintenance and software support fees for ongoing customer support and product updates, ratably over the period of the maintenance contract. Payments for these fees are generally made in advance and are non-refundable. Revenues from professional services such as training, implementation, and consulting are recognized as the services are performed.

      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.

F-65

NOTES TO THE ACCOUNTS (Continued)

     Lease commitments

      The following is a summary of future minimum rental payments for all leases with terms greater than one year remaining as at December 31, 2004. All leases have been classified as capital or operating in accordance with FAS 13 “Accounting For Leases”:

	Capital		Capital			Operating			Operating
	leases — land		leases — plant			leases — land			leases — plant
	& buildings		& machinery/other			& buildings			& machinery/other
	£m		£m			£m			£m
Fiscal year ending December 31,
2005		—		(2	)		(96	)		(19	)
2006		—		(1	)		(89	)		(12	)
2007		—		(1	)		(84	)		(5	)
2008		—		—			(81	)		(2	)
2009		—		—			(78	)		(1	)
Thereafter		—		—			(584	)		—
Total minimum lease payments		—		(4	)		(1,012	)		(39	)

     Consolidation

      The consolidated financial statements include the accounts of the Group and majority-owned and controlled subsidiaries. Under UK GAAP, the investments in companies in which the Group is unable to exercise control but has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method, which is consistent with the equity method under US GAAP. Accordingly, the Group’s share of the net earnings of these companies is included in the consolidated profit and loss. The investments in other companies are carried at cost or fair value, as appropriate. Inter-company accounts and transactions are eliminated upon consolidation.

      The Group consolidates variable interest entities where we are deemed to be the primary beneficiary of the entity. Operating results for variable interest entities in which we are deemed the primary beneficiary are included in the profit and loss account from the date such determination is made.

     Use of estimates

      Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Accounting estimates have been used in these financial statements to determine reported amounts, including realizability, useful lives of tangible and intangible assets, income taxes and other items. Actual results could differ from those estimates.

     Companies Act 1985

      The consolidated financial statements do not constitute “statutory accounts” within the meaning of the Companies Act 1985 of Great Britain for any of the periods presented. Statutory accounts for the years ended December 31, 2003, 2002 and 2001 have been filed with the United Kingdom’s Registrar of Companies. The auditors have reported on these accounts. Their reports were unqualified and did not contain statements under Section 237 (2) or (3) of that Act.

      These consolidated financial statements include all material disclosures required by generally accepted accounting principles in the United Kingdom including those Companies Act 1985 disclosures relating to the profit and loss account and balance sheet items.

F-66

NOTES TO THE ACCOUNTS (Continued)

     Recently issued accounting standards

      In December 2003, the FASB issued FIN 46R “Consolidation of Variable Interest Entities — an interpretation of ARB No. 51”, which clarifies the application of the consolidation rules to certain variable interest entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns, or both. The effective date for public companies is the end of the first reporting period ending after March 15, 2004, except that all public companies must, at a minimum, apply the provisions to entities that were previously considered “special-purpose entities’ by the end of the first reporting period ending after December 15, 2003. The adoption of FIN 46R did not have a material impact on the financial position, cash flows or results of the Group under US GAAP as at December 31, 2004.

      In May 2004, the FASB issued FSP No. 106-2 (“FSP 106-2”), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Medicare Act”). The Medicare Act was enacted December 8, 2003. FSP 106-2 supersedes FSP 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” and provides authoritative guidance on accounting for the federal subsidy specified in the Medicare Act. The Medicare Act provides for a federal subsidy equal to 28% of certain prescription drug claims for sponsors of retiree health care plans with drug benefits that are at least actuarially equivalent to those to be offered under Medicare Part D, beginning in 2006. The adoption of FSP 106-2 did not have a material impact on the financial position, cash flows or results of the Group under US GAAP as at December 31, 2004.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs-An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15,2005. The Group is currently evaluating the effect that the adoption of SFAS 151 will have on its consolidated results of operations and financial condition but does not expect SFAS 151 to have a material impact.

      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non monetary Assets-An Amendment of APB Opinion No. 29, Accounting for Non monetary Transactions” (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for non monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Non monetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non- monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005. The Group is currently evaluating the effect that the adoption of SFAS 153 will have but does not expect it to have a material impact.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15,2005, with early adoption encouraged. The pro forma disclosures previously permitted

F-67

NOTES TO THE ACCOUNTS (Continued)

under SFAS 123 no longer will be an alternative to financial statement recognition. The Group is currently evaluating the impact of adoption of SFAS 123R will have, but because it already applies the requirements SFAS 123 it does not expect adoption of the new standard to have a material impact.

F-68

SIGNATURES

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

Pearson plc

/s/ Rona Fairhead

Rona Fairhead

Chief Financial Officer

Date: June 27, 2005

F-69 EX-2.2 2 u48506exv2w2.txt EX-2.2 Exhibit 2.2 EXECUTION VERSION PEARSON DOLLAR FINANCE PLC AS ISSUER PEARSON PLC, AS GUARANTOR AND THE BANK OF NEW YORK, AS TRUSTEE, PAYING AGENT AND CALCULATION AGENT $350,000,000 4.70% GUARANTEED SENIOR NOTES DUE 2009 $400,000,000 5.70% GUARANTEED SENIOR NOTES DUE 2014 INDENTURE DATED AS OF MAY 25, 2004 SIDLEY AUSTIN BROWN & WOOD, LONDON TABLE OF CONTENTS

PAGE ---- ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions............................................................................1 Section 1.2 Rules of Construction..................................................................8 ARTICLE II THE NOTES Section 2.1 Form and Dating........................................................................9 Section 2.2 Execution and Authentication...........................................................9 Section 2.3 Registrar and Paying Agent; Calculation Agent.........................................12 Section 2.4 Paying Agent to Hold Money in Trust...................................................12 Section 2.5 Holder Lists..........................................................................13 Section 2.6 Global Note Provisions................................................................13 Section 2.7 Legends...............................................................................14 Section 2.8 Transfer and Exchange.................................................................14 Section 2.9 Mutilated, Destroyed, Lost or Stolen Notes............................................17 Section 2.10 Cancellation..........................................................................17 Section 2.11 Add On Notes..........................................................................17 Section 2.12 Default Interest......................................................................19 Section 2.13 CUSIP Numbers.........................................................................19 ARTICLE III COVENANTS Section 3.1 Payment of Notes......................................................................19 Section 3.2 Maintenance of Office or Agency.......................................................20 Section 3.3 Corporate Existence...................................................................20 Section 3.4 Payment of Taxes and Other Claims.....................................................20 Section 3.5 Further Instruments and Acts..........................................................20 Section 3.6 Waiver of Stay, Extension or Usury Laws...............................................20 Section 3.7 Payment of Additional Amounts.........................................................21 Section 3.8 Limitation on Liens...................................................................22 Section 3.9 Reports to Holders....................................................................22 ARTICLE IV TRANSFEREE COMPANY Section 4.1 Assumption of Obligations.............................................................22 Section 4.2 Transferee Company Substituted for Company............................................23 ARTICLE V SUCCESSOR COMPANY Section 5.1 Consolidation, Merger and Sale of Assets of the Company...............................23 Section 5.2 Consolidation, Merger and Sale of Assets of the Guarantor.............................24 Section 5.3 Successor Guarantor Substituted for Guarantor.........................................25

i

PAGE ---- ARTICLE VI OPTIONAL REDEMPTION OF NOTES Section 6.1 Optional Tax Redemption...............................................................25 Section 6.2 Optional Redemption...................................................................26 Section 6.3 Election to Redeem....................................................................26 Section 6.4 Notice of Redemption..................................................................26 Section 6.5 Selection of Notes to be Redeemed in Part Pursuant to an Optional Redemption..........27 Section 6.6 Deposit of Redemption Price...........................................................28 Section 6.7 Notes Payable on Redemption Date......................................................28 Section 6.8 Unredeemed Portions of Partially Redeemed Note........................................28 ARTICLE VII DEFAULTS AND REMEDIES Section 7.1 Events of Default.....................................................................28 Section 7.2 Acceleration..........................................................................30 Section 7.3 Other Remedies........................................................................30 Section 7.4 Waiver of Past Defaults...............................................................31 Section 7.5 Control by Majority...................................................................31 Section 7.6 Limitation on Suits...................................................................31 Section 7.7 Rights of Holders to Receive Payment..................................................32 Section 7.8 Collection Suit by Trustee............................................................32 Section 7.9 Trustee May File Proofs of Claim, etc.................................................32 Section 7.10 Priorities............................................................................32 Section 7.11 Undertaking for Costs.................................................................33 ARTICLE VIII TRUSTEE Section 8.1 Duties of Trustee.....................................................................33 Section 8.2 Rights of Trustee.....................................................................34 Section 8.3 Individual Rights of Trustee..........................................................35 Section 8.4 Trustee's Disclaimer..................................................................35 Section 8.5 Notice of Defaults....................................................................35 Section 8.6 Reports by Trustee to Holders.........................................................35 Section 8.7 Compensation and Indemnity ...........................................................35 Section 8.8 Replacement of Trustee................................................................36 Section 8.9 Successor Trustee by Merger...........................................................37 Section 8.10 Eligibility; Disqualification.........................................................37 Section 8.11 Preferential Collection of Claims Against Company.....................................38 Section 8.12 Paying Agent and Calculation Agent....................................................38 ARTICLE IX SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONIES Section 9.1 Satisfaction and Discharge............................................................38 Section 9.2 Application by Trustee of Funds Deposited for Payment of Notes........................38 Section 9.3 Repayment of Monies Held by Paying Agent..............................................39 Section 9.4 Return of Monies Held by Trustee and Paying Agent Unclaimed for Two Years.................................................................................39

ii

PAGE ---- ARTICLE X AMENDMENTS Section 10.1 Without Consent of Holders............................................................39 Section 10.2 With Consent of Holders...............................................................40 Section 10.3 Compliance with Trust Indenture Act...................................................41 Section 10.4 Acts of Holders; Record Dates.........................................................41 Section 10.5 Notation on or Exchange of Notes......................................................42 Section 10.6 Trustee to Sign Amendments............................................................42 ARTICLE XI GUARANTEES Section 11.1 The Guarantees........................................................................42 Section 11.2 Guarantees Unconditional..............................................................43 Section 11.3 Reinstatement.........................................................................43 Section 11.4 Subrogation...........................................................................43 ARTICLE XII MISCELLANEOUS Section 12.1 Trust Indenture Act Controls..........................................................43 Section 12.2 Notices...............................................................................43 Section 12.3 Communication by Holders with Other Holders...........................................45 Section 12.4 Certificate and Opinion as to Conditions Precedent....................................45 Section 12.5 Statements Required in Certificate or Opinion.........................................45 Section 12.6 Form of Documents Delivered to Trustee................................................45 Section 12.7 Rules by Trustee, Paying Agent and Registrar..........................................46 Section 12.8 Payment on Business Days..............................................................46 Section 12.9 Governing Law, etc....................................................................46 Section 12.10 Successors............................................................................47 Section 12.11 Duplicate and Counterpart Originals...................................................47 Section 12.12 Severability..........................................................................47 Section 12.13 Currency Indemnity....................................................................47 Section 12.14 Benefits of Indenture.................................................................48 Section 12.15 Table of Contents; Headings...........................................................48 EXHIBITS - -------- Exhibit A Form of 2009 Notes...................................................................50 Exhibit B Form of 2014 Notes...................................................................61 Exhibit C Form of Transfer Certificate for Transfer to QIB.....................................72 Exhibit D Form of Certificate to be Delivered in Connection with Transfers Pursuant to Regulation S.........................................................................73 Exhibit E Form of Rule 144 Certification.......................................................75

iii This INDENTURE, dated as of May 25, 2004, among Pearson Dollar Finance plc, a public company incorporated with limited liability under the laws of England (the "Company"), Pearson PLC, a public company incorporated with limited liability under the laws of England (the "Guarantor") and The Bank of New York, a New York banking corporation (the "Trustee"), as Trustee, Paying Agent, and Calculation Agent in New York. Each party agrees as follows for the benefit of the other parties and for the benefit of the Holders of the Company's 4.70% Guaranteed Senior Notes due 2009 (the "2009 Notes") and the Company's 5.70% Guaranteed Senior Notes due 2014 (the "2014 Notes") issued hereunder (together with the 2009 Notes, the "Notes"). ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions. "Actual Knowledge" means, with respect to the Trustee, actual knowledge of any Trust Officer of the Trustee, which shall include within its scope any matter which shall have been notified in writing to the Trustee. "Additional Amounts" has the meaning assigned to it in Section 3.7. "Add On Note Board Resolutions" means resolutions duly adopted by the Board of Directors of the Company and delivered to the Trustee in an Officers' Certificate providing for the issuance of Add On Notes. "Add On Note Supplemental Indenture" means a supplement to this Indenture duly executed and delivered by the Company, the Guarantor and the Trustee pursuant to Section 2.11 providing for the issuance of Add On Notes. "Add On Notes" means any Notes originally issued after the Issue Date pursuant to Section 2.11, including any replacement Notes as specified in the relevant Add On Note Board Resolutions or Add On Note Supplemental Indenture issued therefor in accordance with this Indenture. "Affiliate" shall have the meaning provided in Rule 405 of the Securities Act. "Agent Members" has the meaning assigned to it in Section 2.6(b). "Authenticating Agent" has the meaning assigned to it in Section 2.2(d). "Authorized Agent" has the meaning assigned to it in Section 12.9(d). "Bankruptcy Default" means any of the Events of Default specified in Section 7.1(a)(v) or (vi) (with respect to the dissolution, winding up or reorganization of the Company or the Guarantor). "Bankruptcy Law" means, with respect to any jurisdiction in which the Guarantor or any of its Principal Subsidiaries (including, without limitation, the Company) are incorporated, any laws or regulations and any judicial decisions pertaining to proceedings that are initiated either by an entity or by creditors thereof seeking a general moratorium in relation to such entity's debts, to appoint a receiver for such entity, to have such insolvent entity's assets or businesses sold or distributed among such entity's creditors or to restructure and reorganize the entity's debts for the benefit of such creditors. 1 "Board of Directors" means, as to any Person, the board of directors, management committee or similar governing body of such Person or any duly authorized committee thereof. "Board Resolution" means, with respect to any Person, a copy of a resolution certified by an Officer or the General Counsel of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day other than a Saturday or Sunday or a day on which commercial banks and trust companies located in New York City, London or the Place of Payment with respect to the Notes are authorized or required by law, regulation or executive order to be closed. "Calculation Agent" means the calculation agent appointed by the Company, who shall initially be The Bank of New York. "Capital Employed" means, in respect of the Guarantor and for the purposes of Section 3.8 herein, the amount of the issued and paid-up share capital plus or minus: (i) the aggregate amount standing to the credit or debit of the consolidated reserves (including profit and loss account and any share premium account), plus (ii) the amount of minority interests in any Subsidiary, plus (iii) any reserves for deferred tax, plus (iv) all gross borrowings, whether such borrowing is made within the Group or otherwise, but excluding all such borrowings other than borrowings within the Group repayable on demand or repayable within one year, all of the foregoing as included in the Guarantor's latest published audited consolidated balance sheet or the latest audited balance sheet of such Subsidiary or pro forma consolidated financial statements, as the case may be. For the purpose of this definition only, borrowings shall be construed in accordance with normal accounting principles in the relevant jurisdiction as adopted from time to time in preparing the relevant companies' audited financial statements. "Certificated Note" means any Note issued in fully-registered certificated form (other than a Global Registered Note), which shall be substantially in the form of Exhibit A or Exhibit B, as applicable, with appropriate legends as specified in Section 2.7 and Exhibit A, in the case of the 2009 Notes, or Exhibit B, in the case of the 2014 Notes. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means the party named as such in the introductory paragraph to this Indenture and its successors and assigns, including any Transferee Company that becomes such in accordance with Article IV and any Successor Company that becomes such in accordance with Article V. "Company Order" has the meaning assigned to it in Section 2.2(c). "Comparable Treasury Issue" means, with respect to any Redemption Date for any Notes being redeemed, the United States Treasury security selected by an Independent Investment Banker as having the maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Notes. "Comparable Treasury Price" means, with respect to any Redemption Date for any of the Notes being redeemed: (i) the average of three Reference Treasury Dealer Quotations for the Redemption Date obtained by the Calculation Agent, after excluding the highest and lowest of those Reference Treasury Dealer Quotations, or 2 (ii) if the Calculation Agent obtains fewer than three Reference Treasury Dealer Quotations, the average of all Reference Treasury Dealer Quotations obtained. "Corporate Trust Office" means the corporate trust office of the Trustee at which at any particular time its corporate trust business shall be administered, which office on the date of execution of this Indenture is located at One Canada Square, 48th floor, London, E14 5AL, England, telephone number +44 207 964 6402, Attention: Alison Mitchell. "Default" means an event or condition the occurrence of which is, or with the lapse of time or giving of notice or both would be, an Event of Default. "Directive" has the meaning assigned to it in Section 3.7(d). "Distribution Compliance Period" means, in respect of any Regulation S Global Note, the 40 consecutive days beginning on and including the later of (a) the day on which any Notes represented thereby are offered to persons other than distributors (as defined in Regulation S under the Securities Act) pursuant to Regulation S and (b) the Issue Date for such Notes. "DTC" means The Depository Trust Company, its nominees and their respective successors and assigns, or such other depositary institution hereinafter appointed by the Company that is a clearing agency registered under the Exchange Act. "Event of Default" has the meaning assigned to it in Section 7.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting practices in the United Kingdom. "Global Registered Note" means any Note issued in fully-registered book-entry form to DTC (or its nominee), which shall be substantially in the form of Exhibit A, in the case of the 2009 Notes, or Exhibit B, in the case of the 2014 Notes, with appropriate legends as specified in Section 2.7 and Exhibit A or Exhibit B, as applicable. "Group" means, together, the Guarantor and its Subsidiaries, including the Company. "Guarantees" mean the unconditional and irrevocable guarantees of the payment of the principal of, any premium or interest on, and any Additional Amounts with respect to, each series of the Notes by the Guarantor, as more fully set forth in Article XI. "Guarantor" means the party named as such in the introductory paragraph to this Indenture and its successors and assigns, including any Successor Guarantor that becomes such in accordance with Article V. "Holder" means the Person in whose name a Note is registered in the Note Register. "Indenture" means this Indenture as amended or supplemented from time to time. "Independent Investment Banker" means one of the Reference Treasury Dealers selected by the Trustee in consultation with the Company and the Guarantor. "Interest Payment Date" means June 1 and December 1 in each year, commencing on December 1, 2004 and ending on the relevant Maturity Date. "Issue Date" means May 25, 2004. 3 "Issue Date Notes" means the Notes originally issued on the Issue Date, and any replacement Notes issued therefor in accordance with this Indenture. "Lien" has the meaning assigned to it in Section 3.8. "Maturity Date" with respect to the 2009 Notes means June 1, 2009, and with respect to the 2014 Notes means June 1, 2014. "Non-U.S. Person" means a person who is not a U.S. person, as defined in Regulation S under the Securities Act. "Note Register" has the meaning assigned to it in Section 2.3(a). "Noteholder Meeting" means a meeting of Holders of Outstanding Notes. "Notes" has the meaning assigned to it in the preamble hereto. "2009 Notes" has the meaning assigned to it in the preamble hereto. "2014 Notes" has the meaning assigned to it in the preamble hereto. "Obligor" of the Notes means the Company, the Guarantor and any other obligor of the Notes. "Officer" means, when used in connection with any action to be taken by the Company or the Guarantor, as the case may be, the Chairman of the Board, the Chief Executive Officer, any executive Director of the Company or the Guarantor, as the case may be, or any authorized representative of such persons. "Officers' Certificate" means, when used in connection with any action to be taken by the Company or the Guarantor, as the case may be, a certificate signed by an Officer or Officers of the Company or the Guarantor, as the case may be, that complies with the requirements of Section 10.4 and is delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel for the Company or the Guarantor, as the case may be, who may be an employee of or counsel for the Company or the Guarantor, as the case may be. "Optional Redemption" has the meaning assigned to it in Section 6.2. "Optional Tax Redemption" has the meaning assigned to it in Section 6.1. "Outstanding" means, as of the date of determination, all Notes of a series theretofore authenticated and delivered under this Indenture, except: (i) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company or the Guarantor) in trust or set aside and segregated in trust by the Company or the Guarantor (if the Company shall act as, or shall authorize the Guarantor to act as, Paying Agent) for the Holders of Notes; provided that, if the Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and 4 (iii) Notes which have been surrendered pursuant to Section 2.9 or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held by a bona fide purchaser in whose hands such Notes are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Notes of a series have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Company, the Guarantor or any other obligor upon the Notes or any Affiliate of the Company, the Guarantor or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which a Trust Officer of the Trustee actually knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company, the Guarantor or any other obligor upon the Notes or any Affiliate of the Company, the Guarantor or of such other obligor. "Paying Agent" has the meaning assigned to it in Section 2.3(a). "Person" means an individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof, or any other entity. "Place of Payment" means, with respect to a Note, the place or places where the principal of, any premium and interest on, and any Additional Amounts with respect to, the Notes are payable as specified in the Notes. "Principal Subsidiary" means any Subsidiary at any relevant time of the Guarantor: (a) whose Capital Employed or unconsolidated profit before tax and extraordinary items, calculated by reference to such Subsidiary's latest audited financial statements, is 10% or more of the Group's consolidated Capital Employed or consolidated profit before tax and extraordinary items, as the case may be, calculated by reference to the latest audited financial statements of the Group, provided that if a Subsidiary itself has Subsidiaries, the reference above to Capital Employed of such Subsidiary shall be construed as a reference to the consolidated Capital Employed of such Subsidiary and its Subsidiaries, or (b) to which is transferred the whole or substantially the whole of the assets and undertakings of a Subsidiary which immediately prior to such transfer is a Principal Subsidiary, provided that the transferor Subsidiary shall upon such transfer forthwith cease to be a Principal Subsidiary and the transferee Subsidiary shall cease to be a Principal Subsidiary pursuant to this paragraph (b) on the date on which the audited consolidated financial statements of the Group for the financial period current at the date of such transfer are published, but such transferor Subsidiary or such transferee Subsidiary may be a Principal Subsidiary on or at any time after such date by virtue of the provisions of paragraph (a) above, provided that references to the audited consolidated financial statements of any Subsidiary shall be construed as references to the audited consolidated financial statements of such Subsidiary and its subsidiaries for the relevant financial period if such audited consolidated financial statements were produced (or, if no such audited consolidated financial statements were produced, to unaudited consolidated financial statements produced on the basis of the relevant audited financial statements of such Subsidiary and its subsidiaries), and further provided that if a Subsidiary is acquired after the end of the financial period to which the latest audited consolidated financial statements relate, references to such audited consolidated financial statements for the purpose of the calculations above shall, until consolidated financial statements for the financial period in which the acquisition is made have been prepared and audited, be deemed to refer to such first-mentioned financial statements as if such Subsidiary had been shown in such financial statements by reference to its then latest relevant audited financial statements, adjusted as deemed appropriate by the Guarantor's auditors. The term "Principal Subsidiary" shall also include the Company. 5 "Private Placement Legend" has the meaning assigned to it in Section 2.7. "Purchase Agreement" means the purchase agreement, dated as of May 18, 2004, between the Company, the Guarantor and ANZ Securities, Inc., Banc of America Securities LLC, Deutsche Bank Securities Inc. and JP Morgan Chase Securities Inc. as initial purchasers. "QIB" means any "qualified institutional buyer" (as defined in Rule 144A under the Securities Act). "Qualified Majority" means a vote of a majority of the aggregate principal amount of the applicable series of Notes at a Noteholder Meeting at which more than one-half of the aggregate principal amount of the Outstanding Notes of such series are represented or voting pursuant to a written instrument; provided, however, that if representation, including representation pursuant to a written instrument, of the applicable series of Notes does not reach a majority of the aggregate principal amount of the Outstanding Notes of such series at the initial Noteholder Meeting, a Qualified Majority will nonetheless exist if at a second Noteholder Meeting a majority vote is cast with respect to the aggregate principal amount of the Outstanding Notes of such series represented and voting at such meeting, provided that such amount voting at such meeting shall not be less than 25% in aggregate principal amount of the Outstanding Notes of such series at such date. "Record Date" means any of the dates indicated under the heading "Record Dates" on the face of any of the Global Registered Notes. "Redemption Date" means, with respect to any redemption of the Notes of such series, the date of redemption with respect thereto. "Reference Treasury Dealer" means Banc of America Securities LLC, Deutsche Bank Securities Inc. and JP Morgan Chase Securities Inc. If any Reference Treasury Dealer ceases to be a primary U.S. government securities dealer, the Trustee will in consultation with the Company and the Guarantor substitute another primary U.S. government securities dealer for that dealer. "Reference Treasury Dealer Quotations" means, with respect to any Redemption Date, the average, as determined by the Calculation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted to the Calculation Agent by that Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding the Redemption Date. "Registrar" has the meaning assigned to it in Section 2.3(a). "Regulation S" means Regulation S under the Securities Act or any successor regulation. "Regulation S Global Note" has the meaning assigned to it in Section 2.1(e). "Relevant Date" means, in relation to any Note, the later of (a) the date on which the payment of an Additional Amount in question first becomes due, and (b) if the full amount of the monies payable has not been duly received in New York by the Paying Agent on or prior to such due date, Relevant Date means the date on which the full amount of such monies have been so received, provided notice to that effect is duly given to the holders of the Notes in the manner set forth in Section 12.2. "Relevant Indebtedness" means any indebtedness for borrowed money which is in the form of, or represented or evidenced by, bonds, notes, debentures, loan stocks, depositary receipts or other securities issued otherwise than to constitute or represent advances made by banks and/or other lending institutions; and at its date of issue is, or is intended by the Company or the Guarantor to become, quoted or listed on or by, or dealt in or traded on, any stock exchange, over-the-counter 6 market or other organized securities market (whether or not initially distributed by means of private placement). "Resale Restriction Termination Date" means, (i) for any Restricted Note (or beneficial interest therein) sold pursuant to Rule 144A, two years (or such other period specified in Rule 144(k) under the Securities Act) from the Issue Date or, if any Add On Notes that are Restricted Notes have been issued before the Resale Restriction Termination Date for any Restricted Notes, from the latest such original issue date of such Add On Notes and (ii) for any Restricted Note sold pursuant to Regulation S, 40 days after the later of the Issue Date with respect to the Restricted Note and the day on which such Restricted Notes are offered to persons other than distributors (as defined in Regulation S). "Restricted Note" means each Issue Date Note and each related Add On Note until the Resale Restriction Termination Date with respect thereto. "Rule 144" means Rule 144 under the Securities Act (or any successor rule). "Rule 144A" means Rule 144A under the Securities Act (or any successor rule). "Rule 144A Global Note" has the meaning assigned to it in Section 2.1(d). "SEC" means the United States Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Special Record Date" has the meaning assigned to it in Section 2.12. "Subsidiary" means one of the Guarantor's subsidiaries within the meaning of Section 736 of the United Kingdom Companies Act 1985, as modified or re-enacted from time to time, and any orders or regulations made under that Section. "Successor Company" has the meaning assigned to it in Section 5.1(a). "Successor Guarantor" has the meaning assigned to it in Section 5.2(a). "Tax-Free Exchange" means that, in connection with any proposed transfer and assumption of indebtedness under either series of Notes of the type envisaged by Article IV of this Indenture, (i) no gain or loss will be recognized by Holders of such Notes for United States federal income tax purposes and no capital gain will arise for United Kingdom tax purposes as a direct result of such transfer; (ii) no transfer or similar taxes will be imposed on Holders of such Notes under the laws of the United States or the United Kingdom as a direct result of such transfer; and (iii) such series of Notes will continue to be classified as debt and will not be classified as equity for United States federal income tax purposes. "Taxes" has the meaning assigned to it in Section 3.7. "TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, as in effect on the date of this Indenture (except as otherwise provided in this Indenture). "Transferee Company" has the meaning assigned to it in Section 4.1. "Treasury Rate" means, with respect to any Redemption Date for Optional Redemption: (a) the yield for the maturity corresponding to the Comparable Treasury Issue under the heading that represents the average for the immediately preceding week, appearing in the most recently published statistical release designated "H.15(519)" or any successor publication that is 7 published weekly by the Board of Governors of the Federal Reserve System and that establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," provided, that if no maturity is within three months before or after the relevant Maturity Date for the Notes being redeemed the yields for the two published maturities most closely corresponding to the Comparable Treasury Issue will be determined and the Treasury Rate shall be interpolated or extrapolated from those yields on a straight line basis, rounding to the nearest month; or (b) if the release referred to in (a) (or any successor release) is not published during the week preceding the calculation date or does not contain the yields referred to above, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for that Redemption Date, as calculated on the third Business Day preceding the Redemption Date. "Trustee" means the Person named as such in the introductory paragraph of this Indenture until a successor replaces it in accordance with the terms of this Indenture and, thereafter, means the successor. "Trust Officer" means, when used with respect to the Trustee, any vice president, assistant vice president, assistant treasurer, trust officer or any other officer of such Trustee customarily performing corporate trust functions on behalf of the Trustee and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of such person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture. "U.S. Government Securities" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "U.S. dollars" and "U.S.$" mean the lawful currency of the United States of America that as at the time of payment shall be legal tender for the payment of public and private debts. All TIA terms used in this Indenture that are defined by the TIA, defined in the TIA by reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. Section 1.2 Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it in this Indenture; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) "including" means including without limitation; (e) words in the singular include the plural and words in the plural include the singular; (f) references to the payment of principal of any Notes shall include applicable premium, if any; 8 (g) references to payments of interest on any Notes shall include Additional Amounts pursuant to Section 3.7, if any; and (h) references to England or to English law shall be deemed to be a reference to the jurisdiction of incorporation of the Company and the Guarantor or the law of the jurisdiction of incorporation of the Company or the Guarantor in the event the Company or the Guarantor, as the case may be, is no longer incorporated under the laws of England. ARTICLE II THE NOTES Section 2.1 Form and Dating. (a) The Notes shall be issued under this Indenture in two series in accordance with the requirements of the Purchase Agreement. The Notes will be issued in fully-registered global form without coupons, and only in denominations of U.S.$1,000 and any integral multiples thereof in excess thereof. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, in the case of the 2009 Notes, and Exhibit B, in the case of the 2014 Notes. (b) The terms and provisions of the Notes shall constitute, and are hereby expressly made, a part of this Indenture and each of the Company and the Guarantor, by execution and delivery of this Indenture, expressly agrees to such terms and provisions and to be bound thereby. In the event of an inconsistency between the terms of the Notes set forth in Exhibit A or Exhibit B, as applicable, and other terms of this Indenture, the terms set forth in any part of this Indenture other than in Exhibit A, or Exhibit B, as applicable, shall govern. Except as otherwise expressly permitted in this Indenture, all Notes of a series shall be identical in all respects. Notwithstanding any differences among them, all Notes of a series shall vote and consent together on all matters as one class. (c) The Notes may have notations, legends or endorsements as specified in Section 2.7 or as otherwise required by law, stock exchange rule, DTC rule or usage. The Company and the Trustee shall approve the forms of Notes and any notation, legend or endorsement on them. Each Note shall be dated the date of its authentication. (d) Notes originally offered and sold to QIBs in reliance on Rule 144A will be initially issued in the form of one or more permanent Global Registered Notes (each, a "Rule 144A Global Note"). (e) Notes originally offered and sold outside the United States of America in accordance with Regulation S under the Securities Act will be initially issued in the form of one or more permanent Global Registered Notes (each, a "Regulation S Global Note"). Section 2.2 Execution and Authentication. (a) Any Officer shall sign the Notes for the Company, which may be via facsimile. If an Officer whose signature is on a Note no longer holds that office at the time the Trustee authenticates the Note, the Note shall be valid nevertheless. (b) A Note shall not be valid or enforceable unless and until an authorized signatory of the Trustee, upon Company Order, authenticates the Note substantially in the form of the Trustee's certificate of authentication provided for in Section 2.2(d) hereof. The signature of the Trustee on a Note shall be conclusive evidence that such Note has been duly and validly authenticated and issued under this Indenture. 9 (c) At any time and from time to time after the execution and delivery of this Indenture, the Trustee shall authenticate and make available for delivery Notes upon a written order of the Company signed by an Officer (the "Company Order"). A Company Order shall specify the amount of the Notes to be authenticated, the applicable series and the date on which the original issue of Notes is to be authenticated. (d) The Trustee may appoint an agent or agents with respect to the Notes which shall be authorized to act on behalf of the Trustee to authenticate Notes issued upon original issue and upon exchange, registration of transfer or partial conversion or partial redemption thereof or pursuant to Section 6.8 (an "Authenticating Agent"), and Notes so authenticated shall be entitled to the benefits of this Indenture and shall be valid and enforceable for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Notes by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and the Guarantor and shall at all times be either (i) a branch of the Trustee or (ii) a Person organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than U.S.$50,000,000 and subject to supervision or examination by any federal or state authority in the United States. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent reports of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any Person into which an Authenticating Agent may be merged or with which it may be consolidated, or any Person resulting from any merger or consolidation to which such Authenticating Agent shall be a party, or any Person succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent, provided such Person shall be otherwise eligible under this Section. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee; to the Company and the Guarantor. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent, the Company and the Guarantor. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and the Guarantor and shall give notice of such appointment in the manner provided in Section 12.2 to all Holders of Notes with respect to which such Authenticating Agent will serve. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. Each of the Company and the Guarantor agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Indenture. If an appointment is made pursuant to this Section, the Notes of a series may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: 10 "This is one of the [__] [__] Notes referred to in the within-mentioned Indenture. The Bank of New York, as Trustee By: ________________________ as Authenticating Agent By: ________________________ Authorized Signatory Date: ___________________" If any of the Notes of a series may not be originally issued at one time, and if the Trustee does not have an office capable of authenticating Notes upon original issuance located in a Place of Payment where the Company wishes to have Notes authenticated upon original issuance, the Trustee, if so requested by the Company in writing (which writing need not be an Officers' Certificate or be accompanied by an Opinion of Counsel), shall appoint in accordance with this Section an Authenticating Agent having an office in a Place of Payment designated by the Company with respect of such Notes. (e) In case the Company: (i) shall be consolidated with or merged into any other Person, (ii) shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety, or (iii) shall transfer its obligations in respect of the 2009 Notes or the 2014 Notes in accordance with Articles IV or V of this Indenture. and the Successor Company or Transferee Company, as the case may be, resulting from such consolidation, or surviving such merger, or which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall assume the rights, responsibilities and obligations of the Company pursuant to Article IV or Article V, as the case may be, any of the Notes authenticated or delivered prior to such transaction may, from time to time, at the request of the Successor Company or Transferee Company, as the case may be, be exchanged for other Notes executed in the name of the Successor Company or Transferee Company, as the case may be, with such changes in phrasing and form as may be appropriate (but which shall not affect the rights or duties of the Trustee), but otherwise identical to the Notes surrendered for such exchange and of like principal amount; and the Trustee, upon Company Order of the Successor Company or Transferee Company, as the case may be, shall authenticate and deliver Notes as specified in such order for the purpose of such exchange. If Notes shall at any time be authenticated and delivered in any new name of a Successor Company or Transferee Company, as the case may be, pursuant to this Section 2.2 in exchange or substitution for or upon registration of transfer of any Notes, such Successor Company or Transferee Company, as the case may be, at the option of the Holders of Notes but without expense to them, shall provide for the exchange of all Notes at the time Outstanding for Notes of the same series authenticated and delivered in such new name. Section 2.3 Registrar and Paying Agent; Calculation Agent. (a) The Company shall (and the Guarantor shall cause the Company to) cause to be maintained an office or agency in the Borough of Manhattan, City of New York, where Global Registered Notes and Certificated Notes may be presented for registration of transfer or for exchange (a "Registrar"), for the service of notices and demands to or upon the Company and the Guarantor in 11 respect of the Notes and this Indenture, and where Notes may be presented for payment (a "Paying Agent"). The Registrar shall keep a register of the Global Registered Notes and Certificated Notes and of their transfer and exchange (the "Note Register") and shall maintain such Note Register outside the United Kingdom on behalf of the Company and the Guarantor. The Company may have one or more co-Registrars and one or more additional Paying Agents. The term "Paying Agent" includes any additional Paying Agent. The Company and the Guarantor shall inform the Trustee in writing of any appointment or payment with respect to the Notes or the Guarantees made to any Paying Agent or co-Registrar. (b) The Company and the Guarantor shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-Registrar not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company and the Guarantor shall notify the Trustee in writing of the name and address of each such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.7. The Company may act as, or may authorize the Guarantor to act as, Paying Agent, Registrar, co-Registrar or transfer agent. (c) The Company initially appoints the Trustee at its Corporate Trust Office as Registrar and Paying Agent and shall also appoint The Bank of New York (Luxembourg) in Luxembourg as an additional Paying Agent with respect to any Certificated Notes, until such time as another Person is appointed as such. For so long as any Notes are listed on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, the Company shall (and the Guarantor shall cause the Company to) maintain a Paying Agent in Luxembourg with respect to any Certificated Notes, if any. (d) The Company initially appoints the Trustee as Calculation Agent. For so long as any Notes are Outstanding, the Company shall maintain a Calculation Agent. (e) European Council Directive 2003/48/EC or any other directive implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000 is brought into force, the Company will ensure that it maintains a paying agent in a Member State of the European Union that will not be obliged to withhold or deduct tax pursuant to such Directive. Section 2.4 Paying Agent to Hold Money in Trust. | The Company and the Guarantor shall require each Paying Agent (other than the Trustee) to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by such Paying Agent for the payment of principal of or interest on the Notes and shall notify the Trustee in writing of any Default by the Company or the Guarantor in making any such payment. If the Company, the Guarantor or an Affiliate of the Company or the Guarantor acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust account. The Company and the Guarantor at any time may require a Paying Agent (other than the Trustee) to pay all money held by it to the Trustee and to account for any funds disbursed by such Paying Agent. Upon complying with this Section 2.4, the Paying Agent (if other than the Company or the Guarantor) shall have no further liability for the money delivered to the Trustee. Upon any proceeding under any Bankruptcy Law with respect to the Company, the Guarantor or any Affiliate of the Company or the Guarantor, if the Company, the Guarantor or such Affiliate is then acting as Paying Agent, the Trustee shall replace the Company, the Guarantor or such Affiliate as Paying Agent. Section 2.5 Holder Lists. | The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders of Notes. If the Trustee is not the Registrar, or to the extent otherwise required under the TIA, the Company shall furnish to the Trustee, in writing at least seven Business Days before each Interest Payment Date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders of Notes. 12 Every Holder of Notes, by receiving and holding the same, agrees with the Company, the Guarantor and the Trustee that none of the Company, the Guarantor, the Trustee or any agent of any of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. Section 2.6 Global Note Provisions. | (a) Each Global Registered Note initially shall (i) be registered in the name of DTC or the nominee of DTC and (ii) bear the appropriate legend, as set forth in Section 2.7 and Exhibit A or Exhibit B, as applicable. The Notes may be represented by one or more Global Registered Notes. The aggregate principal amount of each Global Registered Note may from time to time be increased or decreased by adjustments made on the records of the Paying Agent, as provided in this Indenture. (b) Members of, or participants in, DTC ("Agent Members") shall have no rights under this Indenture with respect to any Global Registered Note held on their behalf by DTC and DTC may be treated by the Company, the Guarantor, the Trustee, the Paying Agent and the Registrar and any of their agents as the absolute owner and Holder of such Global Registered Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Guarantor, the Trustee, the Paying Agent or the Registrar or any of their agents from giving effect to any written certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Agent Members, the operation of customary practices of DTC governing the exercise of the rights of an owner of a beneficial interest in any Global Registered Note. The Holder of a Global Registered Note may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action that a Holder is entitled to take under this Indenture or the Notes. (c) Except as provided below, owners of beneficial interests in Global Registered Notes will not be entitled to receive Certificated Notes. Certificated Notes of the same series shall be issued to all owners of beneficial interests in a Global Registered Note of such series in exchange for such interests if: (i) DTC, as depositary for the Global Registered Notes, has discontinued providing its services as a securities depositary and the Company fails to appoint a successor within 90 days of notice of the foregoing or if DTC or any successor depositary ceases to be a clearing agency registered under the Exchange Act, at a time when DTC or such successor depositary is required to be so registered in order to act as depositary and a successor securities clearing system with respect to such Global Registered Note is not appointed by the Company within 90 days of such notice, or (ii) an Event of Default has occurred and is continuing with respect to the Notes of such series and the Registrar has received a written request from the Holder of the Global Registered Note. In connection with the exchange of an entire Global Registered Note for Certificated Notes pursuant to this paragraph (c), such Global Registered Note shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and upon Company Order the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary for such Global Registered Note in exchange for its beneficial interest in such Global Registered Note, an equal aggregate principal amount of Certificated Notes of the same series in authorized denominations. (d) In connection with the exchange of a portion of a Certificated Note for a beneficial interest in a Global Registered Note, the Trustee shall cancel such Certificated Note, and the Company shall execute, and upon Company Order the Trustee shall authenticate and deliver to the exchanging Holder, a new Certificated Note representing the principal amount not so exchanged. 13 Section 2.7 Legends. Each Global Registered Note shall bear the applicable legend or legends specified therefor in Exhibit A or Exhibit B, as applicable, on the face thereof (the "Private Placement Legend"). Section 2.8 Transfer and Exchange. | (a) If (1) the owner of a beneficial interest in a Rule 144A Global Note wishes to transfer such interest (or portion thereof) to a Non-U.S. Person pursuant to Regulation S and (2) such Non-U.S. Person wishes to hold its interest in the Notes through a beneficial interest in a Regulation S Global Note, (x) upon receipt by the Registrar of: (A) written instructions from the Holder of the Rule 144A Global Note directing the Registrar to credit or cause to be credited a beneficial interest in the Regulation S Global Note equal to the principal amount of the beneficial interest in the Rule 144A Global Note to be transferred, and (B) a certificate in the form of Exhibit D from the transferor, and (y) subject to the rules and procedures of DTC with respect to the Rule 144A and the Regulation S Global Note, the Registrar shall increase the applicable Regulation S Global Note and decrease the related Rule 144A Global Note by such amount in accordance with the foregoing. (b) If the owner of an interest in a Regulation S Global Note wishes to transfer such interest (or any portion thereof) to a QIB pursuant to Rule 144A prior to the expiration of the Distribution Compliance Period therefor, (x) upon receipt by the Registrar of: (A) written instructions from the Holder of the Regulation S Global Note directing the Registrar to credit or cause to be credited a beneficial interest in the Rule 144A Global Note equal to the principal amount of the beneficial interest in the Regulation S Global Note to be transferred, and (B) a certificate in the form of Exhibit C duly executed by the transferor, and (y) in accordance with the rules and procedures of DTC with respect to the Rule 144A and the Regulation S Global Note, the Registrar shall increase the applicable Rule 144A Global Note and decrease the related Regulation S Global Note by such amount in accordance with the foregoing. (c) Certificated Notes, if issued, may be exchanged or transferred in whole or in part in the principal amount of authorized denominations by surrendering such Certificated Notes at the Corporate Trust Office or the office of a Paying Agent with a written instrument of transfer as set forth in Exhibit A or Exhibit B, as applicable, duly executed by the Holder thereof or its attorney duly authorized in writing. In exchange for any Certificated Note properly presented for exchange or transfer, the Trustee will promptly, upon Company Order, authenticate and deliver or cause to be authenticated and delivered at the Corporate Trust Office of the Trustee, to the Holder entitled to such Certificated Note, or send by mail (at the risk of such Holder) to such address as such Holder may request in writing, a Certificated Note or Notes of the same series. The costs and expenses of effecting any exchange or transfer pursuant to this paragraph will be borne by the Company and the Guarantor, except that the expense of delivery by other than regular mail (if any) and the payment of a sum sufficient to cover any tax or other government charges or insurance that may be imposed in relation thereto, will be borne solely by the Holder requesting such transfer or exchange. Any transfer or exchange by a Holder of a Certificated Note must occur in accordance with applicable law. (d) Any transfer of Restricted Notes not described above (other than a transfer of a beneficial interest in a Global Registered Note that does not involve an exchange of such interest for 14 a Certificated Note or a beneficial interest in another Global Registered Note, which must be effected in accordance with applicable law and the rules and procedures of DTC with respect to a Restricted Note, but is not subject to any procedure required by this Indenture) shall be made only upon receipt by the Registrar of such Opinions of Counsel, certificates and/or other information reasonably required to ensure compliance with the Securities Act or in accordance with paragraph (e) of this Section 2.8. (e) Upon the transfer, exchange or replacement of Notes (or beneficial interests in a Global Registered Note) not bearing a Private Placement Legend, the Registrar shall exchange such Notes (or beneficial interests) for beneficial interests in a Global Registered Note of the same series (or Certificated Notes of the same series if they have been issued pursuant to Section 2.6(d)) that does not bear a Private Placement Legend. Upon the transfer, exchange or replacement of Notes (or beneficial interests in a Global Registered Note) bearing a Private Placement Legend, the Registrar shall deliver only Notes of the same series (or beneficial interests in a Global Registered Note of the same series) that bear a Private Placement Legend unless: (i) such Notes (or beneficial interests) are transferred pursuant to Rule 144 upon delivery to the Registrar of a certificate of the transferor in the form of Exhibit E and an Opinion of Counsel; (ii) such Notes (or beneficial interests) are transferred, replaced or exchanged after the Resale Restriction Termination Date therefor; or (iii) in connection with such transfer, exchange or replacement the Registrar shall have received an Opinion of Counsel and other evidence reasonably requested by it to the effect that neither such Private Placement Legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. The Private Placement Legend on any Note shall be removed at the written request of the Holder on or after the Resale Restriction Termination Date thereof. The Holder of a Global Registered Note may exchange an interest therein for an equivalent interest in a Global Registered Note of the same series not bearing a Private Placement Legend (other than a Regulation S Global Note) upon transfer of such interest pursuant to any of clauses (i) through (iii) of this paragraph (e). (f) The Registrar shall retain copies of all letters, notices and other written communications received pursuant to this Article II. The Company and the Guarantor shall have the right to inspect and make copies of all such letters, notices or other written communications during the Registrar's normal business hours upon the giving of reasonable written notice to the Registrar. (g) (i) Subject to the other provisions of this Section 2.8, when Notes are presented to the Registrar or a co-Registrar with a request to register the transfer of such Notes or to exchange such Notes for an equal principal amount of Notes of the same series in other authorized denominations, the Registrar or co-Registrar shall register the transfer or make the exchange as requested if its requirements for such transaction are met; provided that any Notes presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument in the form of Exhibit C, D or E, as applicable, to the Registrar or co-Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. To permit registrations of transfers and exchanges and subject to the other terms and conditions of this Article II, the Company will execute and upon Company Order the Trustee will authenticate Certificated Notes and Global Registered Notes. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith 15 (other than any such transfer taxes, assessments or similar governmental charges payable upon exchange or transfer pursuant to Article V or Section 561 or Section 10.5). (iii) The Registrar or co-Registrar shall not be required to register the transfer of or exchange of any Note for a period beginning: (1) 15 days before the mailing of a notice of an offer to repurchase or redeem Notes and ending at the close of business on the day of such mailing or (2) 15 days before an Interest Payment Date and ending on such Interest Payment Date. (iv) Prior to the due presentation for registration of transfer of any Note, the Company, the Guarantor, the Trustee, the Paying Agent, the Registrar or any co-Registrar and any agent of any of them may deem and treat the Person in whose name a Note is registered as the absolute owner and Holder of such Note for the purpose of receiving payment of principal of and interest on such Note and for all other purposes whatsoever, whether or not such Note is overdue, and none of the Company, the Guarantor, the Trustee, the Paying Agent, the Registrar or any co-Registrar and any agent of any of them shall be affected by notice to the contrary. (v) All Notes issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Notes surrendered upon such transfer or exchange. (h) The Trustee shall have no responsibility or obligation to and shall not incur any liability with respect to any beneficial owner of an interest in a Global Registered Note, a member of, or a participant in, DTC or any other Person with respect to the accuracy of the records of DTC or its nominee or of any participant or member thereof, with respect to any ownership interest in the Notes or with respect to the delivery to any participant, member, beneficial owner or other Person (other than DTC) of any notice (including any notice of redemption) or the payment of any amount or delivery of any Notes (or other security or property) under or with respect to such Notes. All notices and communications to be given to the Holders and all payments to be made to Holders in respect of the Notes shall be given or made only to or upon the order of the registered Holders (which shall be DTC or its nominee in the case of a Global Registered Note). The Trustee may rely and shall be fully authorized and protected in relying upon information furnished by DTC with respect to its members, participants and any beneficial owners. (i) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note (including any transfers between or among DTC participants, members or beneficial owners in any Global Registered Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. Section 2.9 Mutilated, Destroyed, Lost or Stolen Notes. | (a) If a mutilated Note is surrendered to the Paying Agent in New York City or if the Holder of a Note claims that the Note has been lost, destroyed or wrongfully taken, the Company shall execute and upon Company Order the Trustee shall authenticate a replacement Note of the same series if such Holder shall furnish an affidavit of loss and indemnity bond sufficient in the judgment of the Company, the Guarantor and the Trustee to protect the Company, the Guarantor, the Trustee, the Paying Agent, the Registrar and any co-Registrar from any loss that any of them may suffer if a Note is replaced, and, in the absence of notice to the Company, the Guarantor or the Trustee that such Note has been acquired by a bona fide purchaser, the Company and the Guarantor shall execute and upon Company Order the Trustee shall authenticate and make available for delivery, in exchange for 16 any such mutilated Note or in lieu of any such destroyed, lost or stolen Note, a new Note of the same series and principal amount, bearing a number not contemporaneously Outstanding. (b) Upon the issuance of any new Note under this Section 2.9, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the reasonable fees and expenses of the Trustee, its agents and counsel) in connection therewith. (c) Every new Note issued pursuant to this Section 2.9 in exchange for any mutilated Note, or in lieu of any destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Company, the Guarantor and any other obligor upon the Notes, whether or not the mutilated, destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. Section 2.10 Cancellation. | The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel and dispose of cancelled Notes in accordance with its policy of disposal. The Company may not issue new Notes to replace Notes it has paid or delivered to the Trustee for cancellation for any reason other than in connection with a transfer or exchange upon Company Order. Section 2.11 Add On Notes. | (a) The Company may, from time to time, subject to compliance with any other applicable provisions of this Indenture, without the consent of the Holders, create and issue pursuant to this Indenture additional notes of a series ("Add On Notes") having terms and conditions identical to those of Outstanding Notes of such series issued under this Indenture, except that Add On Notes: (i) may have a different issue date from such other Outstanding Notes; (ii) may have a different amount of interest payable on the first Interest Payment Date after issuance than is payable on such other Outstanding Notes; and (iii) may have terms specified in the Add On Note Board Resolution or Add On Note Supplemental Indenture for such Add On Notes making appropriate adjustments to this Article II and Exhibit A or Exhibit B, as applicable (and related definitions), applicable to such Add On Notes in order to conform to and ensure compliance with the Securities Act (or other applicable securities laws) which are not adverse in any material respect to the Holder of any such Outstanding Notes (other than such Add On Notes) and which shall not affect the rights or duties of the Trustee. (b) In authenticating any Add On Notes, and accepting the additional responsibilities under this Indenture in relation to such Add On Notes, the Trustee shall be entitled to receive, and shall be fully protected in relying upon: (i) Company Order; (ii) the Add On Note Board Resolutions or Add On Note Supplemental Indenture relating thereto; (iii) an Officers' Certificate with respect to the Company complying with Section 12.4; and (iv) an Opinion of Counsel for the Company complying with Section 12.4 stating, 17 (A) that the forms of such Notes have been established by or pursuant to Add On Note Board Resolutions or by an Add On Note Supplemental Indenture, as permitted by this Section 2.11 and in conformity with the provisions of this Indenture; (B) the terms of such Notes have been established by or pursuant to Add On Note Board Resolutions or by an Add On Note Supplemental Indenture, as permitted by this Section 2.11 and in conformity with the provisions of this Indenture; (C) that such Notes, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any customary conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company and the Guarantor entitled to the benefits provided in the Indenture, enforceable in accordance with their respective terms, except to the extent that the enforcement of such obligations may be subject to bankruptcy laws or insolvency laws or other similar laws, general principles of equity and such other qualifications as such counsel shall conclude are customary or do not materially affect the rights of the Holders of such Notes; (D) that all laws and requirements in respect of the execution and delivery of the Notes have been complied with; and (E) such other matters as the Trustee may reasonably request. (v) an Opinion of Counsel for the Guarantor complying with Section 12.4 stating that the Guarantee with respect to the Add On Notes, when such Add On Notes are issued, authenticated and delivered, will constitute a valid and legally binding obligation of the Guarantor, enforceable in accordance with its terms, except to the extent that the enforcement of such obligation may be subject to bankruptcy laws or insolvency laws or other similar laws, general principles of equity and such other qualifications as such counsel shall conclude are customary or do not materially affect the rights of the Holders of such Notes. (c) If such forms or terms have been so established by or pursuant to Add On Note Board Resolutions or an Add On Note Supplemental Indenture, the Trustee shall have the right to decline to authenticate and deliver any Notes: (i) if the Trustee, being advised by counsel, determines that such action may not lawfully be taken; (ii) if the Trustee by its committee of Trust Officers in good faith determines that such action would expose the Trustee to personal liability to Holders of any Outstanding Notes of the same series; or (iii) if the issue of such Add On Notes pursuant to this Indenture will affect the Trustee's own rights, duties and immunities under the related Notes and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. Notwithstanding anything in this Section 2.11, the Company may not issue Add On Notes if an Event of Default shall have occurred and be continuing. Section 2.12 Defaulted Interest | If the Company defaults in a payment of interest on the Notes, the Company or the Guarantor shall pay the defaulted amounts to the persons who are Holders thereof on a subsequent special record 18 date (the "Special Record Date"). The Company or the Guarantor shall fix the Special Record Date and payment date in a manner satisfactory to the Trustee and provide the Trustee at least 20 days notice of the proposed date. At least 15 days before the Special Record Date, the Company or the Guarantor shall mail or cause to be mailed to Holder at its address as it appears on the Notes Register maintained by the Registrar a notice that states the Special Record Date, the payment date (which shall be not less than five nor more than ten days after the Special Record Date), and the amount to be paid. In lieu of the foregoing procedures, the Company or the Guarantor may pay defaulted interest in any other lawful manner satisfactory to the Trustee. Section 2.13 CUSIP Numbers The Company in issuing the Notes may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the "CUSIP" numbers. ARTICLE III COVENANTS Section 3.1 Payment of Notes. | (a) The Company shall pay the principal of and interest on the Notes in U.S. dollars on the dates and in the manner provided in the Notes and in this Indenture. On or prior to 10:00 a.m. local time on each Interest Payment Date and the relevant Maturity Date, the Company shall deposit or have deposited with the Paying Agent in the Place of Payment with respect to such Notes immediately available U.S. dollar funds sufficient to make cash payments due on such Interest Payment Date or relevant Maturity Date, as the case may be. If the Company, the Guarantor or an Affiliate of the Company is acting as Paying Agent, the Company, the Guarantor or such Affiliate shall, prior to 10:00 a.m. local time in the Place of Payment with respect to the Notes on each Interest Payment Date and the relevant Maturity Date, segregate and hold in trust U.S. dollar funds sufficient to make cash payments due on such Interest Payment Date or relevant Maturity Date, as the case may be, with respect to the Notes. Principal and interest shall be considered paid on the date due if on such date the Trustee or the Paying Agent (other than the Company, the Guarantor or an Affiliate of the Company) holds in accordance with this Indenture U.S. dollar funds designated for and sufficient to pay all principal and interest then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Holders of Notes on that date pursuant to the terms of this Indenture. (b) Each Paying Agent shall notify the Trustee promptly in writing when it has received from the Company payment of the principal and/or interest on the Notes with respect to each Interest Payment Date and/or relevant Maturity Date. (c) Notwithstanding anything to the contrary contained in this Indenture, the Company (but without prejudice to the obligations of the Company or the Guarantor to pay Additional Amounts in accordance with a requirement of the Indenture) may, to the extent it is required to do so by law, deduct or withhold income or other similar taxes imposed by the United States of America from principal or interest payments hereunder. Section 3.2 Maintenance of Office or Agency. | 19 (a) The Company shall (and the Guarantor shall cause the Company to) maintain each office or agency required under Section 2.3. The Company will (and the Guarantor shall cause the Company to) give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and each of the Company and the Guarantor hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. (b) The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York or Luxembourg) where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York and Luxembourg for such purposes. The Company will (and the Guarantor shall cause the Company to) give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. Section 3.3 Corporate Existence. | Subject to Articles IV and V, each of the Company and the Guarantor will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. Section 3.4 Payment of Taxes and Other Claims. | Each of the Company and the Guarantor will, and the Guarantor will cause each Principal Subsidiary to, pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon it or any Principal Subsidiary or for which it or any of them are otherwise liable, or upon the income, profits or property of it or any Principal Subsidiary and (ii) all lawful claims for labor, materials and supplies, which, if unpaid, might by law become a liability or security interest upon the property of it or any Principal Subsidiary; provided, however, that it shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate reserves, if necessary (in the good faith judgment of management the Guarantor), are being maintained in accordance with GAAP or where the failure to effect such payment will not be disadvantageous to the Holders. Section 3.5 Further Instruments and Acts. | The Company and the Guarantor will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. Section 3.6 Waiver of Stay, Extension or Usury Laws. | Each of the Company and the Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive it from paying all or any portion of the principal of or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture. Each of the Company and the Guarantor hereby expressly waives (to the extent that it may lawfully do so) all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 3.7 Payment of Additional Amounts. | The Company shall make all payments of principal and interest in respect of the Notes without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by the United Kingdom or any political subdivision or any authority thereof or therein having power to tax ("Taxes") with respect to payments of interest and 20 principal on the Notes, unless such withholding or deduction is required by law or by the official judicial or administrative interpretation thereof; provided, however, that if the law of the United Kingdom should require that any payments in respect of the Notes of a series be subject to withholding or deduction with respect to any Taxes imposed or levied by, or on behalf of, such jurisdiction or any authority therein or thereof having power to tax, the Company shall, to the fullest extent then permitted by law, pay such additional amounts as may be necessary in order that the net amounts received by a Holder of Notes of such series who is not resident in the United Kingdom for tax purposes after such withholding or deduction shall equal the respective amounts of principal and interest, if any, that would otherwise have been receivable in respect of the Notes of such series in the absence of such withholding or deduction (the "Additional Amounts"); except that no such Additional Amounts shall be payable with respect to any Note of such series presented for payment: (a) by or on behalf of a Holder of a Note (including a beneficial owner) who is liable for such Taxes in respect of such Note by reason of such Holder having some connection with the United Kingdom other than the mere holding of such Note; (b) where such withholding or deduction could have been avoided by the Holder making a declaration of non-residence or other similar claim for exemption to any authority of or in the United Kingdom; (c) where (in the case of a payment of principal or interest on final redemption) the relevant Note is surrendered for payment more than 30 days after the Relevant Date except to the extent that the relevant Holder would have been entitled to such Additional Amounts if such Holder had surrendered the relevant Note on the last day of such period of 30 days; (d) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or (e) where the relevant Note is surrendered for payment by or on behalf of a Holder who would have been able to avoid such withholding or deduction by presenting the relevant Note to another Paying Agent in a member state of the European Union. If the Directive is promulgated, the Company undertakes to maintain a Paying Agent in a European Union member state that will not be obliged to withhold or deduct Taxes pursuant to the Directive if such a member state exists. If the Company, or its successor, becomes subject at any time to any taxing jurisdiction other than the United Kingdom, references in this Section to the United Kingdom with respect to Additional Amounts shall be construed as references to the United Kingdom and/or such other successor jurisdiction. Section 3.8 Limitation on Liens. | So long as any Notes remain outstanding, the Guarantor will not, and will not permit any Principal Subsidiary to, create, assume or permit to arise or to exist any mortgage, pledge, charge, lien, security interest or other encumbrance (other than a lien or other encumbrance arising by operation of law) (a "Lien") upon the whole or any part of its present or future property, assets or revenues to secure (i) payment of any Relevant Indebtedness or (ii) payment under any guarantee or indemnity granted by the Guarantor or any Principal Subsidiary in respect of any Relevant Indebtedness, without in any such case at the same time affording to the Notes the same security as the Lien created or subsisting to secure any such Relevant Indebtedness, guarantee or indemnity or such other security as the Guarantor, by an Officers' Certificate, shall confirm to the Trustee is not 21 materially less beneficial to the Holders of the Notes or as shall be approved by Holders of a majority in aggregate principal amount of each series of Outstanding Notes; provided, however, that a Lien existing to secure Relevant Indebtedness of, or in respect of the payment of which there is granted a guarantee or an indemnity by, a Principal Subsidiary and which Lien existed prior to the time of such Principal Subsidiary becoming a Subsidiary (other than a Lien created or assumed in contemplation of such company becoming a Subsidiary), shall be permitted and neither the Guarantor nor such Principal Subsidiary shall be required to extend the security of such Lien to the Holders of the Notes. Section 3.9 Reports to Holders. | At any time when the Guarantor is not subject to Section 13 or Section 15(d) of the Exchange Act (or is not current in its reporting obligations thereunder nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder), the Guarantor will make available, upon request and at the expense of the Company and the Guarantor, to any Holder and any prospective purchaser of Notes the information required pursuant to Rule 144A(d)(4) under the Securities Act. ARTICLE IV TRANSFEREE COMPANY Section 4.1 Assumption of Obligations. A limited liability company or corporation that is organized under the laws of the State of Delaware in the United States of America and is legally and beneficially wholly-owned by the Guarantor, directly or indirectly (the "Transferee Company"), may assume the obligations of the Company under a series of Notes and the Indenture without the consent of the Holders thereof, provided that: (a) the Transferee Company shall expressly assume by a supplemental indenture all of the obligations of the Company under the Notes of such series and this Indenture; (b) such supplemental indenture shall be in a form reasonably satisfactory to the Trustee, shall be duly authorized and executed by the Transferee Company, shall constitute a valid and legally binding agreement of such Transferee Company, and shall be delivered to the Trustee; (c) subject to exceptions (a) through (e) in Section 3.7 herein, such Transferee Company shall agree that all payments made by it in respect of principal of, or premium, if any, or interest on, the relevant Notes will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the United States or any authority thereof or therein having power to tax, unless such withholding or deduction is required by law or by the official judicial or administrative interpretation thereof, and if withholding or deduction is so required, such Transferee Company will pay to each Holder of such Notes such Additional Amounts as may be necessary so that the net amounts paid to such Holder who is not resident for tax purposes in the United States after such deduction or withholding, shall be not less than the amounts specified in such series of Notes to which such Holder is entitled; (d) immediately after giving effect to such transfer, no Event of Default with respect to such series of Notes, and no event which, after notice or lapse of time of both, would become an Event of Default with respect to such series of Notes, shall have occurred and be continuing; (e) the Guarantor's obligations under the Guarantees shall remain in full force and effect after the transfer; 22 (f) the relevant Notes shall not be delisted from the Luxembourg Stock Exchange as a result of such transfer, unless alternative listing arrangements satisfactory to the affected Holders have been made; (g) the ratings assigned to the relevant Notes shall not be adversely affected as a result of any such transfer, and Moody's Investors Service, Inc and Standard & Poor's shall have provided written confirmation to that effect to the Guarantor; (h) the Company shall give written notice of such transfer to Holders of the relevant Notes not less than 30 nor more than 60 days prior to the date such transfer shall occur, as set forth in Section 12.2; (i) there shall have been delivered to the Trustee an Opinion of Counsel stating that such transfer shall constitute a Tax-Free Exchange to the Holders affected thereby; and (j) the Company and the Guarantor shall each deliver to the Trustee an Officer's Certificate and an Opinion of Counsel stating that such transfer complies with this Section 4.1 and that all conditions precedent to such transfer have been satisfied. Section 4.2 Transferee Company Substituted for Company. Upon any assumption in accordance with Section 4.1, the Transferee Company shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such Transferee Company had been named as the Company herein; and thereafter the predecessor shall be released from all obligations and covenants under the relevant series of Notes and this Indenture with respect to the relevant series of Notes. ARTICLE V SUCCESSOR COMPANY Section 5.1 Consolidation, Merger and Sale of Assets of the Company. The Company may consolidate or merge with or into any other entity and may convey, transfer or lease its property as an entirety or substantially as an entirety to any entity, provided that: (a) the entity (if other than the Company) formed by or resulting from any such consolidation or merger or which shall have received such property (the "Successor Company") shall expressly assume by a supplemental indenture all of the obligations of the Company under the Notes and this Indenture; (b) such supplemental indenture shall be in a form reasonably satisfactory to the Trustee, shall be duly authorized and executed by the Successor Company, shall constitute a valid and legally binding agreement of such Successor Company, and shall be delivered to the Trustee; (c) subject to exceptions (a) through (e) in Section 3.7 herein, such Successor Company shall agree that all payments made by it in respect of principal of, or premium, if any, or interest on, any series of the Notes will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the jurisdiction in which such Successor Company is incorporated, or any political subdivision thereof or authority or agency thereof or therein having power to tax, unless such withholding or deduction is required by law or by the official judicial or administrative interpretation thereof, and if withholding or deduction is so required, such Successor Company will pay to each Holder of Notes such Additional Amounts as may be necessary so that the net amounts paid to such Holder who is not resident for tax purposes in the 23 jurisdiction in which such Successor Company is incorporated, after such deduction or withholding, shall be not less than the amounts specified in such Notes to which such Holder is entitled; (d) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing with respect to any series of Notes; (e) the Guarantor's obligations under the Guarantees shall remain in full force and effect after the transaction; and (f) the Company and the Guarantor shall each deliver to the Trustee an Officers' Certificate and an Opinion of Counsel stating that such consolidation, merger, conveyance, transfer or lease and supplemental agreement comply with this Article V and that all conditions precedent to such consolidation, merger, conveyance, transfer or lease have been satisfied. Section 5.2 Consolidation, Merger and Sale of Assets of the Guarantor. The Guarantor may consolidate or merge with or into any other entity and may convey, transfer or lease its property as an entirety or substantially as an entirety to any entity, provided that: (a) the entity (if other than the Guarantor) formed by or resulting from any such consolidation or merger or which shall have received such property (the "Successor Guarantor") shall expressly assume by a supplemental indenture all of the obligations of the Guarantor under the Guarantees and this Indenture; (b) such supplemental indenture shall be in form reasonably satisfactory to the Trustee, shall be duly authorized and executed by the Successor Guarantor, shall constitute a valid and legally binding agreement of such Successor Guarantor, and shall be delivered to the Trustee; (c) subject to exceptions (a) through (e) in Section 3.7 and Section 11.1 herein, such Successor Guarantor shall agree that all payments made by it under the Guarantees in respect of principal of, or premium, if any, or interest on, any Note will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the jurisdiction in which such Successor Guarantor is incorporated, or any political subdivision thereof or authority or agency thereof or therein having power to levy the same, unless such withholding or deduction is required by law or by the official judicial or administrative interpretation thereof, and if withholding or deduction is so required, such Successor Guarantor will pay to each Holder of Notes such Additional Amounts as may be necessary so that the net amounts paid to such Holder who is not resident for tax purposes in the jurisdiction in which such Successor Guarantor is incorporated, after such deduction or withholding, shall be not less than the amounts specified in such Notes to which such Holder is entitled; (d) immediately after giving effect to such transaction, no Event of Default with respect to any series of Notes, and no event which, after notice or lapse of time or both, would become an Event of Default with respect to any series of Notes, shall have occurred and be continuing; and (e) the Guarantor shall deliver to the Trustee an Officers' Certificate and an Opinion of Counsel stating that such consolidation, merger, conveyance, transfer or lease complies with this Article V and that all conditions precedent to such consolidation, merger, conveyance, transfer or lease and have been satisfied. Section 5.3 Successor Company or Guarantor Substituted. 24 Upon any consolidation, merger, conveyance, transfer or lease to any entity involving the Company, in the case of Section 5.1, or the Guarantor in the case of Section 5.2, the Successor Company or Successor Guarantor, as applicable, formed by such consolidation, merger, conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company or the Guarantor, as applicable, and the Notes or the Guarantees, as applicable, under this Indenture and the Notes or the Guarantees, as applicable, with the same effect as if such Successor Company or Successor Guarantor, as applicable, had been named originally as such herein; and thereafter the predecessor shall be released from all obligations and covenants under this Indenture and the Notes or the Guarantees, as applicable. ARTICLE VI OPTIONAL REDEMPTION OF NOTES Section 6.1 Optional Tax Redemption. The Notes of either series may be redeemed on not less than 30 nor more than 60 days' prior written notice to the Trustee, and, in accordance with Section 6.4 and in the manner provided in Section 12.2, the Holders of such Notes, at the option of the Company or the Guarantor (an "Optional Tax Redemption"), in whole, but not in part, at any time, if: (a) on the occasion of the next succeeding Interest Payment Date for such series, each of the Company and the Guarantor has or will become obliged to pay Additional Amounts as a result of any change in, or amendment to, the laws or regulations of the Company's domicile or any authority in or of the Company's domicile having power to tax, or any change in the official judicial or administrative interpretation of these laws or regulations, which change or amendment becomes effective on or after the Issue Date; and (b) each of the Company and the Guarantor is unable to avoid this obligation by taking reasonable measures available to it; provided that no notice of Optional Tax Redemption shall be given earlier than 90 days prior to the earliest date on which the Company or the Guarantor, as the case may be, would be obliged to pay, deduct or withhold amounts were a payment in respect of the Notes of such series then due. Notes redeemed pursuant to an Optional Tax Redemption will be redeemed at an amount equal to the principal amount of the Notes being redeemed together with Additional Amounts, if any, plus any accrued and unpaid interest to (but excluding) the Redemption Date. Section 6.2 Optional Redemption. | The Company may redeem the Notes of any series, as a whole at any time or in part from time to time, at the option of the Company (an "Optional Redemption"), at a redemption price equal to the greater of: (a) 100% of the principal amount of the Notes of such series being redeemed; or (b) as determined by the Calculation Agent, the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed, not including any portion of such payment of interest accrued on the Redemption Date, from the Redemption Date to the relevant Maturity Date, discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 15 basis points, in the case of the 2009 Notes, and 20 basis points, in the case of the 2014 Notes, plus any accrued and unpaid interest to (but excluding) the Redemption Date and Additional Amounts, if any. Notice of any redemption will be mailed at least 30 days but no more than 60 days before the Redemption Date to the Trustee, the Guarantor and, in accordance with Section 6.4 and in the manner provided in Section 12.2, to each Holder of Notes to be redeemed. 25 Section 6.3 Election to Redeem. The Guarantor or the Company, as applicable, shall evidence its election to redeem any Notes pursuant to Section 6.1 or Section 6.2 by a Board Resolution. Section 6.4 Notice of Redemption. | (a) The Company or the Guarantor shall give or cause the Trustee to give written notice of redemption not less than 30 nor more than 60 days prior to the Redemption Date to each Holder of Notes to be redeemed at the address appearing in the Notes Register. If the Company or the Guarantor itself gives the notice, it shall also deliver a copy to the Trustee. (b) If either (i) the Company is not redeeming all Outstanding Notes of a series, or (ii) the Company or the Guarantor elects to have the Trustee give notice of redemption, then the Company shall deliver to the Trustee, at least 45 days prior to the Redemption Date (unless the Trustee is satisfied with a shorter period), an Officers' Certificate requesting that the Trustee select the Notes to be redeemed and/or give notice of redemption and setting forth the information required by paragraph (c) of this Section 6.4. If the Company or the Guarantor elects to have the Trustee give notice of redemption, the Trustee shall give the notice in the name of the Company and the Guarantor and at the expense of the Company and the Guarantor. (c) All notices of redemption shall state: (i) which series of Notes is the subject of redemption and whether such Notes are being redeemed pursuant to an Optional Tax Redemption or an Optional Redemption; (ii) the Redemption Date, (iii) the redemption price and the amount of any accrued interest payable as provided in Section 6.7, (iv) in the case of an Optional Redemption, whether or not the Company is redeeming all Outstanding Notes of a series, (v) in the case of an Optional Redemption, if the Company is not redeeming all Outstanding Notes of a series, the aggregate principal amount of Notes of such series that the Company is redeeming and the aggregate principal amount of Notes of such series that will remain Outstanding after the partial redemption, as well as the identification of the particular Notes, or portions of the particular Notes, that the Company is redeeming, (vi) in the case of an Optional Redemption, if the Company is redeeming only a portion of the principal amount of a Note or Notes of a series, the notice that relates to such Note or Notes shall state that on and after the Redemption Date, upon surrender of such Note or Notes, the Holders will receive, without charge, a new Note or Notes of such series of authorized denominations for the principal amount of the Note or Notes remaining unredeemed, (vii) that on the Redemption Date the redemption price and any accrued interest payable to the Redemption Date as provided in Section 6.7 will become due and payable in respect of each Note to be redeemed, and, unless the Company and the Guarantor defaults in making the redemption payment, that interest on each Note to be redeemed will cease to accrue on and after the Redemption Date, (viii) the place or places where a Holder must surrender the Holder's Notes for payment of the redemption price, and 26 (ix) the CUSIP or ISIN number, if any, listed in the notice or printed on the Notes, and that no representation is made as to the accuracy or correctness of such CUSIP or ISIN number. Section 6.5 Selection of Notes to be Redeemed in Part Pursuant to an Optional Redemption. | (a) If the Company is not redeeming all Outstanding Notes of a series pursuant to an Optional Redemption, the Trustee shall, so long as such Notes are listed on the Luxembourg Stock Exchange, select the Notes to be redeemed in compliance, based on an Opinion of Counsel furnished to the Trustee by the Company prior to the Redemption Date, with the requirements of the Luxembourg Stock Exchange, and in all cases, on a pro rata basis, by lot or in another fair and reasonable manner chosen by the Trustee. The Trustee shall make the selection from the Outstanding Notes of such series not previously called for redemption. The Trustee shall promptly notify each of the Company and the Guarantor in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount of the Notes to be redeemed. In the event of a partial redemption by lot, the Trustee shall select the particular Notes to be redeemed not less than 30 nor more than 60 days prior to the relevant Redemption Date from the Outstanding Notes of such series not previously called for redemption. The Company may redeem Notes in those denominations specified for such Notes only in whole. The Trustee may select for redemption portions (equal to the denomination(s) specified for such Notes or any integral multiple thereof) of the principal of Notes that have denominations larger than a denomination specified for such Notes, provided that after such partial redemption the remaining principal amount of any such Note shall be a denomination specified for such Notes or any integral multiple thereof. (b) For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes shall relate, in the case of any Note redeemed or to be redeemed only in part, to the portion of the principal amount of that Note which has been or is to be redeemed. Section 6.6 Deposit of Redemption Price. | Prior to 10:00 a.m. local time in the city in which the office of the Trustee or the Paying Agent with respect to the Notes being redeemed is located on the relevant Redemption Date, the Company and the Guarantor (without duplication) shall deposit with the Trustee or with a Paying Agent (or, if the Company or the Guarantor is acting as Paying Agent, segregate and hold in trust as provided in Section 2.4) an amount of money in immediately available funds sufficient to pay the redemption price of, and accrued interest on, all the Notes that are being redeemed on that date. Section 6.7 Notes Payable on Redemption Date. | If the Company or the Guarantor, or the Trustee on behalf of the Company or the Guarantor, gives notice of redemption in accordance with this Article VI, the Notes, or the portions of Notes (in the case of an Optional Redemption), called for redemption, shall, on the Redemption Date, become due and payable at the redemption price specified in the notice (together with accrued interest, if any, to (but excluding) the Redemption Date), and from and after the Redemption Date (unless the Company and the Guarantor shall default in the payment of the redemption price and accrued interest) the Notes or the portions of the Notes shall cease to bear interest. Upon surrender of any Note for redemption in accordance with the notice, the Company shall pay the Notes at the redemption price, together with accrued, but unpaid, interest, if any, to (but excluding) the Redemption Date and any Additional Amounts, if any, subject to the rights of Holders in the case of a Global Registered Note on the relevant Record Date to receive interest due on the related Interest Payment Date. If the Company and the Guarantor shall fail to pay any Note called for redemption upon its surrender for redemption, the principal shall, until paid, bear interest from the Redemption Date at the rate borne by Note. Section 6.8 Unredeemed Portions of Partially Redeemed Note. | In the case of an Optional Redemption, upon surrender of a Note that is to be redeemed in part, the Company and the Guarantor shall execute, and upon Company Order the Trustee shall authenticate and make available for delivery 27 to the Holder of the Note at the expense of the Company, a new Note or Notes of the same series in any authorized denomination as requested by the Holder, in an aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Note surrendered, provided that each new Note will be in a principal amount of $1,000 and integral multiples of $1,000 in excess thereof. ARTICLE VII DEFAULTS AND REMEDIES Section 7.1 Events of Default. | (a) An "Event of Default" occurs with respect to a series of Notes if one or more of the following events shall occur with respect to such series: (i) default in the payment of any interest on any of the Notes of such series when due and payable, and such default continues for a period of 30 days; (ii) default in the payment of the principal of any of the Notes of such series when due and payable, and such default continues for a period of two Business Days; (iii) default in the performance of, or breaches, any covenant or warranty of the Company or the Guarantor contained in this Indenture or the Notes, and such default or breach continues for a period of 30 days after written notice of such default or breach shall have been given to the Company or the Guarantor by the Trustee or the Holders of at least 25% in aggregate principal amount of such series of Notes then Outstanding; (iv) if any event of default as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Guarantor or indebtedness of any Principal Subsidiary for money borrowed, whether such indebtedness now exists or shall hereafter be created, shall occur and shall result in such indebtedness in principal amount in excess of $30,000,000 (or the equivalent thereof in other currencies) becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, and such acceleration shall not be rescinded or annulled, or such indebtedness shall not have been discharged, within a period of 30 days after written notice thereof shall have been given to the Guarantor and the Company by the Trustee or the Holders of at least 25% in aggregate principal amount of such series of Notes then Outstanding; (v) if proceedings are initiated against the Company, the Guarantor or any Principal Subsidiary under any applicable liquidation, insolvency, re-organization or any other similar laws, or an application is made for the appointment of an administrative or other receiver, manager or administrator, or any such or other similar official is appointed, in relation to the Company, the Guarantor or any Principal Subsidiary, as the case may be, in relation to the whole or a part of the undertakings or assets of the Company, the Guarantor or any Principal Subsidiary, or an encumbrancer takes possession of the whole or a part of the applicable company's undertakings or assets, or a distress, execution, attachment, sequestration or other process is levied, enforced upon, sued out or put in force against the whole or a part of its undertakings or assets; and in any case (other than the appointment of an administrator) are not discharged within 28 days; provided that this paragraph (v) shall not apply to any proceedings against the Company, the Guarantor or a Principal Subsidiary brought by a third party other than an administrative or judicial authority where the Company, the Guarantor, or the Principal Subsidiary can demonstrate that any such proceedings are being contested by the Company, the Guarantor or the Principal Subsidiary in good faith, diligently and by appropriate proceedings in a competent court; 28 (vi) commencement by the Company, the Guarantor or any Principal Subsidiary of a voluntary case or proceeding under any applicable liquidation, insolvency, re-organization or any other similar laws, or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by the Company, the Guarantor or any Principal Subsidiary to the entry of a decree or order for relief in respect of the Company, the Guarantor or any Principal Subsidiary in an involuntary case or proceeding under any applicable liquidation, insolvency, re-organization or any other similar laws, or to the commencement of any bankruptcy or insolvency case or proceeding against the Company, the Guarantor or any Principal Subsidiary, or the filing by the Company, the Guarantor or any Principal Subsidiary of a petition or answer or consent seeking re-organization or relief under any applicable law, or the consent by the Company, the Guarantor or any Principal Subsidiary to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, conservator, liquidator, assignee, trustee, sequestrator or similar official of the Company, the Guarantor or any Principal Subsidiary or of any substantial part of the property of the Company, the Guarantor or any Principal Subsidiary or the making by the Company, the Guarantor or any Principal Subsidiary of an assignment for the benefit of creditors, or the taking of corporate action by the Company, the Guarantor or any Principal Subsidiary in furtherance of any such action; or (vii) the Guarantees shall cease to be in full force and effect or the Guarantor shall, in writing, deny or disaffirm its obligations under the Guarantees (or any of them) or this Indenture. Any of the foregoing will constitute an Event of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. (b) The Company and the Guarantor shall deliver to the Trustee within five days after the occurrence of any Default or Event of Default written notice in the form of an Officers' Certificate of any Default or Event of Default, their status and what action the Company and the Guarantor propose to take in respect thereof. Section 7.2 Acceleration. If an Event of Default occurs and is continuing with respect to a series of Notes (other than one relating to the matters referred to in Section 7.1(v) or (vi), in which case, the principal of all Outstanding Notes of each series shall become due and payable immediately), then the Trustee or Holders of at least 25% in aggregate principal amount of the Outstanding Notes of that series may declare the principal amount of all of the Outstanding Notes of such series to be due and payable immediately, together with accrued and unpaid interest, Additional Amounts, if any, accrued to the date of repayment by a notice in writing to the Company and the Guarantor (and to the Trustee if given by the Holders), and upon any such declaration, such principal amount and accrued and unpaid interest shall become immediately due and payable. At any time after such a declaration of acceleration with respect to the Notes of a series subject to such declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee or the Holders as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Outstanding Notes of the applicable series, by written notice to the Company, the Guarantor and the Trustee, may rescind and annul such declaration of acceleration and its consequences if: (a) the Company or the Guarantor has irrevocably paid or deposited with the Trustee a sum sufficient to pay: (i) all overdue interest on all Notes of such series subject to such declaration of acceleration, 29 (ii) the principal of all Notes of such series subject to such declaration of acceleration which become due otherwise than by such declaration of acceleration and any interest thereon at the rate or rates prescribed therefor in such Notes, (iii) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates therefor in the Notes of such series subject to such declaration of acceleration, and (iv) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursement and advances of the Trustee, its agents and counsel, and any other amounts due to the Trustee under Section 8.7; and (b) all Events of Default with respect to Notes of such series subject to such declaration of acceleration, other than the non-payment of the principal of Notes subject to such declaration of acceleration which has become due solely by such declaration of acceleration, have been cured or waived as provided in Section 7.4. Section 7.3 Other Remedies. | (a) If an Event of Default occurs and is continuing with respect to Notes of a series, the Trustee may pursue any available remedy to collect the payment of principal of and interest on the Notes of that series or to enforce the performance of any provision of the Notes of that series or this Indenture. (b) The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. Section 7.4 Waiver of Past Defaults. | The Holders of not less than a Qualified Majority in aggregate principal amount of the Outstanding Notes of a series may on behalf of the Holders of all the Notes of such series waive any Event of Default hereunder with respect to such series of Notes and its consequences, except (i) a default in the payment of the principal of, or premium, if any, or interest on, such Notes, or (ii) a Default in respect of a covenant or agreement that cannot be modified or amended without the consent of the Holder of each such Note affected thereby. Upon any such waiver, such Default shall cease to exist and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon. Section 7.5 Control by Majority. | The Holders of a majority in principal amount of the Outstanding Notes of a series may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. Subject to Sections 8.1 and 8.2, however, the Trustee may refuse to follow any direction that (i) conflicts with law or this Indenture, (ii) exposes the Trustee to personal liability for which the Trustee would not be satisfactorily indemnified pursuant to Section 8.7 hereof or (iii) is unduly prejudicial to such Holders not joined therein; provided, further, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Section 7.6 Limitation on Suits. | No Holder of any Note will have any right to institute any proceeding with respect to this Indenture for any remedy hereunder, unless: 30 (a) such Holder has previously given to the Trustee written notice of a continuing Event of Default; (b) Holders of at least 25% in principal amount of the then Outstanding Notes of the applicable series shall have made a written request to the Trustee to pursue the remedy in its own name as trustee hereunder; (c) such Holders of the Notes have provided to the Trustee reasonable indemnity satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee does not comply within 60 days after its receipt of such notice, request and offer of indemnity; and (e) during such 60 day period the Holders of a majority in principal amount of the Outstanding Notes of the applicable series have not given the Trustee a written direction which is inconsistent with the request. Otherwise, no Holder of any Note will have any right to institute any proceeding with respect to this Indenture or for any remedy hereunder, except: (f) a Holder of a Note may institute suit for enforcement of payment of the principal of and premium, if any, or interest on such Note on or after the respective due dates expressed in such Note, or (g) for the institution of any proceeding with respect to this Indenture or any remedy thereunder, including, without limitation, acceleration, by the Holders of a majority in principal amount of the Outstanding Notes of the applicable series; provided, that upon institution of any proceeding or exercise of any remedy, such Holder or Holders provide the Trustee with prompt written notice thereof. Section 7.7 Rights of Holders to Receive Payment. | Notwithstanding any other provision of this Indenture (including, without limitation, Section 7.6), the right of any Holder to receive payment of principal of or interest on the Notes held by such Holder, on or after the respective due dates or Redemption Dates expressed in this Indenture or the Notes, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. Section 7.8 Collection Suit by Trustee. | If an Event of Default occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company and the Guarantor for the whole amount then due and owing (together with applicable interest on any overdue principal and, to the extent lawful, interest on overdue interest) and the amounts provided for in Section 8.7. Section 7.9 Trustee May File Proofs of Claim, etc. | (a) The Trustee may (irrespective of whether the principal of the Notes is then due): (i) file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Holders under this Indenture and the Notes allowed in any bankruptcy, insolvency, liquidation or other judicial proceedings relative to the Company, the Guarantor or any Subsidiary of the Guarantor or their respective creditors or properties; and 31 (ii) collect and receive any monies or other property payable or deliverable in respect of any such claims and distribute them in accordance with this Indenture. Any receiver, trustee, liquidator, sequestrator (or other similar official) in any such proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, taxes, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due to the Trustee pursuant to Section 8.7. (b) Nothing in this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 7.10 Priorities. | If the Trustee collects any money or property pursuant to this Article VII, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts due under Section 8.7; SECOND: if the Holders proceed against the Company or the Guarantor directly without the Trustee in accordance with this Indenture, to the Holders for their collection costs; THIRD: to the Holders for amounts due and unpaid on the Notes of the applicable series for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal and interest, respectively; and FOURTH: to the Company, the Guarantor or such other party as a court of competent jurisdiction shall direct. The Trustee may, upon notice to the Company and the Guarantor, fix a record date and payment date for any payment to Holders pursuant to this Section 7.10. Section 7.11 Undertaking for Costs. | In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 7.11 does not apply to a suit by the Trustee, a suit by the Company, a suit by the Guarantor, a suit by a Holder pursuant to Section 7.7 or a suit by Holders of more than 10% in principal amount of the Outstanding Notes of a series. ARTICLE VIII TRUSTEE Section 8.1 Duties of Trustee. | (a) If a Default or an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of a Default or an Event of Default: 32 (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall examine such certificates and opinions to determine whether or not they reasonably conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein). (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this paragraph (c) does not limit the effect of paragraph (b) of this Section 8.1; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 7.2, 7.4 or 7.5. (d) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company and the Guarantor. (e) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (f) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (g) Whether or not expressly provided herein, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Article VIII and to the provisions of the TIA. (h) The Trustee shall not be liable for indirect or consequential loss or damages in connection with this Indenture. (i) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company or the Guarantor shall be sufficient if signed by an Officer of the Company or the Guarantor, respectively. (j) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity satisfactory to it against the costs, expenses (including reasonable attorneys' fees and expenses) and liabilities that might be incurred by it in compliance with such request or direction. 33 Section 8.2 Rights of Trustee. | Subject to Section 8.1: (a) The Trustee may conclusively rely and shall be fully protected in acting or refraining from acting on any document (whether in original or facsimile form) reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee need not investigate any fact or matter stated in the document. (b) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on an Officers' Certificate or Opinion of Counsel. (c) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its attorneys and agents and shall not be responsible for the misconduct or negligence on the part of any agent or attorney appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; provided, however, that the Trustee's conduct does not constitute willful misconduct or negligence (as finally determined by a court of competent jurisdiction). (e) The Trustee may consult with counsel of its selection, and the advice or opinion of counsel with respect to legal matters relating to this Indenture, the Notes and the Guarantees shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. (f) If the Trustee shall determine, it shall be entitled to examine the books, records and premises of the Company and the Guarantor, personally or by agent or attorney. (g) The Trustee shall not be deemed to have knowledge of any Default or Event of Default unless a Trust Officer of the Trustee has Actual Knowledge thereof or unless written notice of any event which is in fact such a Default or Event of Default is received by the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Notes and this Indenture. (h) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder. (i) The Trustee may request that each of the Company and the Guarantor deliver an Officers' Certificate setting forth the names of individuals and/or titles of Officers authorized at such time to take specified actions pursuant to this Indenture, which Officers' Certificate may be signed by any Person authorized to sign an Officers' Certificate, including any Person specified as so authorized in any such certificate previously delivered and not superseded. (j) Any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Order and any resolution of the Board of Directors of the Company shall be sufficiently evidenced by a Board Resolution. Section 8.3 Individual Rights of Trustee. | The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company, the Guarantor or any of its Affiliates with the same rights it would have if it were not Trustee. Any Authenticating 34 Agent, Paying Agent, Registrar or co-Registrar may do the same with like rights. However, the Trustee must comply with Sections 8.10 and 8.11 and the Authenticating Agent must comply with Section 2.2(d). Section 8.4 Trustee's Disclaimer. | The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, the Guarantees or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes, and it shall not be responsible for any statement of the Company in this Indenture or in any document issued in connection with the sale of the Notes or in the Notes other than the Trustee's certificate of authentication. Section 8.5 Notice of Defaults. | If a Default or Event of Default occurs and is continuing with respect to a series of Notes and if a Trust Officer has Actual Knowledge thereof, the Trustee shall mail to each Holder of such series of Notes, notice of the Default or Event of Default within 30 days after the Trustee obtains Actual Knowledge thereof. Except in the case of a Default or Event of Default in payment of principal of or interest on any Note (including payments pursuant to the Optional Redemption, Optional Tax Redemption or required repurchase provisions of such Note, if any), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of the Holders of such Notes. Section 8.6 Reports by Trustee to Holders. | The Trustee shall comply with TIA Section 313. The Company agrees to notify promptly the Trustee whenever any Notes become listed, quoted and/or traded on or by any stock exchange, competent listing authority and/or quotation system and of any delisting thereof. Section 8.7 Compensation and Indemnity. | (a) The Company and the Guarantor (without duplication) shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder as the Company, the Guarantor and the Trustee shall from time to time agree in writing. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company and the Guarantor (without duplication) shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses, disbursements and advances incurred or made by it, including, without limitation, costs of collection, costs of preparing and reviewing reports, certificates and other documents, costs of preparation and mailing of notices to Holders. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. (b) The Company and the Guarantor (jointly and severally but without duplication) shall indemnify the Trustee against any and all loss, judgment, liability, claim, damage or expense (including reasonable attorneys' fees and expenses) incurred by it without negligence, willful misconduct or bad faith on its part arising out of or in connection with the acceptance and administration of this trust and the performance of its duties hereunder, including the costs and expenses of enforcing this Indenture (including this Section 8.7) and of defending itself against any claims or liabilities (whether asserted by any Holder, the Company or otherwise). The Trustee shall notify the Company and the Guarantor promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company and the Guarantor shall not relieve the Company or the Guarantor of its obligations hereunder. The Company and the Guarantor shall defend the claim and the Trustee may, upon written request to the Company and the Guarantor, have separate counsel and the Company and the Guarantor shall upon such event pay the fees and expenses of such counsel. Neither the Company nor the Guarantor need reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustee's own negligence, willful misconduct or bad faith. (c) To secure the Company's and the Guarantor's payment obligations in this Section 8.7, the Trustee shall have a lien prior to the Notes on all money or property held or collected 35 by the Trustee other than money or property held in trust to pay principal of and interest on particular Notes. The Trustee's right to receive payment of any amounts due under this Section 8.7 shall not be subordinate to any other liability or indebtedness of the Company or the Guarantor. (d) The Company's and the Guarantor's payment obligations pursuant to this Section 8.7 shall survive the discharge of this Indenture and the resignation or removal of the Trustee. When the Trustee incurs expenses after the occurrence of a Bankruptcy Default, the expenses are intended to constitute expenses of administration under any Bankruptcy Law; provided, however, that this shall not affect the Trustee's rights as set forth in this Section 8.7 or Section 7.10. Section 8.8 Replacement of Trustee. | (a) The Trustee may resign at any time by notifying the Company and the Guarantor. The Holders of a majority in principal amount of the Outstanding Notes of a series may remove the Trustee insofar as it relates to the Notes of such series at any time by so notifying the Trustee in writing and may appoint a successor Trustee reasonably acceptable to the Company and the Guarantor. The Company or the Guarantor shall remove the Trustee if: (i) the Trustee fails to comply with Section 8.10; (ii) the Trustee is adjudged bankrupt or insolvent; (iii) a receiver or other public officer takes charge of the Trustee or its property; or (iv) the Trustee otherwise becomes incapable of acting. (b) If the Trustee resigns or is removed by the Company, the Guarantor or the Holders of a majority in principal amount of the Outstanding Notes of a series (and such Holders do not reasonably promptly appoint a successor Trustee), or if a vacancy exists in the office of the Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company or the Guarantor shall promptly appoint a successor Trustee for the applicable series. (c) A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company and the Guarantor. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 8.7. (d) If a successor Trustee does not deliver a written acceptance of its appointment within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of 10% in principal amount of the Outstanding Notes of the applicable series may petition, at the expense of the Company and the Guarantor, any court of competent jurisdiction for the appointment of a successor Trustee. (e) If the Trustee fails to comply with Section 8.10, any Holder of Notes of the applicable series may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (f) Notwithstanding the replacement of the Trustee pursuant to this Section 8.8, each of the Company's and the Guarantor's obligations under Section 8.7 shall continue for the benefit of the retiring Trustee. 36 (g) In the event of the resignation, termination or removal of the Trustee, the Company or the Guarantor (at the expense of the Company and the Guarantor) shall within 30 days mail written notice thereof to the Holders of Notes. Section 8.9 Successor Trustee by Merger. | (a) If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another Person, the resulting, surviving or transferee Person without any further act shall be the successor Trustee. (b) In case at the time such successor or successors to the Trustee shall succeed to the trusteeship created by this Indenture, any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have. Section 8.10 Eligibility; Disqualification. | The Trustee and the Authenticating Agent shall at all times satisfy the requirements of TIA Section 310(a). The Trustee shall have a combined capital and surplus of at least U.S.$50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company or the Guarantor are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. Section 8.11 Preferential Collection of Claims Against Company. | The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. Section 8.12 Paying Agent and Calculation Agent. | All rights, duties and immunities of the Trustee under this Indenture shall apply to any Paying Agent and Calculation Agent under this Indenture. ARTICLE IX SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONIES Section 9.1 Satisfaction and Discharge. | The Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for in the Indenture and except as to the Company's and the Guarantor's obligations under Section 8.7) as to all Outstanding Notes when: (a) either: (i) the Notes theretofore executed, authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company or the Guarantor and thereafter repaid to the Company or the Guarantor or discharged from such trust) have been delivered to the Trustee for cancellation, or (ii) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable, or by their terms are due and payable within one year (or scheduled for Optional Redemption or Optional Tax Redemption within one year) and the Company or the 37 Guarantor has irrevocably deposited or caused to be deposited with the Trustee U.S. dollar funds sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of and interest on the Notes to the date of deposit (or until their redemption, as confirmed by the opinion of an internationally recognized firm of independent public accountants), together with irrevocable written instructions from the Company or the Guarantor directing the Trustee to apply such funds to the payment; (b) the Company or the Guarantor has paid all other sums payable under: (i) this Indenture, (ii) the Notes and (iii) the Guarantees; and (c) each of the Company and the Guarantor has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that all conditions precedent under this Indenture relating to the satisfaction and discharge of this Indenture have been complied with. Section 9.2 Application by Trustee of Funds Deposited for Payment of Notes. | Subject to Section 9.4, all monies deposited with the Trustee pursuant to Section 9.1 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company or the Guarantor acting as paying agent), to the Holders of the particular Notes for the payment or redemption of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest; but such money need not be segregated from other funds except to the extent required by law. Section 9.3 Repayment of Monies Held by Paying Agent. | In connection with the satisfaction and discharge of this Indenture with respect to the Notes, all monies then held by any paying agent under the provisions of this Indenture with respect to such series of Notes shall, upon written demand of the Company or the Guarantor, be repaid to the Company or the Guarantor, as the case may be, or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such monies. Section 9.4 Return of Monies Held by Trustee and Paying Agent Unclaimed for Two Years. | Any monies deposited with or paid to the Trustee or any paying agent for the payment of the principal of or interest (including Additional Amounts) on any Note and not applied but remaining unclaimed for two years after the date upon which such principal or interest (including Additional Amounts) shall have become due and payable, shall, upon the written request of the Company and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Company or the Guarantor by the Trustee or such paying agent, and the Holder of such Note shall, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Company or the Guarantor for any payment which such Holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such monies shall thereupon cease. ARTICLE X AMENDMENTS Section 10.1 Without Consent of Holders. | (a) The Company, the Guarantor and the Trustee may amend this Indenture with respect to either or both series of Notes or the Notes of a series without notice to or consent of any Holder: 38 (i) to cure any ambiguity, omission, defect or inconsistency, provided that such action shall not adversely affect the interests of the Holders of the Notes of such series in any material respect; (ii) to comply with Article IV or V in respect of the assumption by a Transferee Company or a Successor Company of the obligations of the Company under the Notes of such series and this Indenture with respect to such series of Notes; (iii) to comply with Article V in respect of assumption by a Successor Guarantor of the obligations of the Guarantor under the Guarantees and this Indenture; (iv) to provide for uncertificated Notes of such series in addition to or in place of certificated Notes of such series; provided, however, that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code; (v) to add additional guarantees with respect to the Notes of such series or to secure the Notes of such series; (vi) to add to the covenants of the Company or the Guarantor for the benefit of the Holders of Notes of such series or to surrender any right or power herein conferred upon the Company or the Guarantor; (vii) to add any additional Events of Default for the benefit of the Holders of the Notes of such series; (viii) to make any change that does not adversely affect the rights of any Holder of the Notes of such series in any material respect; (ix) to provide for the issuance of Add On Notes as permitted by Section 2.11, which will have terms substantially identical to the other Outstanding Notes of the same series except as specified in Section 2.11, and which will be treated, together with any other Outstanding Notes of such series, as a single series of securities. (b) After an amendment under this Section 10.1 becomes effective, the Company or the Guarantor (at its own expense) shall mail to Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section 10.1. Section 10.2 With Consent of Holders. | (a) The Company, the Guarantor and the Trustee may amend this Indenture with respect to the Notes of a series without notice to any Holder but with the written consent of the Holders of at least a Qualified Majority in principal amount of the Outstanding Notes of the applicable series (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes), which consent(s) shall be delivered to the Company, the Guarantor and the Trustee. However, without the consent of each Holder of Notes of such series affected, an amendment may not: (i) reduce the principal amount of Notes of such series the Holders of which must consent to an amendment or waiver; (ii) reduce the rate of, or change, or have the effect of changing the time for payment of, interest, including Additional Amounts, if any, on any Notes of such series or change in any adverse respect the obligation of the Company and the Guarantor to pay Additional Amounts with respect to such series; 39 (iii) reduce the principal of, or change, or have the effect of changing the time for payment of principal or the fixed maturity of, any Notes of such series or the amount due upon an Event of Default, or change the date on which any Notes of such series may be subject to acceleration or redemption, or reduce the redemption price therefor; (iv) make any Notes of such series payable in a currency or at a location other than that stated in the Notes or at a place other than stated in the Notes; (v) make any change in the provisions of this Indenture entitling each Holder of Notes of such series to receive payment of principal of and interest on such Notes on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a Qualified Majority in principal amount of Outstanding Notes of such series to waive compliance with various provisions of this Indenture or Defaults or Events of Default; (vi) reduce the percentage of Holders of Notes of such series whose consent is needed to modify or amend the provisions of this Indenture with respect to the Notes of such series; (vii) make any changes to this Section 10.2; or (viii) change the terms of the Guarantees with respect to such series. (b) It shall not be necessary for the consent of the Holders under this Section 10.2 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. (c) After an amendment under this Section 10.2 becomes effective, the Company or the Guarantor shall mail to Holders of the applicable series a notice briefly describing such amendment. The failure to give such notice to all such Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section 10.2. Section 10.3 Compliance with Trust Indenture Act. | Every amendment to this Indenture or the Notes shall comply with the TIA as then in effect. Section 10.4 Acts of Holders; Record Dates. | (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing as herein otherwise expressly provided. Such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company or the Guarantor. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 8.1) conclusive in favor of the Trustee, the Company and the Guarantor, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved in any reasonable manner which the Trustee deems sufficient. (c) The Company or the Guarantor may set any day as a record date for the purpose of determining the Holders of Outstanding Notes of any series represented by Global Registered Notes or Certificated Notes entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this 40 Indenture to be given, made or taken by Holders of Notes of a series (for the purposes of this Section 10.4 only, a "record date"); provided that the Company and the Guarantor may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Notes of a series represented by Global Registered Notes or Certificated Notes on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable expiration date by Holders of the requisite principal amount of Outstanding Notes of the applicable series on such record date. Nothing in this paragraph shall be construed to prevent the Company or the Guarantor from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and be of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Notes of such series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company or the Guarantor (at its own expense) shall cause notice of such record date, the proposed action by Holders and the applicable expiration date to be given to the Trustee in writing and to each Holder of Notes in the manner set forth in Section 12.2. The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Notes of a series represented by Global Registered Notes or Certificated Notes entitled to join in the giving or making of (i) any request to institute proceedings referred to in Section 7.6 or (ii) any direction referred to in Section 7.5, in each case with respect to the Notes of such series. If any record date is set pursuant to this paragraph, the Holders of Outstanding Notes of such series on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable expiration date by Holders of the requisite principal amount of Outstanding Notes of the applicable series on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and be of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Notes of such series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the expense of the Company and the Guarantor, shall cause notice of such record date, the proposed action by Holders and the applicable expiration date to be given to the Company and the Guarantor in writing and to each Holder of Notes in the manner set forth in Section 12.2. With respect to any record date set pursuant to this Section, the party hereto which sets such record date may designate any day as the "expiration date" and from time to time may change the expiration date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new expiration date is given to the other parties hereto in writing and to each Holder of Notes in the manner set forth in Section 12.2, on or prior to the existing expiration date. Notwithstanding the foregoing, no expiration date shall be later than the 180th day after the applicable record date and, if an expiration date is not designated with respect to any record date set pursuant to this Section, the party or parties hereto which set such record date shall be deemed to have designated the 180th day after such record date as the expiration date with respect thereto. Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Note may do so with regard to all or any part of the principal amount of such Note or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. Section 10.5 Notation on or Exchange of Notes. | If an amendment changes the terms of a Note, the Trustee may require the Holder of the Note to deliver it to the Trustee. The Trustee may 41 place an appropriate notation on the Note regarding the changed terms and return it to the Holder. Alternatively, if the Company, the Guarantor or the Trustee so determines, the Company in exchange for the Note will execute and upon Company Order the Trustee will authenticate a new Note of the same series that reflects the changed terms. Failure to make the appropriate notation or to issue a new Note shall not affect the validity of such amendment. Section 10.6 Trustee to Sign Amendments. | The Trustee shall sign any amendment authorized pursuant to this Article X; provided that the Trustee may, but shall not be obligated to, sign any amendment that adversely affects its own rights, duties, liabilities or immunities. If it does, the Trustee may but need not sign it. In signing such amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and shall be provided with, and (subject to Sections 8.1 and 8.2) shall be fully authorized and protected in relying upon an Opinion of Counsel and an Officers' Certificate, each stating that such amendment is authorized or permitted by this Indenture. ARTICLE XI GUARANTEES Section 11.1 The Guarantees. | (a) The Guarantor hereby irrevocably and unconditionally guarantees to each Holder of a Note of each series authenticated and delivered by the Trustee the due and punctual payment of the principal of, any premium and interest on, and any Additional Amounts with respect to, such Note, when and as the same shall become due and payable, whether at the relevant Maturity Date, by acceleration, redemption or otherwise, in accordance with the terms of such Note and of this Indenture. In case of the failure of the Company punctually to pay any such principal, premium, interest or Additional Amounts, the Guarantor hereby agrees to cause any such payment to be made punctually when and as the same shall become due and payable, whether at the relevant Maturity Date, upon acceleration, redemption or otherwise, and as if such payment were made by the Company. The aforesaid Guarantees are ones of payment and not of collection. Section 11.2 Guarantees Unconditional, etc. The Guarantor hereby agrees that its obligations hereunder shall be as principal and not merely as surety, and shall be absolute, irrevocable and unconditional, irrespective of, and shall be unaffected by, any invalidity, irregularity or unenforceability of any Note or this Indenture, any failure to enforce the provisions of any Note or this Indenture, or any waiver, modification, consent or indulgence granted with respect thereto by the Holder of such Note or the Trustee, the recovery of any judgment against the Company or any action to enforce the same, or any other circumstances which may otherwise constitute a legal or equitable discharge of a surety or guarantor. The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of merger, insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest or notice with respect to any such Note or the indebtedness evidenced thereby and all demands whatsoever, and covenants that these Guarantees will not be discharged except by payment in full of the principal of, any premium and interest on, and any Additional Amounts required with respect to, the Notes and the complete performance of all other obligations contained in the Notes. The Guarantor further agrees, to the fullest extent that it lawfully may do so, that as between the Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, the relevant Maturity Date of the obligations guaranteed hereby may be accelerated as provided in Section 7.2 hereof for the purposes of these Guarantees, notwithstanding any stay, injunction or prohibition extant under any bankruptcy, insolvency, reorganization or other similar law of any jurisdiction preventing such acceleration in respect of the obligations guaranteed hereby. Section 11.3 Reinstatement. 42 These Guarantees shall continue to be effective or be reinstated, as the case may be, if at any time payment on any Note, in whole or in part, is rescinded or must otherwise be repaid or restored to the Company or the Guarantor upon the bankruptcy, liquidation or reorganization of the Company, the Guarantor or otherwise. Section 11.4 Subrogation The Guarantor shall be subrogated to all rights of the Holder of any Note against the Company in respect of any amounts paid to such Holder by the Guarantor pursuant to the provisions of these Guarantees; provided, however, that the Guarantor shall not, without the consent of the Holders of all the Notes of the applicable series then Outstanding, be entitled to enforce, or to receive any payments arising out of or based upon, such right of subrogation until the principal of, any premium and interest on, and any Additional Amounts required with respect to, all Notes shall have been paid in full. ARTICLE XII MISCELLANEOUS Section 12.1 Trust Indenture Act Controls. | If any provision of this Indenture limits, qualifies or conflicts with another provision which is required or deemed to be included in this Indenture by the TIA, the required or deemed provision shall control. Section 12.2 Notices. | Any notice or communication provided or permitted by this Indenture to be given to the Company, the Guarantor, the Trustee or the Paying Agent may be given to the Company, the Guarantees, the Trustee or any Paying Agent, as the case may be, and shall be made in writing by hand-delivery, first-class mail, facsimile or air courier guaranteeing next-day delivery: if to the Company: Pearson Dollar Finance plc 80 Strand London WC2R 0RL United Kingdom Attention: Directors With a copy to: Pearson PLC 80 Strand London WC2R 0RL United Kingdom Attention: General Counsel if to the Guarantor: Pearson PLC 80 Strand London WC2R ORL United Kingdom 43 Attention: Group Treasurer With a copy to: Pearson PLC 80 Strand London WC2R ORL United Kingdom Attention: General Counsel if to the Trustee and Paying Agent: The Bank of New York One Canada Square London E14 5AL United Kingdom [Attention: Alison Mitchell] All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered against written receipt; one business day after being timely delivered to a next-day air courier; five business days after being deposited in the mail postage prepaid; and when receipt is acknowledged by the recipient's facsimile machine, if sent by facsimile. The Company, the Guarantor, the Trustee or the Paying Agent by notice to the others may designate additional or different addresses for subsequent notices or communications. Such notices or communications may also be given by any Holder of Notes to the Trustee or any Paying Agent through DTC in such manner that such Trustee or Paying Agent, as the case may be, and DTC may approve for such purpose. (b) All notices regarding the Notes shall be published (i) in a leading English language daily newspaper of general circulation in New York City and (ii) if and for so long as the Notes are listed on the Luxembourg Stock Exchange, and for so long as the Luxembourg Stock Exchange rules so require, a daily newspaper of general circulation in Luxembourg. Such publications will initially be made in The Wall Street Journal in New York City and the Luxemburger Wort in Luxembourg. The Company or the Guarantor (at its own expense) shall also ensure that such notice is duly published in a manner that complies with the rules and regulations of any other stock exchange, competent listing authority and/or quotation system on or by which the Notes are for the time being listed, quoted and/or traded. Any such notice will be deemed to have been given on the date of the first publication or, where required to be published in more than one newspaper, on the date of the first publication in each such newspaper. Furthermore, the Company and the Guarantor shall send all notices via first class mail or a courier delivery service to the Trustee and the nominee of DTC. Section 12.3 Communication by Holders with Other Holders. | Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Guarantor, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). Section 12.4 Certificate and Opinion as to Conditions Precedent. | Upon any request or application by the Company or the Guarantor to the Trustee to take or refrain from taking any action under this Indenture, the Company or the Guarantor, as the case may be, shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signer or signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and 44 (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent, if any, have been complied with. Section 12.5 Statements Required in Certificate or Opinion. | Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (a) a statement that the individual making such certificate or opinion has read such covenant or condition and the definitions relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. In giving such Opinion of Counsel, counsel may rely as to factual matters on an Officers' Certificate or on certificates of public officials unless such counsel knows, or in the exercise of reasonable care, should know that the Officers' Certificate or certificates of public officials or the representations with respect to such matters are erroneous. Section 12.6 Form of Documents Delivered to Trustee. | In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an Officer of the Company or the Guarantor may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such Officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an Officer or Officers of the Company or the Guarantor stating that the information with respect to such factual matters is in the possession of the Company or the Guarantor, unless such counsel knows or in the exercise of reasonable care should know, that the opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Section 12.7 Rules by Trustee, Paying Agent and Registrar. | The Trustee may make reasonable rules for action by, or a meeting of, Holders. The Registrar and the Paying Agent may make reasonable rules for their functions. Section 12.8 Payment on Business Days. | If any Interest Payment Date, a, Redemption Date or the relevant Maturity Date falls on a day that is not a Business Day, the payment of interest and/or 45 principal otherwise required to be paid on such day may be made on the next succeeding Business Day, and no interest on such payment shall accrue for the period from and after payment on such next succeeding Business Day. If a regular Record Date is not a Business Day, the Record Date shall not be affected. Section 12.9 Governing Law, etc. | (a) THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT THAT THE AUTHORIZATION AND EXECUTION BY THE COMPANY AND THE GUARANTOR OF THE INDENTURE AND THE NOTES OR THE GUARANTEES, AS APPLICABLE, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF ENGLAND, WITHOUT GIVING EFFECT TO ANY CONTRARY CONFLICT OF LAWS OR CHOICE OF LAW PROVISIONS OF THE LAWS OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION. (b) To the extent that the Company or the Guarantor any of their respective properties, assets or revenues, may have or may hereafter become entitled to, or have attributed to it, any right of immunity, on the grounds of sovereignty or otherwise, from any legal action, suit or proceeding, from the giving of any relief in any such legal action, suit or proceeding, from setoff or counterclaim, from the jurisdiction of any court, from service of process, from attachment upon or prior to judgment, from attachment in aid of execution of judgment, or from execution of judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of any judgment, in any jurisdiction in which proceedings may at any time be commenced, with respect to its obligations, liabilities or any other matter under or arising out of or in connection with this Indenture, the Notes or the Guarantees, each of the Company and the Guarantor hereby irrevocably and unconditionally waives, and agrees not to plead or claim, any such immunity and consents to such relief and enforcement. (c) Each of the Company and the Guarantor hereby irrevocably consents and agrees, for the benefit of the Holders and the Trustee, that any legal action, suit or proceeding against it with respect to its obligations, liabilities or any other matter arising out of or in connection with this Indenture, the Notes or the Guarantees may be brought in any United States federal court or New York state court, in each case located in the Borough of Manhattan, The City of New York, and hereby irrevocably consents and submits to the non-exclusive jurisdiction of each such court in personam, generally and unconditionally with respect to any action, suit or proceeding for itself and in respect of its properties, assets and revenues. (d) Each of the Company and the Guarantor hereby irrevocably designates, appoints, and empowers Pearson Inc., with an office at 1330 Avenue of the Americas, New York, New York 10019, as its designee, appointee and agent (the "Authorized Agent") to receive, accept and acknowledge for and on its behalf, and its properties, assets and revenues, service of any and all legal process, summons, notices and documents which may be served in any such action, suit or proceeding brought in any United States federal court or New York state court which may be made on such Authorized Agent in accordance with legal procedures prescribed for such courts. If for any reason such Authorized Agent hereunder shall cease to be available to act as such, each of the Company and the Guarantor agrees to designate a new designee, appointee and agent in The City of New York on the terms and for the purposes of this clause satisfactory to the Trustee. Each of the Company and the Guarantor further hereby irrevocably consents and agrees to the service of any and all legal process, summons, notices and documents out of any of the aforesaid courts in any such action, suit or proceeding by serving a copy thereof upon the relevant agent for service of process referred to in this clause (whether or not the appointment of such agent shall for any reason prove to be ineffective or such agent shall accept or acknowledge such service) or by mailing copies thereof by registered or certified air mail, first class, postage prepaid, to each of them at their respective 46 addresses specified in or designated pursuant to this Indenture. Each of the Company and the Guarantor further agrees that the failure of any such Authorized Agent to give any notice of such service to it shall not impair or affect in any way the validity of such service or any judgment rendered in any action or proceeding based thereon. Nothing herein shall in any way be deemed to limit the ability of the Trustee or any Holder to serve any such legal process, summons, notices and documents in any other manner permitted by applicable law or to obtain jurisdiction over the Company or the Guarantor or bring actions, suits or proceedings against the Company or the Guarantor in any jurisdiction, and in any manner, as may be permitted by applicable law. Each of the Company and the Guarantor hereby irrevocably and unconditionally waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions, suits or proceedings arising out of or in connection with this Indenture, the Notes or the Guarantees brought in any United States federal court or New York state court, in each case located in the Borough of Manhattan, The City of New York, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. (e) Nothing in this Section 12.9 shall affect the right of the Trustee or any Holder of the Notes to serve process in any other manner permitted by law. Section 12.10 Successors. | All agreements of each of the Company and the Guarantor in this Indenture, the Notes and the Guarantees shall bind each of its successors and assigns. All agreements of the Trustee in this Indenture shall bind its successors and assigns. Section 12.11 Duplicate and Counterpart Originals. | This Indenture may be executed in any number of counterparts, each of which so executed shall be an original, but all of them together represent the same agreement. Section 12.12 Severability. | In case any provision in this Indenture, the Notes or the Guarantees shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 12.13 Currency Indemnity. | (a) The U.S. dollar is the sole currency of account and payment for all sums payable by the Company or the Guarantor under or in connection with the Notes, the Guarantees or this Indenture with respect to the Notes, including damages. Any amount received or recovered in currency other than U.S. dollars in respect of the Notes (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the winding-up or dissolution of the Company, the Guarantor, any Subsidiary or otherwise) by any Holder of the Notes in respect of any sum expressed to be due to it from the Company or the Guarantor shall only constitute a discharge of them under the Notes, the Guarantor and this Indenture with respect to the Notes only to the extent of the U.S. dollar amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so). If that U.S. dollar amount is less than the U.S. dollar amount expressed to be due to the recipient under the Notes, the Guarantees or this Indenture with respect to the Notes, each of the Company and the Guarantor shall indemnify and hold harmless the recipient against any loss or cost sustained by it in making any such purchase. For the purposes of this Section 12.13, it will be sufficient for the Holder of a Note to certify that it would have suffered a loss had an actual purchase of U.S. dollars been made with the amount so received in that other currency on the date of receipt or recovery (or, if a purchase of U.S. dollars on such date had not been practicable, on the first date on which it would have been practicable). (b) The indemnities of each of the Company and the Guarantor contained in this Section 12.13, to the extent permitted by law: (i) constitute a separate and independent obligation 47 from the other obligations of each of the Company and the Guarantor under the Notes, the Guarantor and this Indenture with respect to the Notes; (ii) shall give rise to a separate and independent cause of action against each of the Company and the Guarantor; (iii) shall apply irrespective of any waiver granted by any Holder of the Notes or the Trustee with respect to the Notes from time to time; and (iv) shall continue in full force and effect notwithstanding any other judgment, order, claim or proof of claim for a liquidated amount in respect of any sum due under the Notes, the Guarantees or this Indenture with respect to the Notes or any other judgment or order. Section 12.14 Benefits of Indenture. | Nothing in this Indenture, the Notes or the Guarantees, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit of any legal or equitable right, remedy or claim under this Indenture. Section 12.15 Table of Contents; Headings. | The table of contents and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. 48 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. PEARSON DOLLAR FINANCE PLC By: /s/ Michael Day ------------------------ Name: Michael Day Title: Director PEARSON PLC By: /s/ Michael Day ------------------------ Name: Michael Day Title: Group Treasurer THE BANK OF NEW YORK as Trustee, Paying Agent and Calculation Agent By: /s/ Alison Mitchell ________________________________________ Name: Alison Mitchell Title: Assistant Treasurer 49 EXHIBIT A FORM OF 2009 NOTES UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. [Include the following legend on all Notes that are Global Registered Notes: THIS NOTE IS A GLOBAL REGISTERED NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS NOTE MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A NOTE REGISTERED, AND NO TRANSFER OF THIS NOTE IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.] [Include the following legend on all Notes that are Rule 144A Global Notes: THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE US SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR WITH ANY SECURITIES REGULATORY AUTHORITY IN ANY JURISDICTION, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, US PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (2) AGREES THAT IT WILL NOT, WITHIN TWO YEARS AFTER THE LATER OF (x) THE ORIGINAL ISSUANCE OF THIS NOTE AND (y) THE LAST DATE ON WHICH PEARSON DOLLAR FINANCE PLC (THE "COMPANY"), PEARSON PLC (THE "GUARANTOR") OR ANY AFFILIATE THEREOF WAS THE BENEFICIAL OWNER OF THIS NOTE (OR ANY PREDECESSOR HEREOF) (THE "RESTRICTED PERIOD"), RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION OF THE RESTRICTED PERIOD. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALES OF THIS NOTE.] [Include the following legend on all Notes that are Regulation S Global Notes: THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE US SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR WITH ANY SECURITIES REGULATORY AUTHORITY IN ANY JURISDICTION, AND, ACCORDINGLY, 50 MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, US PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A US PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT, PRIOR TO THE EXPIRATION OF THE DISTRIBUTION COMPLIANCE PERIOD (DEFINED AS 40 DAYS AFTER THE LATER OF THE CLOSING DATE WITH RESPECT TO THE NOTES AND THE COMPLETION OF THE DISTRIBUTION OF THE NOTES), RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A)(1) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT OR (2) TO A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A; AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "US PERSON" HAVE THE MEANINGS GIVEN TO THEM IN REGULATION S UNDER THE SECURITIES ACT.] [Include the following legend on all Notes that are Certificated Notes: IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR SUCH OPINIONS OF COUNSEL, CERTIFICATES AND/OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE IN FORM REASONABLY SATISFACTORY TO IT AS PROVIDED FOR IN THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIED WITH THE FOREGOING RESTRICTIONS AS PROVIDED FOR IN THE INDENTURE.] 51 FORM OF FACE OF NOTE 4.70% Guaranteed Senior Notes due 2009 No. [___] Principal Amount U.S.$[______________] [If the Note is a Global Note include the following two lines, as revised by the Schedule of Increases and Decreases in Global Registered Note attached hereto] [CUSIP NO. ____________] [ISIN NO. ____________] [COMMON CODE. ____________] Pearson Dollar Finance plc, a public company incorporated with limited liability under the laws of England promises to pay to [___________], or its nominee, or its registered assigns, the principal sum of [SPELL OUT IN WORDS] U.S. dollars, [If the Note is a Global Registered Note, add the following, as revised by the Schedule of Increases and Decreases in Global Registered Note attached hereto], on [Maturity Date]. Interest Payment Dates: o and o in each year Record Dates: o and o in each year Interest rate: o% per annum Additional provisions of this Note are set forth on the other side of this Note. 52 IN WITNESS WHEREOF, Pearson Dollar Finance plc has caused this Note to be signed by its duly authorized officer. Date: May o, 2004 PEARSON DOLLAR FINANCE PLC By: ________________________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION The Bank of New York, as Trustee, certifies that this is one of the Notes referred to in the Indenture. Date: May o, 2004 By: ________________________________ Authorized Signatory GUARANTEE This Note is irrevocably and unconditionally guaranteed by the Guarantor in the manner and to the extent set forth in Article XI of the Indenture. Date: May o, 2004 PEARSON PLC By: ________________________________ Name: Title: 53 FORM OF REVERSE SIDE OF NOTE O% GUARANTEED SENIOR NOTES DUE O 1. Interest Pearson Dollar Finance plc (the "Company"), a public company incorporated with limited liability under the laws of England (and each of its successors and assigns under the Indenture), promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest semi-annually in arrears on each Interest Payment Date of each year commencing o, 2004. Interest on the Notes will accrue from the most recent date to which interest has been paid on the Notes or, if no interest has been paid, from o, 2004. Interest on the Notes will be payable in U.S. dollars at the Company's office or agency in the Borough of Manhattan, the City of New York, New York. If interest is required to be calculated for any period less than a year, other than with respect to regular semi-annual payments, it will be calculated based on a 360-day year consisting of twelve 30-day months. All payments in respect of the Notes will be made free and clear of and without deduction or withholding for or on account of any Taxes, unless such withholding or deduction is required by law or by the interpretation or administration thereof. In that event, the Company or Pearson PLC (the "Guarantor"), as the case may be, will pay to each Holder of the Notes Additional Amounts as provided in the Indenture subject to the limitations set forth in the Indenture. 2. Method of Payment On the date on which any principal of or interest on any Note is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent in New York, New York [If a Certificated Note, and in Luxembourg] U.S. dollar funds sufficient to pay such principal and/or interest. The Company will pay interest to the Persons who are registered Holders of Notes at the close of business on the Record Date preceding the Interest Payment Date even if Notes are cancelled, repurchased or redeemed after the Record Date and on or before the relevant Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in U.S. dollars. Payments (including principal and interest) will be made by the transfer of immediately available funds to the account specified by DTC with respect to the Global Registered Note. [If this a Certificated Note, add the following: The Company will make all payments in respect of a Certificated Note (including principal and interest) by mailing a check to the registered address of each Holder thereof; provided, however, that payments on the Notes may also be made, in the case of a Holder of at least U.S.$1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 15 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion).] 54 3. Paying Agent and Registrar Initially, The Bank of New York (the "Trustee"), will act as Trustee, Paying Agent, Calculation Agent and Registrar. [If this Note is a Certificated Note, The Bank of New York (Luxembourg) will act as Paying Agent and transfer agent in Luxembourg.] The Company or the Guarantor may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Holder. The Company or the Guarantor may act as Paying Agent, Registrar or co-registrar. 4. Indenture The Company issued the Notes under an Indenture, dated as May o, 2004 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Company, the Guarantor and the Trustee. In the event of an inconsistency between the terms of the Notes set forth herein and other terms of the Indenture, the terms set forth in any part of the Indenture other than in Exhibit A thereto shall govern. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the TIA. Capitalized terms used but not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Holders are referred to the Indenture and the TIA for a statement of those terms. Each Holder, by accepting a Note, agrees to be bound by all of the terms and provisions of the Indenture, as amended from time to time. The Notes are general senior unsecured obligations of the Company and have the benefit of an irrevocable and unconditional guarantee of the Guarantor. Subject to the conditions set forth in the Indenture and without the consent of the Holders, the Company may issue Add On Notes. All Notes of this series will be treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on, among other things, (i) the ability of the Company, the Guarantor and its Principal Subsidiaries to create Liens to secure Relevant Indebtedness or (ii) the ability of the Company and the Guarantor to consolidate or merge or transfer, lease or convey all or substantially all of the Company's or the Guarantor's respective assets unless certain conditions are satisfied. 5. Redemption Optional Tax Redemption. The Notes may be redeemed on not less than 30 nor more than 60 days' prior written notice to the Trustee, and, in accordance with the procedures described in the Indenture, to each Holder of the Notes, at the option of the Company or the Guarantor, in whole, but not in part, at any time, if: (a) on the occasion of the next payment of interest due under the Notes, each of the Company and the Guarantor has or will become obliged to pay Additional Amounts as a result of any change in, or amendment to, the laws or regulations of the Company's domicile or any authority in or of the Company's or the Guarantor's domicile, having power to tax, or any change in the official judicial or administrative interpretation of those laws and regulations, which change or amendment becomes effective on or after the Issue Date; and (b) each of the Company and the Guarantor is unable to avoid this obligation by taking reasonable measures available to it, provided that no notice of Optional Tax Redemption shall be given earlier than 90 days prior to the earliest date on which the Company or the Guarantor, as the case may be, would be obliged to pay, deduct or withhold amounts were a payment in respect of the Notes then due. Notes redeemed pursuant to an Optional Tax Redemption will be redeemed at an amount equal to the principal amount of the Notes being redeemed together with Additional Amounts, if any, plus any accrued and unpaid interest to (but excluding) the Redemption Date. 55 Optional Redemption. The Notes may also be redeemed, as a whole at any time or in part from time to time, at the option of the Company, at a redemption price equal to the greater of: (a) 100% of the principal amount of the Notes being redeemed; or (b) as determined by the Calculation Agent, the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed, not including any portion of such payment of interest accrued on the Redemption Date, from the Redemption Date to the relevant Maturity Date, discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus o basis points, plus any accrued and unpaid interest to (but excluding) the Redemption Date and Additional Amounts, if any. Notice of any redemption will be mailed at least 30 days but no more than 60 days before the Redemption Date to the Trustee, the Guarantor and, in accordance with the procedures described in the Indenture, to each Holder of Notes to be redeemed. Unless the Company or the Guarantor defaults in payment of the redemption price, on and after the Redemption Date, interest will cease to accrue on the Notes called for redemption. 6. Denominations; Transfer; Exchange The Notes are in fully registered form without coupons, and only in denominations of principal amount of U.S.$1,000 and any integral multiples of U.S.$1,000 in excess thereof. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents. The Registrar need not register the transfer of or exchange (i) any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 days before the mailing of a notice of Notes to be redeemed and ending on the date of such mailing or (ii) any Notes for a period beginning 15 days before an Interest Payment Date and ending on such Interest Payment Date. 7. Persons Deemed Owners The Holder of this Note may be treated as the owner of it for all purposes. 8. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company or the Guarantor at its written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company or the Guarantor and not to the Trustee for payment. 9. Discharge Prior to Redemption or Maturity Subject to certain conditions set forth in the Indenture, the Company or the Guarantor at any time may terminate some or all of its obligations under the Notes and the Indenture if the Company or the Guarantor deposits with the Trustee U.S. dollar funds for the payment of principal of and interest on the Notes to redemption or maturity, as the case may be. 56 10. Defaults and Remedies If an Event of Default occurs and is continuing, and subject to the provisions set forth in the Indenture, the Trustee or any Holder of a Note may declare the Note to be due and payable immediately. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security satisfactory to it. Subject to certain limitations, Holders of a majority in principal amount of the Outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 11. Trustee Dealings with the Company Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company, the Guarantor or its Affiliates and may otherwise deal with the Company, the Guarantor or its Affiliates with the same rights it would have if it were not Trustee. 12. Authentication This Note shall not be valid or enforceable unless and until an authorized signatory of the Trustee (or an Authenticating Agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. 13. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the entirety), JT TEN (= joint tenants with rights of survivorship and not as tenants in common), CUST (= custodian) and U/G/M/A (= Uniform Gift to Minors Act). 14. Governing Law THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT THAT THE AUTHORIZATION AND EXECUTION BY THE COMPANY OF THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF ENGLAND WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAWS OR CHOICE OF LAWS PROVISIONS OF THE LAWS OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION. 15. Currency of Account; Conversion of Currency. The U.S. dollar is the sole currency of account and payment for all sums payable by the Company under or in connection with the Notes or the Indenture, including damages. The Company will indemnify the Holders as provided in respect of the conversion of currency relating to the Notes and the Indenture. 16. Agent for Service; Submission to Jurisdiction; Waiver of Immunities. Each of the Company and the Guarantor has agreed that any suit, action or proceeding against the Company or the Guarantor brought by any Holder or the Trustee arising out of or based upon the 57 Indenture or the Notes may be instituted in any state or federal court in the Borough of Manhattan, the City of New York, New York. Each of the Company and the Guarantor has irrevocably submitted to the non-exclusive jurisdiction of such courts for such purpose and waived, to the fullest extent permitted by law, trial by jury and any objection it may now or hereafter have to the laying of venue of any such proceeding, and any claim it may now or hereafter have that any proceeding in any such court is brought in an inconvenient forum. Each of the Company and the Guarantor has appointed Pearson Inc., with an office at 1330 Avenue of the Americas, New York, NY 10019 as its authorized agent upon whom all writs, process and summonses may be served in any suit, action or proceeding arising out of or based upon the Indenture or the Notes which may be instituted in any state or federal court in the Borough of Manhattan, the City of New York. To the extent that the Company or the Guarantor has or hereafter may acquire any immunity (sovereign or otherwise) from any legal action, suit or proceeding, from jurisdiction of any court or from set-off or any legal process (whether service or notice, attachment in aid or otherwise) with respect to itself or any of its property, each of the Company and the Guarantor has irrevocably waived and agreed not to plead or claim such immunity in respect of its obligations under the Indenture or the Notes. 17. Defined Terms. Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Indenture. The term "Note" or "Notes" as used herein shall refer to Notes of this series. The Company will furnish to any Holder upon written request and without charge to the Holder a copy of the Indenture which has in it the text of this Note. Requests may be made to: Pearson Dollar Finance plc, 80 Strand, London WC2R 0RL, United Kingdom. 58 ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to -------------------------------------------- (Print or type assignee's name, address and zip code) -------------------------------------------- (Insert assignee's Social Security or Tax I.D. Number) and irrevocably appoint as agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date:________________________ Your Signature:_________________________ Signature Guarantee:______________________________ (Signature must be guaranteed) ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program), pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934. 59 [To be attached to Global Registered Notes only: SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Registered Note have been made:

AMOUNT OF INCREASE IN PRINCIPAL AMOUNT OF SIGNATURE OF AMOUNT OF DECREASE IN PRINCIPAL AMOUNT OF THIS GLOBAL REGISTERED AUTHORIZED SIGNATORY DATE OF PRINCIPAL AMOUNT OF THIS GLOBAL REGISTERED NOTE FOLLOWING SUCH OF TRUSTEE OR PAYING EXCHANGE THIS GLOBAL NOTE NOTE DECREASE OR INCREASE AGENT - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- --------------------

] 60 EXHIBIT B FORM OF 2014 NOTES UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. [Include the following legend on all Notes that are Global Registered Notes: THIS NOTE IS A GLOBAL REGISTERED NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS NOTE MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A NOTE REGISTERED, AND NO TRANSFER OF THIS NOTE IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.] [Include the following legend on all Notes that are Rule 144A Global Notes: THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE US SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR WITH ANY SECURITIES REGULATORY AUTHORITY IN ANY JURISDICTION, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, US PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (2) AGREES THAT IT WILL NOT, WITHIN TWO YEARS AFTER THE LATER OF (x) THE ORIGINAL ISSUANCE OF THIS NOTE AND (y) THE LAST DATE ON WHICH PEARSON DOLLAR FINANCE PLC (THE "COMPANY"), PEARSON PLC (THE "GUARANTOR") OR ANY AFFILIATE THEREOF WAS THE BENEFICIAL OWNER OF THIS NOTE (OR ANY PREDECESSOR HEREOF) (THE "RESTRICTED PERIOD"), RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION OF THE RESTRICTED PERIOD. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALES OF THIS NOTE.] [Include the following legend on all Notes that are Regulation S Global Notes: THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE US SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR WITH ANY SECURITIES REGULATORY AUTHORITY IN ANY JURISDICTION, AND, ACCORDINGLY, 61 MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, US PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A US PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT, PRIOR TO THE EXPIRATION OF THE DISTRIBUTION COMPLIANCE PERIOD (DEFINED AS 40 DAYS AFTER THE LATER OF THE CLOSING DATE WITH RESPECT TO THE NOTES AND THE COMPLETION OF THE DISTRIBUTION OF THE NOTES), RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A)(1) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT OR (2) TO A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A; AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "US PERSON" HAVE THE MEANINGS GIVEN TO THEM IN REGULATION S UNDER THE SECURITIES ACT.] [Include the following legend on all Notes that are Certificated Notes: IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR SUCH OPINIONS OF COUNSEL, CERTIFICATES AND/OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE IN FORM REASONABLY SATISFACTORY TO IT AS PROVIDED FOR IN THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIED WITH THE FOREGOING RESTRICTIONS AS PROVIDED FOR IN THE INDENTURE.] 62 FORM OF FACE OF NOTE 5.70% Guaranteed Senior Note due 2014 No. [___] Principal Amount U.S.$[______________] [If the Note is a Global Note include the following two lines, as revised by the Schedule of Increases and Decreases in Global Registered Note attached hereto] [CUSIP NO. ____________] [ISIN NO. ____________] [COMMON CODE ____________] Pearson Dollar Finance plc, a public company incorporated with limited liability under the laws of England promises to pay to [___________], or its nominee, or its registered assigns, the principal sum of [SPELL OUT IN WORDS] U.S. dollars, [If the Note is a Global Registered Note, add the following, as revised by the Schedule of Increases and Decreases in Global Registered Note attached hereto], on [Maturity Date]. Interest Payment Dates: o and o in each year Record Dates: o and o in each year Interest rate: o% per annum Additional provisions of this Note are set forth on the other side of this Note. 63 IN WITNESS WHEREOF, Pearson Dollar Finance plc has caused this Note to be signed by its duly authorized officer. Date: May o, 2004 PEARSON DOLLAR FINANCE PLC By: ________________________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION The Bank of New York, as Trustee, certifies that this is one of the Notes referred to in the Indenture. Date: May o, 2004 By: ________________________________ Authorized Signatory GUARANTEE This Note is irrevocably and unconditionally guaranteed by the Guarantor in the manner and to the extent set forth in Article XI of the Indenture. Date: May o, 2004 PEARSON PLC By: ________________________________ Name: Title: 64 FORM OF REVERSE SIDE OF NOTE O% GUARANTEED SENIOR NOTES DUE O 1. Interest Pearson Dollar Finance plc (the "Company"), a public company incorporated with limited liability under the laws of England (and each of its successors and assigns under the Indenture), promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest semi-annually in arrears on each Interest Payment Date of each year commencing O, 2004. Interest on the Notes will accrue from the most recent date to which interest has been paid on the Notes or, if no interest has been paid, from O, 2004. Interest on the Notes will be payable in U.S. dollars at the Company's office or agency in the Borough of Manhattan, the City of New York, New York. If interest is required to be calculated for any period less than a year, other than with respect to regular semi-annual payments, it will be calculated based on a 360-day year consisting of twelve 30-day months. All payments in respect of the Notes will be made free and clear of and without deduction or withholding for or on account of any Taxes, unless such withholding or deduction is required by law or by the interpretation or administration thereof. In that event, the Company or Pearson PLC (the "Guarantor"), as the case may be, will pay to each Holder of the Notes Additional Amounts as provided in the Indenture subject to the limitations set forth in the Indenture. 2. Method of Payment On the date on which any principal of or interest on any Note is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent in New York, New York [If a Certificated Note, and in Luxembourg] U.S. dollar funds sufficient to pay such principal and/or interest. The Company will pay interest to the Persons who are registered Holders of Notes at the close of business on the Record Date preceding the Interest Payment Date even if Notes are cancelled, repurchased or redeemed after the Record Date and on or before the relevant Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in U.S. dollars. Payments (including principal and interest) will be made by the transfer of immediately available funds to the account specified by DTC with respect to the Global Registered Note. [If this a Certificated Note, add the following: The Company will make all payments in respect of a Certificated Note (including principal and interest) by mailing a check to the registered address of each Holder thereof; provided, however, that payments on the Notes may also be made, in the case of a Holder of at least U.S.$1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 15 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion).] 65 3. Paying Agent and Registrar Initially, The Bank of New York (the "Trustee"), will act as Trustee, Paying Agent, Calculation Agent and Registrar. [If this Note is a Certificated Note, The Bank of New York (Luxembourg) will act as Paying Agent and transfer agent in Luxembourg.] The Company or the Guarantor may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Holder. The Company or the Guarantor may act as Paying Agent, Registrar or co-registrar. 4. Indenture The Company issued the Notes under an Indenture, dated as May O, 2004 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Company, the Guarantor and the Trustee. In the event of an inconsistency between the terms of the Notes set forth herein and other terms of the Indenture, the terms set forth in any part of the Indenture other than in Exhibit B thereto shall govern. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the TIA. Capitalized terms used but not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Holders are referred to the Indenture and the TIA for a statement of those terms. Each Holder, by accepting a Note, agrees to be bound by all of the terms and provisions of the Indenture, as amended from time to time. The Notes are general senior unsecured obligations of the Company and have the benefit of an irrevocable and unconditional guarantee of the Guarantor. Subject to the conditions set forth in the Indenture and without the consent of the Holders, the Company may issue Add On Notes. All Notes of this series will be treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on, among other things, (i) the ability of the Company, the Guarantor and its Principal Subsidiaries to create Liens to secure Relevant Indebtedness or (ii) the ability of the Company and the Guarantor to consolidate or merge or transfer, lease or convey all or substantially all of the Company's or the Guarantor's respective assets unless certain conditions are satisfied. 5. Redemption Optional Tax Redemption. The Notes may be redeemed on not less than 30 nor more than 60 days' prior written notice to the Trustee, and, in accordance with the procedures described in the Indenture, to each Holder of the Notes, at the option of the Company or the Guarantor, in whole, but not in part, at any time, if: (a) on the occasion of the next payment of interest due under the Notes, each of the Company and the Guarantor has or will become obliged to pay Additional Amounts as a result of any change in, or amendment to, the laws or regulations of the Company's domicile or any authority in or of the Company's or the Guarantor's domicile, having power to tax, or any change in the official judicial or administrative interpretation of those laws and regulations, which change or amendment becomes effective on or after the Issue Date; and (b) each of the Company and the Guarantor is unable to avoid this obligation by taking reasonable measures available to it, provided that no notice of Optional Tax Redemption shall be given earlier than 90 days prior to the earliest date on which the Company or the Guarantor, as the case may be, would be obliged to pay, deduct or withhold amounts were a payment in respect of the Notes then due. Notes redeemed pursuant to an Optional Tax Redemption will be redeemed at an amount equal to the principal amount of the Notes being redeemed together with Additional Amounts, if any, plus any accrued and unpaid interest to (but excluding) the Redemption Date. 66 Optional Redemption. The Notes may also be redeemed, as a whole at any time or in part from time to time, at the option of the Company, at a redemption price equal to the greater of: (a) 100% of the principal amount of the Notes being redeemed; or (b) as determined by the Calculation Agent, the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed not including any portion of such payment of interest accrued on the Redemption Date, from the Redemption Date to the relevant Maturity Date, discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus o basis points, plus any accrued and unpaid interest to (but excluding) the Redemption Date and Additional Amounts, if any. Notice of any redemption will be mailed at least 30 days but no more than 60 days before the Redemption Date to the Trustee, the Guarantor and, in accordance with the procedures described in the Indenture, to each Holder of Notes to be redeemed. Unless the Company or the Guarantor defaults in payment of the redemption price, on and after the Redemption Date, interest will cease to accrue on the Notes called for redemption. 6. Denominations; Transfer; Exchange The Notes are in fully registered form without coupons, and only in denominations of principal amount of U.S.$1,000 and any integral multiples of U.S.$1,000 in excess thereof. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents. The Registrar need not register the transfer of or exchange (i) any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 days before the mailing of a notice of Notes to be redeemed and ending on the date of such mailing or (ii) any Notes for a period beginning 15 days before an Interest Payment Date and ending on such Interest Payment Date. 7. Persons Deemed Owners The Holder of this Note may be treated as the owner of it for all purposes. 8. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company or the Guarantor at its written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company or the Guarantor and not to the Trustee for payment. 9. Discharge Prior to Redemption or Maturity Subject to certain conditions set forth in the Indenture, the Company or the Guarantor at any time may terminate some or all of its obligations under the Notes and the Indenture if the Company or the Guarantor deposits with the Trustee U.S. dollar funds for the payment of principal of and interest on the Notes to redemption or maturity, as the case may be. 67 10. Defaults and Remedies If an Event of Default occurs and is continuing, and subject to the provisions set forth in the Indenture, the Trustee or any Holder of a Note may declare the Note to be due and payable immediately. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 11. Trustee Dealings with the Company Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company, the Guarantor or its Affiliates and may otherwise deal with the Company, the Guarantor or its Affiliates with the same rights it would have if it were not Trustee. 12. Authentication This Note shall not be valid or enforceable unless and until an authorized signatory of the Trustee (or an Authenticating Agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. 13. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the entirety), JT TEN (= joint tenants with rights of survivorship and not as tenants in common), CUST (= custodian) and U/G/M/A (= Uniform Gift to Minors Act). 14. Governing Law THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT THAT THE AUTHORIZATION AND EXECUTION BY THE COMPANY OF THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF ENGLAND WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAWS OR CHOICE OF LAWS PROVISIONS OF THE LAWS OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION. 15. Currency of Account; Conversion of Currency. The U.S. dollar is the sole currency of account and payment for all sums payable by the Company under or in connection with the Notes or the Indenture, including damages. The Company will indemnify the Holders as provided in respect of the conversion of currency relating to the Notes and the Indenture. 16. Agent for Service; Submission to Jurisdiction; Waiver of Immunities. Each of the Company and the Guarantor has agreed that any suit, action or proceeding against the Company or the Guarantor brought by any Holder or the Trustee arising out of or based upon the Indenture or the Notes may be instituted in any state or federal court in the Borough of Manhattan, the 68 City of New York, New York. Each of the Company and the Guarantor has irrevocably submitted to the non-exclusive jurisdiction of such courts for such purpose and waived, to the fullest extent permitted by law, trial by jury and any objection it may now or hereafter have to the laying of venue of any such proceeding, and any claim it may now or hereafter have that any proceeding in any such court is brought in an inconvenient forum. Each of the Company and the Guarantor has appointed Pearson Inc., with an office at 1330 Avenue of the Americas, New York, NY 10019 as its authorized agent upon whom all writs, process and summonses may be served in any suit, action or proceeding arising out of or based upon the Indenture or the Notes which may be instituted in any state or federal court in the Borough of Manhattan, the City of New York. To the extent that the Company or the Guarantor has or hereafter may acquire any immunity (sovereign or otherwise) from any legal action, suit or proceeding, from jurisdiction of any court or from set-off or any legal process (whether service or notice, attachment in aid or otherwise) with respect to itself or any of its property, each of the Company and the Guarantor has irrevocably waived and agreed not to plead or claim such immunity in respect of its obligations under the Indenture or the Notes. 17. Defined Terms. Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Indenture. The term "Note" or "Notes" as used herein shall refer to Notes of this series. The Company will furnish to any Holder upon written request and without charge to the Holder a copy of the Indenture which has in it the text of this Note. Requests may be made to: Pearson Dollar Finance plc, 80 Strand, London WC2R 0RL, United Kingdom. 69 ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to -------------------------------------------- (Print or type assignee's name, address and zip code) -------------------------------------------- (Insert assignee's Social Security or Tax I.D. Number) and irrevocably appoint as agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date:______________________ Your Signature:___________________________ Signature Guarantee:______________________________ (Signature must be guaranteed) ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program), pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934. 70 [To be attached to Global Registered Notes only: SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Registered Note have been made:

AMOUNT OF INCREASE IN PRINCIPAL AMOUNT OF SIGNATURE OF AMOUNT OF DECREASE IN PRINCIPAL AMOUNT OF THIS GLOBAL REGISTERED AUTHORIZED SIGNATORY DATE OF PRINCIPAL AMOUNT OF THIS GLOBAL REGISTERED NOTE FOLLOWING SUCH OF TRUSTEE OR PAYING EXCHANGE THIS GLOBAL NOTE NOTE DECREASE OR INCREASE AGENT - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- -------------------- - --------- --------------------- ----------------------- ---------------------- --------------------

71 EXHIBIT C FORM OF TRANSFER CERTIFICATE FOR TRANSFER TO QIB [Date] The Bank of New York One Canada Square 48th Floor London E14 5AL United Kingdom [Attention: Alison Mitchell] Re: o% Guaranteed Senior Notes due o (the "Notes") of Pearson Dollar Finance plc (the "Company") guaranteed by Pearson PLC (the "Guarantor") Ladies and Gentlemen: Reference is hereby made to the Indenture, dated as of May o, 2004 (as amended and supplemented from time to time, the "Indenture"), between the Company, the Guarantor and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given them in the Indenture. This letter relates to U.S.$ [o] aggregate principal amount of Notes [in the case of a transfer of an interest in a Regulation S Global Note to a QIB during the Distribution Compliance Period] which represents an interest in a Regulation S Global Note beneficially owned by the undersigned (the "Transferor") to effect the transfer of such Notes in exchange for an equivalent beneficial interest in the Rule 144A Global Note. In connection with such request, and with respect to such Notes, the Transferor does hereby certify that such Notes are being transferred in accordance with Rule 144A under the Securities Act of 1933, as amended ("Rule 144A"), to a transferee that the Transferor reasonably believes is purchasing the Notes for its own account or an account with respect to which the transferee exercises sole investment discretion, and the transferee, as well as any such account, is a "qualified institutional buyer" within the meaning of Rule 144A, in a transaction meeting the requirements of Rule 144A and in accordance with applicable securities laws of any state of the United States or any other jurisdiction. You and the Company and the Guarantor are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferor] By:________________________________ ___________________________________ Authorized Signature 72 EXHIBIT D FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S [Date] The Bank of New York One Canada Square 48th Floor London E14 5AL United Kingdom [Attention: Alison Mitchell] Re: o% Guaranteed Senior Notes due o (the "Notes") of Pearson Dollar Finance plc (the "Company") guaranteed by Pearson PLC (the "Guarantor") Ladies and Gentlemen: Reference is hereby made to the Indenture, dated as of May o, 2004 (as amended and supplemented from time to time, the "Indenture"), between the Company, the Guarantor and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given them in the Indenture. In connection with our sale of U.S.$ [o] aggregate principal amount of the Notes [in the case of a transfer of an interest in a 144A Global Note to a Non-US Person in accordance with Regulation S], which represent an interest in a 144A Global Note beneficially owned by the undersigned ("Transferor"), we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (a) the offer of the Notes was not made to a person in the United States; (b) either (i) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (ii) the transaction was executed in, on or through the facilities of, a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (c) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (d) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and (e) we are the beneficial owner of the principal amount of Notes being transferred. In addition, if the sale is made during the Distribution Compliance Period and the provisions of Rule 904(b)(1) or Rule 904(b)(2) of Regulation S are applicable thereto, we confirm that such sale 73 has been made in accordance with the applicable provisions of Rule 904(b)(1) or Rule 904(b)(2), as the case may be. You and the Company and the Guarantor are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this letter have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By:________________________________ ___________________________________ Authorized Signature 74 EXHIBIT E FORM OF RULE 144 CERTIFICATION [Date] The Bank of New York One Canada Square 48th Floor London E14 5AL United Kingdom [Attention: Alison Mitchell] Re: o% Guaranteed Senior Notes due o (the "Notes") of Pearson Dollar Finance plc (the "Company") guaranteed by Pearson PLC (the "Guarantor") Ladies and Gentlemen: Reference is hereby made to the Indenture, dated as of May o, 2004 (as amended and supplemented from time to time, the "Indenture"), between the Company, the Guarantor and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given them in the Indenture. In connection with our sale of U.S.$ [o] aggregate principal amount of the Notes [in the case of a transfer of an interest in a 144A Global Note] which represents an interest in a 144A Global Note beneficially owned by the undersigned ("Transferor"), we confirm that such sale has been effected pursuant to and in accordance with Rule 144 under the Securities Act. You and the Company and the Guarantor are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferor] By:________________________________ ___________________________________ Authorized Signature 75 EX-4.1 3 u48506exv4w1.txt EX-4.1 Exhibit 4.1 PEARSON PLC 3 80 Strand London WC2R 0RL Telephone +44 (0)20 7010 2000 Facsimile +44 (0)20 7010 6060 www.pearson.com January 28, 2005 CONFIDENTIAL Peter Jovanovich Re: Employment with Pearson Education and its Affiliates Dear Peter: This letter ("Letter Agreement") outlines our arrangements regarding your employment with Pearson Education Holdings Inc. (together with its successors and assigns, the "Company"), Pearson plc, and their affiliates, as follows: 1. Disability Leave: Duties. As we are both in agreement that you are no longer able to perform any of the material and substantial duties of your job, you will step down as President and Chief Executive Officer of the Company effective January 31, 2005 (the "Disability Date"). You will also resign from all other officer and director positions you hold with the Company, Pearson plc, and their affiliates as of the Disability Date. As of the Disability Date, you will relinquish all of your day-to-day duties and responsibilities as President and Chief Executive Officer of the Company. We very much appreciate your offer to make yourself available for appropriate consulting projects during the 18 month period following the Disability Date on a pro bono basis. We will be discussing possible projects with you, but we acknowledge and agree that none of the benefits outlined in this Letter Agreement is conditioned upon your taking on or completing any such projects. 2. Payments and Benefits. After the Disability Date, you will be entitled to receive only the following payments and benefits (in each case subject to applicable tax withholding): a. Short Term Disability. With the assistance of the Company's Human Resources Department, you will apply for benefits under the Company's Short-Term Disability (STD) Plan. The STD Plan will provide you with 100% of your current base salary ($890,000) from the Disability Date through the earlier of the date of your death and the six month anniversary of the Disability Date (the "STD Period"). b. Long Term Disability. Prior to the end of the STD Period, with the assistance of and in consultation with the Company's Human Resources Department, you will apply for benefits under the Company's Long-Term Disability (LTD) Plan. Assuming you qualify and continue to qualify thereunder, UNUM, our insurance carrier, will pay you (on a non-taxable basis, no less frequently than monthly, and in approximately equal installments) $300,000 annually (60% of the first $500,000 of your base salary), commencing on the six month anniversary of the Disability Date and ending on the earlier of the date of your death and the date you attain age 65 (the "LTD Period"), provided that for purposes of REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723 pearson plc paragraphs 2(c), 2(e), 2(f), 2(h) and 3, the LTD Period shall end upon your knowingly rendering material services to a material competitor of the Company or any of its affiliates ("Competitive Services"). c. Supplemental Long-Term Disability Benefits. During the LTD Period, we will supplement your benefits under the LTD Plan and pay you (on a taxable basis, no less frequently than monthly, and in approximately equal periodic installments) $234,000 annually (60% of your base salary above $500,000, or 60% of ($890,000 less $500,000)). In addition, to the extent that the $300,000 in annualized non-taxable LTD payments discussed in paragraph 2(b) are not promptly and fully paid to you throughout the LTD Period (e.g., because the LTD benefit is reduced, eliminated, or delayed, or because you do not otherwise initially qualify for the benefit), we will promptly make up any lost, reduced or delayed payment to you, on a fully tax grossed-up basis (assuming taxation at the highest applicable marginal rates), provided you have, in good faith, filed applications, submitted to physical exams or interviews, and supplied other information, in each case as may be required under the applicable LTD Plan or UNUM policy; provided further that if all or any portion of any such make-up payment is later paid by UNUM, you agree to promptly pay such amount, or assign your right to such amount, to the Company. If during the LTD Period you receive earnings for services rendered to any entity not affiliated with the Company or Pearson plc, amounts otherwise payable to you under this paragraph 2(c) will be reduced dollar-for-dollar by the amount of such earnings. d. Benefits during the STD Period. During the STD Period, you will be treated as an active employee for purposes of all of the equity, welfare, pension, retirement and other benefit plans of the Company and its affiliates, provided that following the Disability Date, you acknowledge that no new awards will be made to you under any of the Pearson plc stock plans (other than any awards made pursuant to the second sentence of paragraph 2(h)). e. Benefits during the LTD Period. (i) Medical, Dental and Vision Plans. Your coverage (and that of your dependents) in the Pearson Inc. medical, hospitalization, dental and vision plans and programs will continue during the LTD Period at the same level, and with the same benefits, as are then provided to active employees of the Company who participate in those plans and programs. You will be required to contribute toward the costs of those plans and programs at the same level, and on the same basis, as active employees. (ii) Life Insurance. Your coverage under the Pearson Inc. basic life insurance plan will continue during the LTD Period at the same level in force prior to the Disability Date. The Company will pay the full cost of this coverage. You also are entitled to continue to participate, during the LTD Period, in the supplemental life insurance plan at the same level in force prior to the Disability Date, provided that you continue to pay premiums at no greater a rate than the rate that then applies to active employees whose coverage continues. You may apply to the insurance company for a wavier of premium for the supplemental life coverage once you have been receiving LTD benefits for 6 months. REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723 Page 2 pearson plc (iii) Vacation. At the expiration of the STD Period, you will receive payment for any unused vacation days that are then accrued. You will accrue vacation days during the STD Period, and will cease to accrue additional vacation days upon the expiration of the STD Period. (iv) Retirement Plans. At the expiration of the STD Period, you (a) will cease to accrue additional benefits under, and (b) will be entitled to apply for, and receive, benefits under the Pearson Inc. Pension Plan, Supplemental Executive Retirement Plan, Pearson Inc. Retirement Plan (401k), Pearson Excess Retirement Plan, and Pearson Inc. Share Bonus Plan in accordance with the terms of those plans. f. Individual Defined Contribution Arrangement. During both the STD and LTD Periods, the Company will continue to credit your notional account under your Individual Defined Contribution Arrangement (as described in our letter to you dated June 13, 2003, with contributions at an annualized rate of $409,400 made in approximately equal periodic installments no less frequently than monthly. All amounts credited to you under this arrangement (including, for avoidance of doubt, notional interest) will be paid to you (or, in the event of your death, to your nominated beneficiary) in a lump sum promptly following the end of the LTD Period. g. Annual Bonus. You will be paid your annual bonus in respect of 2004 in cash, such payment to be made at the time, and in the amount, that would have applied if your active employment with the Company had continued indefinitely, and determined without regard to any period of disability during 2004. h. Pearson plc Stock Plans. The treatment of your outstanding awards under the Pearson plc stock plans will governed by the terms of the applicable plan documents and your individual award agreements, and, except with respect to any plan intended to qualify under Section 401(a) or 423 of the Internal Revenue Code, applied as if your active employment with the Company had continued throughout the LTD Period. In the event that during the LTD Period, active senior executives of the Company, Pearson plc, or any of their affiliates receive special grants or awards in respect of grants or awards that correspond to grants or awards that you received prior to the Disability Date, then you too shall be entitled to receive corresponding special grants or awards, which grants and awards shall be on terms and conditions (including relative amounts) no less favorable than those received by continuing senior executives and shall thereafter be treated as if your active employment with the Company had continued throughout the LTD Period. The treatment of any awards or grants described in the previous two sentences that are outstanding at the time of the termination of the LTD Period will be governed by the terms of the applicable plans and, to the extent that the Personnel Committee has discretion as to the treatment of any such awards or grants, we will recommend to the Personnel Committee that it exercise such discretion in the manner that is most favorable to you or your beneficiaries, except where such termination is by reason of your rendering Competitive Services. 3. Indemnification/D&O Insurance. a. In the event that any Claim is made, is threatened to be made, or is reasonably anticipated to be made, against you that arise out of or relates to your REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723 Page 3 pearson plc employment by, or services for, the Company, Pearson plc, or any of their affiliates, then you shall promptly be indemnified and held harmless to the fullest extent permitted or authorized by the corporate governance documents of the Company or Pearson plc, or if greater, by applicable law, against any and all costs, expenses, liabilities and losses (including, without limitation, attorneys' and other professional fees and charges reasonably incurred, judgments, interest, expenses of investigation reasonably incurred, penalties, fines, ERISA excise taxes or penalties, and amounts paid or to be paid pursuant to settlements reasonably entered into) incurred or suffered by you in connection therewith, and such indemnification shall continue through the STD and LTD Periods, and thereafter, and shall inure to the benefit of your heirs, executors and administrators. You shall be entitled to prompt advancement of any and all costs and expenses (including, without limitation, attorneys' and other professional fees and charges) incurred by you in connection with any such Claim, or in connection with seeking to enforce your rights under this paragraph 3(a), any such advancement to be made within 15 days after you give written notice, supported by reasonable documentation, requesting such advancement. Such notice shall include and undertaking by you to repay the amount advanced if you are ultimately determined not to be entitled to indemnification against such costs and expenses. You shall be deemed to have met any standard of conduct required for indemnification unless the contrary shall be established by the Company or Pearson plc. Nothing in this Agreement, or the attached Release, shall operate to limit or extinguish any right to indemnification, advancement of expenses, or contribution that you would otherwise have (including, without limitation, by agreement or under applicable law). For purposes of this paragraph 3(a), "Claim" shall mean any claim, demand, investigation, dispute, threat, discovery request, or request for testimony or information. b. A directors' and officers' liability insurance policy (or policies) shall be kept in place, until at least the sixth anniversary of the Disability Date, providing coverage to you that is no less favorable to you in any respect (including, without limitation, with respect to scope, exclusions, amounts, and deductibles) than the coverage then being provided to any active senior executive or director of the Company or any active director of Pearson plc. 4. Cessation of all other Compensation and Benefits. You will not receive compensation, payments or benefits of any kind from the Company, Pearson plc or its affiliates in respect of any period that ends after the Disability Date other than those set forth in paragraphs 2 and 3 above, and you expressly acknowledge and agree that, except with respect to the payments and benefits specifically set forth in this Letter Agreement, you are not entitled to any compensation, payment or benefit from the Company, Pearson plc or its affiliates whatsoever, including, without limitation, any right to payments or benefits under your letter of employment dated October 9, 2000 and subsequent amendments or supplements thereto (the "Employment Agreement"). 5. Restrictive Covenants. The covenants and agreements made by you in paragraphs 12, 13 and 14 of your Employment Agreement shall remain in full force and effect in accordance with their terms, with the expiration of the STD Period treated as your last day of employment for purposes of paragraph 12. Notwithstanding the forgoing, you shall be entitled to retain, and not return to the Company, your personal rolodex, personal REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723 Page 4 pearson plc correspondence files, documents relating to your personal entitlements and obligations, and the like. 6. Release. In order to be entitled to the payments and benefits set forth in paragraphs 2(c), 2(e)(i) and the second sentence of 2(h), and in consideration therefor, you must (i) deliver a signed and dated copy of the attached Release no later than February 21, 2005, and (ii) not subsequently revoke your execution of such Release. 7. Assignability; Binding Nature. a. This Letter Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, heirs (in your case) and assigns. b. No rights or obligations of the Company or Pearson plc under this Letter Agreement may be assigned or transferred by the Company or Pearson plc (each a "Company Transferor") except that such rights and obligations may be assigned or transferred pursuant to a merger, consolidation or other combination in which the Company Transferor is not the continuing entity, or a sale or liquidation of all or substantially all of the business and assets of the Company Transferor, provided that the assignee or transferee is the successor to all or substantially all of the business and assets of the Company Transferor and such assignee or transferee expressly assumes the liabilities, obligations and duties of the Company Transferor as set forth in this Agreement. c. None of your rights or obligations under this Agreement may be assigned or transferred by you other than your rights to compensation and benefits, which may be transferred only by will or by operation of law. Notwithstanding the previous sentence, you shall be entitled, to the extent permitted under applicable plans, programs and arrangements of the Company, Pearson plc, and their affiliates, to select and change a beneficiary or beneficiaries to receive any compensation or benefit hereunder following your death by giving written notice thereof. In the event of your death or a judicial determination of your incompetence, references in this Letter Agreement to you shall be deemed, where appropriate, to refer to your beneficiary, estate or other legal representatives. 8. Miscellaneous. This Letter Agreement may be executed in several counterparts, each or which shall be deemed to be an original but all of which together will constitute one and the same instrument. Signatures delivered by facsimile shall be effective for all purposes. This Letter Agreement constitutes the entire agreement, and supersedes all prior agreements, of the parties hereto relating to the subject matter hereof, except to the extent otherwise set forth herein, and there are no written or oral terms or representations made by any party other than those contained herein and therein. This Letter Agreement cannot be modified, altered or amended except by a writing signed by all the parties. No waiver by either party of any provision or condition of this Letter Agreement at any time shall be deemed a waiver of such provision or condition at any prior or subsequent time or of any provision or condition at the same or any prior or subsequent time. This Letter Agreement and attached Release shall be governed by and construed in accordance with the domestic laws of the State of New York, except to the extent preempted by federal law, without giving effect to any choice of law or conflict of law provision or rule (whether of the REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723 Page 5 pearson plc State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. You are under no obligation to seek other employment or otherwise mitigate our obligations under this Letter Agreement. Other than as expressly set forth in this Letter Agreement, there shall be no offset against amounts or benefits due to you under this Letter Agreement (or otherwise) because of any benefit or remuneration you receive after the Disability Date. In the event of any inconsistency between any provision of this Letter Agreement and any provision of any plan, program, policy, agreement, corporate governance document, or other arrangement of the Company, Pearson plc, or any of their affiliates, the provisions of this Letter Agreement shall control. The headings of the paragraphs and subparagraphs contained in this Letter Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Letter Agreement. 9. Notices. Signed and dated copies of this Letter Agreement, the Release, and any revocation of the Release should be sent by mail, courier, or facsimile to: Richard Glicini Senior Vice President, Human Resources Pearson Education One Lake Street Upper Saddle River, NJ 07458 (201) 236-3370 (tel) (201) 236-3382 (fax) 10. Public Announcement. You and we will agree on the form of all statements to be made to employees, analysts, the media and the public generally relating to the subject matter of this Letter Agreement. 11. Acknowledgement. By signing this Letter Agreement and attached Release, you certify that you have read the terms of this Letter Agreement and Release, and that your execution of this Letter Agreement and Release shall indicate that this Letter Agreement and Release conforms to your understanding and is acceptable to you as a final agreement. You further acknowledge and agree that you have been advised of the opportunity to consult with counsel of your choice and that you have been given a reasonable and sufficient period of time in which to consider and return this Letter Agreement and attached Release. Sincerely, Pearson plc By: /s/ David Bell - ------------------------------ Name: David Bell Title: Executive Director Pearson Education Holdings Inc. REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723 Page 6 pearson plc By: /s/ Richard Gligini - ----------------------------- Name: Richard Gligini Title: SVP, Human Resources, Pearson Education REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723 Page 7 pearson plc ACCEPTED AND AGREED /s/ Peter Jovanovich - ----------------------------- Peter Jovanovich Date: 28/01/05 - ----------------------------- REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723 Page 8 RELEASE I, Peter Jovanovich, the undersigned, irrevocably and unconditionally release, remise, and forever discharge Pearson Education Holdings Inc. (the "Company") and the Releasees (as defined below) from, any and all agreements, promises, liabilities, claims and demands of any kind, in law or equity, whether known or unknown, suspected or unsuspected, which I, my heirs, executors, administrators, successors or assigns ever had, or now have against the Company or any Releasee that arises out of or relates to my employment with, or services for, the Company, Pearson plc, or any of their affiliates, or the termination thereof, including (without limitation and to the extent set forth herein) any and all contract claims, benefit claims, tort claims, fraud claims, claims for payments, bonuses, severance, defamation, disparagement, or any other personal injury claims, claims relating to retirement, pension or unemployment, arising out of or relating to my status as a stockholder of Pearson plc, my employment, compensation and benefits with the Company or the Releasees, and/or the termination thereof, and any and all claims of unfair or unjust dismissal or discrimination on any basis including but not limited to on the basis of age, race, gender, disability, ethnic or national origin, sexual orientation, and claims for costs, expenses and attorneys' fees with respect thereto existing, in each case arising or occurring at any time up to and including the date I execute this Release, provided, however, that nothing herein shall release, waive, or otherwise affect any claim or right arising under, or preserved by, the terms of the Letter Agreement between me and the Company, dated January 28, 2005 (the "Letter Agreement"), or preclude my participation as a class member in any class action or derivative action against Pearson plc where I am not a named defendant, provided that I agree that I shall in no way initiate or encourage the initiation of the filing of any such action. This Release specifically includes, without limitation and to the extent set forth above, any and all claims under the Age Discrimination in Employment Act, 29 U.S.C. Section 621 et seq., Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2000(e), the Americans with Disabilities Act, 42 U.S.C. 1201, et seq., the Employee Retirement Income Security Act of 1974, any and all other federal, state and/or local statutes, ordinances, regulations or common laws, and any and all claims for benefits under any compensation, bonus or benefit plan, program or policy of the Company or the Releasees. For purposes of this Letter Agreement, the term "Releasee" includes Pearson plc, its direct and indirect subsidiaries, insurers, affiliates, its and their past, present and future predecessors, successors and assigns, and its and their current, former and future officers, directors, employees, stockholders, representatives, agents, and attorneys, in their official and/or individual capacities, jointly and individually. I understand that I have a period of up to 21 days to review and consider this Release. I further understand that once I have signed this Release, I may revoke it at any time during the 7 days following its execution by delivering a written notice of revocation as provided in paragraph 9 of the Letter Agreement. I ACKNOWLEDGE THAT I HAVE READ THIS RELEASE AND I UNDERSTAND AND ACCEPT ITS TERMS - ------------------------------------- ---------------------- Peter Jovanovich Date EX-4.2 4 u48506exv4w2.txt EX-4.2 EXHIBIT 4.2 CONFORMED COPY IRREVOCABLE UNDERTAKINGS IN RESPECT OF AN OFFER BY RETOS CARTERA, S.A. FOR THE SHARES OF RECOLETOS GRUPO DE COMUNICACION, S.A. In Madrid, on 14 December, 2004 BETWEEN ON THE ONE SIDE PEARSON PLC, a company duly incorporated under the laws of England and Wales, with registered office at 80 Strand, London WC2R 0RL, England, and with registration number 00053723 (hereinafter, "PEARSON"), duly represented by Mr. Timothy Scott Henderson, of legal age, of Canadian nationality, with Canadian Passport number BC253786 and with business address at 80 Strand, London WC2R 0RL, England, by virtue of a notarized and apostilled power of attorney dated 9 December 2004. ON THE OTHER SIDE RETOS CARTERA, S.A., a company duly incorporated under the laws of Spain, with registered office at C/ Carbonero y Sol, n(degrees) 12, Madrid, Spain, and with tax identification number A-84154046 (hereinafter, the "OFFEROR"), duly represented by Mr. Jaime Castellanos Borrego, of legal age, of Spanish nationality, with National Identity Card number 14.899.002 Q and with business address at Paseo de la Castellana, n(degrees) 66, Madrid, Spain, in his capacity as Managing Director (Consejero Delegado) of OFFEROR and by virtue of a notarized power of attorney dated 14 December 2004 and granted by the Board of Directors of OFFEROR. PEARSON and OFFEROR shall be hereinafter jointly referred to as the "PARTIES", and each of them individually as a "PARTY". WHEREAS CONFORMED COPY I. RECOLETOS GRUPO DE COMUNICACION, S.A. (hereinafter, "RECOLETOS" or the "COMPANY"), a company duly incorporated under the laws of Spain, with registered office at Paseo de la Castellana, n(degrees) 66, Madrid, Spain, is the parent of a group of companies whose main activity is media and publishing. RECOLETOS has a share capital of Euro 26,142,749.80, represented by 130,713,749 ordinary shares of Euro 0.20 nominal value each, all of them listed on the Madrid, Barcelona, Bilbao and Valencia Stock Exchanges and included in the Spanish Automated Quotation System (Mercado Continuo). II. PEARSON OVERSEAS HOLDINGS LIMITED, a company duly incorporated under the laws of England and Wales, with registered office at 80 Strand, London WC2R 0RL, England, and with registration number 00145205 (hereinafter, "POHL") is a wholly-owned subsidiary of PEARSON and PEDIFRI, S.L., a company duly incorporated under the laws of Spain, with registered office at Paseo de la Castellana, n(degrees) 66, Madrid, Spain, and with tax identification number B-79561478 (hereinafter, "PEDIFRI"), is, in turn, a wholly-owned subsidiary of POHL. POHL and PEDIFRI, in turn, respectively own 94,005,598 and 9,169,198 shares of RECOLETOS (together, hereinafter the "SHARES") (71.92% and 7.01% of the share capital of the Company). III. OFFEROR is a newly incorporated company with an issued share capital of Euros 12,950,000, divided into 12,950,000 shares of Euro 1.00 nominal value each, all fully subscribed and paid up, and subordinated participating loans (prestamos participativos) from its shareholders in an aggregate nominal amount of Euro 160,050,000. Attached hereto as Annex 1 to this Agreement is a chart showing the shareholding and participating loan structure of OFFEROR. IV. OFFEROR is interested in acquiring the Shares. Due to the fact that RECOLETOS is a listed company in Spain, and in accordance with the provisions of the Spanish securities markets regulations, such acquisition may only be achieved by OFFEROR through a public tender offer over 100% of the shares issued by RECOLETOS, thus giving the minority shareholders of RECOLETOS the opportunity to sell their shares in the Company. V. OFFEROR therefore intends to launch a public tender offer over RECOLETOS in accordance with, and subject to, the provisions of clause 1 below (hereinafter, the "OFFER"). VI. For the purposes referred to under IV above, the Parties have held negotiations aimed at establishing the terms and conditions upon which PEARSON would be prepared irrevocably to undertake, subject to the terms of this Agreement, to procure that POHL and PEDIFRI accept the Offer or otherwise to procure that OFFEROR acquires, directly or indirectly, the Shares. VII. All payment obligations arising out of the Offer (therefore including payment of the price of the Shares) have been secured by means of four bank guarantees, each dated the date hereof, for an amount of Euro 365,354,992.80, Euro 240,000,000, CONFORMED COPY Euro 246,000,000 and Euro 90,000,000, provided by Banco Espanol de Credito, S.A. ("BANESTO"), Calyon, Sucursal en Espana ("CALYON"), Caja de Ahorros y Monte de Piedad de Madrid ("CAJA MADRID") and Caja de Ahorros del Mediterraneo ("CAM") respectively, as required by Royal Decree 1197/1991, of July 26, as amended, on rules governing tender offers (hereinafter, "ROYAL DECREE 1197/1991") (hereinafter, the "OFFER GUARANTEES"), a copy of each of which is attached as Annex 2 hereto. VIII. In addition, any payment obligations of OFFEROR in respect of the units (participaciones) of PEDIFRI arising as a consequence of exercise by PEARSON of the PEDIFRI Put Option (as defined below) have been secured by means of four bank guarantees, each dated the date hereof, for an amount of Euro 22,129,686, Euro 14,546,891.30, Euro 14,900,313.50 and Euro 5,441,334.20, provided by BANESTO, Calyon, Caja Madrid and CAM respectively (hereafter the "PEDIFRI GUARANTEES"), a copy of each of which is attached as Annex 3 hereto. IX. Now therefore, the Parties have decided to enter into this agreement in respect of the Offer (hereinafter, the "AGREEMENT"), which shall be governed by the following CLAUSES 1. IRREVOCABLE UNDERTAKING OF OFFEROR 1.1. OFFEROR hereby expressly and irrevocably undertakes to submit to the Spanish Comision Nacional del Mercado de Valores (hereinafter, the "CNMV"), not later than the next Business Day (hereinafter, a "BUSINESS DAY" being a day other than a Saturday or Sunday or public holiday in the city of Madrid) following the date of this Agreement, a request for the authorization of the Offer (hereinafter, the "AUTHORIZATION"), together with an "hecho relevante", the prospectus (in a form identical to the draft attached as Annex 4 hereto) (hereinafter, the "PROSPECTUS"), the Offer Guarantees and the remaining documentation required by Royal Decree 1197/1991, other than the administrative authorizations and clearances from the authorities referred to in sub-clause 1.4 below (provided that OFFEROR shall deliver to the CNMV on the date such applications or submissions are made copies of the relevant application and submissions to such authorities and shall deliver to the CNMV as soon as they are available the relevant authorizations and clearances). OFFEROR shall diligently progress and pursue the obtaining of the Authorization and, subject to and conditional upon the Authorization having been obtained, shall launch the Offer and seek diligently to ensure that the Offer achieves a positive result, in each case within the briefest possible timeframe. 1.2. The Offer shall be subject to the following terms and conditions: CONFORMED COPY (i) It must be an offer for 100% of the shares of RECOLETOS. (ii) It may be conditioned to the acquisition of 71.92% or less of the shares of RECOLETOS. (iii) The consideration of the Offer shall be Euro 7.20 per share (the "OFFER PRICE") and each offeree shall, in addition to the Offer Price, be offered the Deferred Contingent Offer Consideration as described more fully in clause 9. (iv) The Offer Price and the Deferred Contingent Offer Consideration shall be fully paid in cash. (v) The acceptance period of the Offer shall be two months. 1.3. Notwithstanding the provisions of sub-clause 1.1. above, in the event that, prior to the submission of the request for the Authorization, any third party had submitted a request for the authorization of another tender offer in respect of some or all of the shares of RECOLETOS under which, in the case of an all cash offer, the offer price is the same or higher than the Offer Price or, in the case of any other offer, the consideration offered for each RECOLETOS share is (as at the date of such third party's request) as valuable as, or more valuable than, the consideration offered for each RECOLETOS share under the Offer in the reasonable opinion of Lazard Asesores Financieros, S.A. ("LAZARD"), then OFFEROR shall have to choose (and shall immediately inform PEARSON of its choice), during five (5) Business Days from the announcement of the submission of the prior tender offer by the third party, between the following: (i) not to submit the Offer, in which case both Parties will be released from their respective obligations under this Agreement without any liability arising therefrom; or (ii) to submit the Offer as a competing offer of the prior third party's tender offer, therefore increasing the price of the Offer. OFFEROR undertakes that any such competing offer it makes will continue to satisfy the terms and conditions of this Agreement, save that the Offer Price shall be higher (if necessary). If such a competing offer is launched by OFFEROR: (A) PEARSON's undertakings to procure acceptance of the Offer in sub- clause 2.2(i) and sub-clause 2.2(ii) of this Agreement shall be deemed to be undertakings to procure acceptance of such improved competing offer on the terms set out herein; and (B) in the event that PEARSON exercises the PEDIFRI Put Option in such circumstances, the total price payable for the PEDIFRI units under sub-clause 3.3 shall be increased by the total additional amount which would have been payable by OFFEROR for the Shares in RECOLETOS held by PEDIFRI were PEDIFRI to have accepted OFFEROR's improved competing offer for such Shares. CONFORMED COPY 1.4.(i) OFFEROR shall notify or, if appropriate, procure that its shareholders shall notify the Offer to the competent anti-trust authorities in Spain and Portugal and,to the extent legally required, any other regulatory authorities within five (5) Business Days as from the date of submission to the CNMV of the request for the Authorization, unless prior to that date OFFEROR has received oral (to be confirmed by OFFEROR or its legal counsel to PEARSON in writing) or written confirmation from the authority concerned that no notification is required in connection with the Offer, and OFFEROR shall diligently seek to ensure that it obtains any necessary clearances from such authorities within the briefest possible timeframe. (ii) OFFEROR undertakes likewise to apply for the relevant authorizations of, and/or make the appropriate notifications to, the Ministry of Industry, Commerce and Tourism and the relevant Autonomous Regions, as required by applicable legislation in connection with the television and radio concessions held by RECOLETOS and its subsidiaries and affiliates within the five (5) Business Days following the date of submission to the CNMV of the request for the Authorization and shall diligently seek to ensure that it obtains any necessary clearances and approvals from such authorities in the briefest possible timeframe. 1.5. Unless OFFEROR has notified PEARSON within the terms of sub-clause 1.3 that it has decided not to submit the Offer and subject to termination under any other provision of this Agreement, OFFEROR undertakes to make and complete the Offer (including, where necessary, making and completing the Offer on a modified basis to include or conform with any condition, conditions or amendments imposed by the CNMV, any competent anti-trust authorities or any other competent regulatory authorities unless such condition or conditions falls within sub-clause 1.6(i) and PEARSON is not prepared to agree to it or them or within sub-clause 1.7(i) and OFFEROR is not prepared to agree to it or them). 1.6. If: (i) the CNMV, any competent anti-trust authorities or any other competent regulatory authorities require any amendments or impose one or more conditions for the transaction which would have a material adverse effect on PEARSON (and any such condition or amendment which: (A) could reduce the consideration (including in respect of Deferred Contingent Offer Consideration) receivable by POHL or PEDIFRI in respect of the Shares; or (B) could reduce the consideration (including in respect of Deferred Contingent Offer Consideration) receivable by POHL in respect of the units in PEDIFRI, shall be deemed to be a material adverse effect for these purposes); or CONFORMED COPY (ii) OFFEROR has not exercised the OFFEROR Call Option prior to the expiry of the OFFEROR Call Option Period (as such terms are defined in sub- clause 2.1); or (iii) the legal notice referred to in Article 18 of Royal Decree 1197/1991 in respect of the Offer has not been published by 14 April 2005, and this Agreement has not been previously terminated in accordance with its terms, then PEARSON shall have the right (but not the obligation) to terminate this Agreement with immediate effect on written notice to OFFEROR. 1.7. If: (i) the CNMV, any competent anti-trust authorities or any other competent regulatory authorities deny approval of the Offer or require any amendment or impose one or more conditions for the transaction which would have a material adverse effect on the business of RECOLETOS taken as a whole (and any such condition or amendment which is imposed by the authorities in relation to the television and radio concessions referred to in sub-clause 1.4 (ii) shall be deemed not to have a material adverse effect for these purposes) or which could increase the Offer Price to more than E7.20 per RECOLETOS share; or (ii) the legal notice referred to in Article 18 of Royal Decree 1197/1991 in respect of the Offer has not been published by 14 July 2005, and this Agreement has not been previously terminated in accordance with its terms, then OFFEROR shall have the right (but not the obligation) to terminate this Agreement with immediate effect on written notice to PEARSON. 1.8. Following any termination under sub-clauses 1.6 and 1.7, neither party shall have any claim against the other save for any rights which PEARSON may have against OFFEROR in respect of OFFEROR's failure to comply with its obligations under sub-clause 1.1, sub-clause 1.4 or sub-clause 1.5. 1.9. OFFEROR shall promptly notify PEARSON, and provide copies, of any communications from the CNMV, any competent anti-trust authority or any other competent regulatory authority in relation to obtaining the Authorization and any other relevant clearances. Where reasonably requested by PEARSON, OFFEROR shall provide PEARSON (or advisers nominated by PEARSON) with draft copies of all submissions and communications to the CNMV and any such other authority in relation to obtaining the Authorization and any other relevant clearances at such time as will allow PEARSON a reasonable opportunity to provide comments on such submissions and communications before they are submitted or sent to the CNMV or such other relevant authority. OFFEROR shall take into account any such comments as are reasonable and provide PEARSON (or advisers nominated by PEARSON) with copies of all such submissions and communications in the form submitted or sent. Where reasonably requested by PEARSON and where permitted by the CNMV or the other relevant authority CONFORMED COPY concerned, OFFEROR shall allow persons nominated by PEARSON to attend all meetings with the CNMV or such other relevant authorities in relation to obtaining the Authorization and any other relevant clearances and, where appropriate, to make oral submissions at such meetings. If necessary and where reasonable grounds exist for expecting that such action by OFFEROR could be successful, OFFEROR shall fully defend any court or administrative action which the CNMV or any competent anti-trust authority or any other regulatory authority may bring to prohibit, enjoin or modify the Offer and/or the other transactions contemplated by this Agreement. 1.10. For the avoidance of doubt, none of the following shall affect any of OFFEROR's obligations or undertakings under this Agreement, including, without limitation its obligations and undertakings to make and complete the Offer and its obligations and undertakings to act diligently: (i) a third party submitting at any time a request for the authorization of another tender offer over any RECOLETOS shares at a price lower than the Offer Price; (ii) a third party submitting following the submission of the request for the Authorization a request for the authorization of another tender offer over any RECOLETOS shares at a price equal to or higher than the Offer Price; and (iii) a third party taking any action in relation to any of the types of tender offers referred to in sub-clauses 1.10(i) and 1.10(ii) above. 2. IRREVOCABLE UNDERTAKING OF PEARSON 2.1. Subject to sub-clauses 1.3, 1.6, 1.7, 1.8 and 2.5, PEARSON hereby grants an option to OFFEROR (the "OFFEROR CALL OPTION") (which may be exercised by OFFEROR at any time during the period commencing on the later of (i) 1 January 2005 and (ii) the date of commencement of the acceptance period of the Offer, and ending five (5) Business Days later (the "OFFEROR CALL OPTION PERIOD")) to require PEARSON to comply with sub-clause 2.2. The OFFEROR Call Option may only be exercised by OFFEROR giving notice in the form set out in Annex 5 hereto (the "OFFEROR EXERCISE NOTICE"). 2.2. Subject to OFFEROR giving the Offeror Exercise Notice pursuant to sub-clause 2.1 above and to sub-clauses 1.3, 1.6, 1.7, 1.8 and 2.5, PEARSON hereby expressly and irrevocably undertakes (provided that the Offer is capable of acceptance in accordance with the applicable tender offers regulations): (i) to procure acceptance of the Offer in respect of all of the Shares; or (ii) to procure acceptance of the Offer in respect of all of the Shares held directly by POHL and to serve the PEDIFRI Exercise Notice (as defined in sub-clause 3.2 below), CONFORMED COPY in each case within five (5) Business Days of receipt by PEARSON of the Offeror Exercise Notice; and if the Offer is not capable of acceptance within such period but the Offer subsequently becomes capable of acceptance in accordance with the applicable tender offers regulations then PEARSON shall, subject always to the other provisions of this Agreement, comply with any obligations under this subclause 2.2 as soon as reasonably practicable in the circumstances. 2.3. (Subject always to the termination provisions in sub-clauses 1.3, 1.6, 1.7 and 1.8) As a consequence of the foregoing provisions of this clause 2: (i) PEARSON expressly and irrevocably undertakes to procure that: (A) neither POHL nor PEDIFRI shall transfer the Shares, under any legal title, to any third party; (B) POHL shall not transfer the units of PEDIFRI, under any legal title, to any third party; and (C) neither POHL nor PEDIFRI shall accept any tender offer over RECOLETOS competing with the Offer, whether previous or subsequent to the Offer and regardless of the price of said tender offer; and (ii) PEARSON shall procure that neither POHL nor PEDIFRI shall accept the Offer at any time prior to the OFFEROR Call Option Period or, unless and until the Offeror Exercise Notice is given pursuant to sub-clause 2.1 above, during the OFFEROR Call Option Period, but without prejudice to PEARSON's rights to procure acceptance of the Offer and to exercise the PEDIFRI Put Option (as defined in sub-clause 3.1 below) at any time after the expiry of the OFFEROR Call Option Period. 2.4. For the avoidance of doubt: (i) each of POHL and PEDIFRI shall remain legal and beneficial owner of its respective Shares unless and until it accepts the Offer and the Offer is completed in accordance with its terms. Unless and until each of POHL and PEDIFRI accepts the Offer and such completion occurs nothing in this Agreement shall operate to fetter the rights (including voting rights of its respective Shares) of POHL or PEDIFRI in relation to the Shares; and (ii) POHL shall remain legal and beneficial owner of the units of PEDIFRI unless and until the sale of such units to OFFEROR is completed in accordance with clause 3. Unless and until such completion occurs nothing in this Agreement shall operate to fetter the rights (including voting rights of the PEDIFRI units) of POHL in relation to the units of PEDIFRI. 2.5. PEARSON's undertakings in sub-clause 2.2 and 2.3(i) are and shall at all times be conditional on: CONFORMED COPY (i) each of OFFEROR's representations and warranties in sub-clause 7.1(v) and (vi) being true and accurate at all relevant times; and (ii) each of the Offer Guarantees and the PEDIFRI Guarantees remaining in full force and effect. 2.6. Nothing in this Agreement shall prejudice PEARSON's rights to procure acceptance of the Offer and to exercise the PEDIFRI Put Option (as defined in sub-clause 3.1 below) at any time after the expiry of the OFFEROR Call Option Period. 3. PEDIFRI PUT OPTION 3.1. OFFEROR hereby grants PEARSON an option (hereinafter, the "PEDIFRI PUT OPTION") to require OFFEROR to purchase from POHL all of the units comprising the equity capital of PEDIFRI subject to the terms and conditions in this clause 3. 3.2. PEARSON may exercise the PEDIFRI Put Option by procuring that PEARSON and POHL serve on OFFEROR written notice in the form set out in Annex 6 hereto (hereinafter, the "PEDIFRI EXERCISE NOTICE") following the serving of the Offeror Exercise Notice or (provided that the Offer has been made) the expiry of the OFFEROR Call Option Period but no later than 9:00 a.m. (Madrid time) on the last Business Day of the Offer acceptance period. 3.3.(i) The effect of serving the PEDIFRI Exercise Notice shall be that OFFEROR shall purchase and, PEARSON shall procure that POHL shall sell, the entire issued equity capital of PEDIFRI for an aggregate consideration of: (A) an amount which is equal to Euro 57,018,225.60 plus Net Assets (as defined below), provided that, for the avoidance of doubt, the Net Assets may be a negative amount and, in such circumstances an amount equal to such negative amount of Net Asset shall be deducted from the amount of Euro 57,018,225.60 (hereinafter, the "INITIAL PEDIFRI CONSIDERATION"); and: (B) the Deferred Contingent Offer Consideration (as defined in sub-clause 9.2) which would, in relation to the Shares held by PEDIFRI at the time of its transfer to OFFEROR be attributable to those Shares on the assumption that PEDIFRI had accepted the Offer (hereinafter, the "DEFERRED CONTINGENT PEDIFRI CONSIDERATION"). Completion shall be conditional only upon completion of the Offer by OFFEROR. Completion shall take place on the same date and at the same time as settlement occurs in respect of completion of the Offer. For such purposes, POHL and OFFEROR shall appear in front of a Notary Public of Madrid at or prior to Completion and shall execute a sale and purchase notarial deed, conditional only upon completion of the Offer by OFFEROR and subject only to the representations and warranties set out expressly in CONFORMED COPY this Agreement (hereinafter, the "NOTARIAL DEED"). At Completion, OFFEROR shall pay the Initial PEDIFRI Consideration in cash in Euros to POHL and POHL shall transfer the units in PEDIFRI to OFFEROR. The Parties shall procure that from Completion, the current directors of PEDIFRI are replaced with nominees of OFFEROR and PEARSON shall procure that on resignation of the current directors of PEDIFRI, such directors shall provide written confirmation to PEDIFRI that they have no outstanding claims against, and are owed no amounts by, PEDIFRI. PEARSON shall procure that POHL does, and OFFEROR shall do, all other things to ensure that Completion occurs in accordance with this clause 3. OFFEROR shall pay the Deferred Contingent PEDIFRI Consideration in cash in Euros to POHL at the same time as it pays the Deferred Contingent Offer Consideration in accordance with the terms of the Offer. (ii) PEARSON (or, to the extent that at any relevant time, OFFEROR is the owner of the PEDIFRI units, OFFEROR) shall procure that the accounts of PEDIFRI for the year to 31 December 2004 (the "PEDIFRI 2004 ACCOUNTS") are prepared promptly on a basis consistent with that on which the accounts of PEDIFRI for the year to 31 December 2003 were prepared and are audited by PricewaterhouseCoopers (or, if they are unwilling to act, another firm of accountants of international repute selected by PEARSON) as promptly as possible after such accounts have been prepared and that copies of such audited accounts are delivered to the Parties promptly after they are available. (iii) PEARSON shall procure that: (A) the intra-group loan shown in the PEDIFRI balance sheet for the financial year ended 31 December 2003 is repaid by POHL; and (B) to the extent there are distributable reserves available for the purpose and so far as legally possible in Spain, the cash resulting from such intra-group loan repayment together with any other cash in PEDIFRI is dividended up to POHL or is otherwise distributed to POHL. (PEARSON and POHL shall also have the right, but not the obligation, to extract through reduction of capital of PEDIFRI and, in the case of any such reduction of capital, notwithstanding anything to the contrary in this Agreement, any reference to the total share capital of PEDIFRI to be transferred at Completion and any representation or warranty in respect of it shall be to the share capital as so reduced.) Once this has been done, PEARSON shall procure that a balance sheet for PEDIFRI which takes into account the operations referred to in (A) and (B) (the "PROVISIONAL COMPLETION BALANCE SHEET") is drawn up on a basis consistent with that on which the PEDIFRI 2004 Accounts were prepared (or, if the balance sheet from the PEDIFRI 2004 Accounts is used for these purposes, such balance sheet has been prepared in accordance with the requirements of (ii) above). PEARSON shall procure that the Provisional Completion Balance Sheet is audited by PricewaterhouseCoopers (or if they CONFORMED COPY are unwilling to act, another firm of accountants of international repute selected by PEARSON) as promptly as possible and that copies of such audited balance (the "AUDITED COMPLETION BALANCE SHEET") shall be delivered to the parties promptly after they are available. The Parties shall use the Audited Completion Balance Sheet to calculate the Net Assets of PEDIFRI for the purposes of calculating the Initial PEDIFRI Consideration. The "NET ASSETS" shall be the amount in Euros that is represented in the Audited Completion Balance Sheet by: (C) adding the aggregate balance sheet value of all the assets; (D) deducting the book value of the Shares held by PEDIFRI; and (E) deducting the balance sheet value of the creditors and any other liabilities (excluding, for the avoidance of doubt, all amounts relating to shareholders' equity). If the Provisional Completion Balance Sheet has not been audited prior to Completion, then for the purposes of calculating the amount of the Initial PEDIFRI Consideration to be paid at Completion, the Net Assets shall be deemed to be the Net Assets figure shown by the unaudited Provisional Completion Balance Sheet and, subsequently, once the audit of the Provisional Completion Balance Sheet has been completed, shall be the Net Assets figure shown by the Audited Completion Balance Sheet and an appropriate adjusting repayment by POHL to OFFEROR, or (as the case may be) payment by OFFEROR to POHL, shall be made to reflect any difference between the amount paid by OFFEROR at Completion based on the unaudited Provisional Completion Balance Sheet and the amount which would have been payable at Completion had the Audited Completion Balance Sheet then been available. Such adjusting repayment or, as the case may be, payment shall be made within five (5) Business Days of the Audited Completion Balance Sheet being delivered to the Parties. To the extent that any non-cash item is taken into account as an asset in the Provisional Completion Balance Sheet (or, as the case may be, Audited Completion Balance Sheet) so that it is included in the calculation of the Initial PEDIFRI Consideration, PEARSON shall guarantee to PEDIFRI the receipt by PEDIFRI of its full amount within one year of Completion. If PEARSON makes any payment to PEDIFRI under such guarantee then OFFEROR agrees that PEARSON may require an assignment of the asset to PEARSON at PEARSON's cost but, if that is not legally possible, PEARSON may itself take reasonable steps to obtain payment of such asset for PEDIFRI and OFFEROR shall provide such access to the records of PEDIFRI as PEARSON shall reasonably require for such purpose and shall procure payment by PEDIFRI to PEARSON of any amount recovered. (iv) If: CONFORMED COPY (a)the Audited Completion Balance Sheet shows that the amount of Initial PEDIFRI Consideration would be less than Euro 57,018,225.60; and (b)the Offer acceptance period has not at that time closed, PEARSON and POHL may, by written notice to OFFEROR served not later than 9:00 a.m. (Madrid time) on the last Business Day of the Offer Acceptance period, rescind their exercise of the PEDIFRI Put Option provided that such notice of rescission is accompanied by an acceptance by PEDIFRI of the Offer in respect of the Shares held by PEDIFRI. The effect of such rescission shall be that PEARSON and POHL shall not be required, respectively, to procure the sale and sell the units of PEDIFRI and OFFEROR shall not be required to buy them. (v) For the purposes of OFFEROR's reasonable due diligence requirements, during the period between (A) the date of this Agreement and (B) the execution of the Notarial Deed or rescission of the PEDIFRI Put Option, PEARSON agrees to provide OFFEROR and its duly authorised agents upon reasonable request with full and free access (including the right to take copies) during usual business hours to the books, accounts and records of and relating to PEDIFRI except to the extent any such access is restricted by law, provided that OFFEROR shall and ensure that its duly authorised agents keep such disclosed information confidential. OFFEROR shall be entitled to notify the auditors referred to above of any matter it believes should be reflected in the Audited Completion Balance Sheet. (vi) PEARSON undertakes to procure that PEDIFRI is run in the ordinary course between (A) the date of this Agreement and (B) the execution of the Notarial Deed or rescission of the PEDIFRI Put Option, except that such actions as are necessary for the actions referred to in sub-clause 3.3(iii)(A) and (B) above may be taken. 4. SETTLEMENT AND DELIVERY 4.1. Subject to sub-clause 4.2, payment of the consideration for the Shares shall be made by OFFEROR in the context of the Offer, in accordance with the settlement procedures set forth by the applicable tender offers regulations. The same shall apply, mutatis mutandis, to the delivery of the Shares by POHL and (where the PEDIFRI Put Option has not been exercised or has been exercised and rescinded in accordance with clause 3) PEDIFRI to OFFEROR. 4.2. Where the PEDIFRI Put Option has been exercised and not rescinded, payment of the consideration for the sale to OFFEROR of the PEDIFRI units, and settlement and delivery arrangements in relation to their transfer, shall be as provided in clause 3. 5. UNDERTAKINGS CONFORMED COPY 5.1. PEARSON undertakes, to the extent necessary in each case, to procure that POHL and PEDIFRI do such things as are necessary in order to fulfil the terms of this Agreement (whether or not any provision herein expressly refers to POHL and PEDIFRI), provided always that neither PEARSON nor POHL shall be responsible for any action or inaction of PEDIFRI following completion of the transfer of the PEDIFRI units in accordance with clause 3. 5.2. OFFEROR undertakes, to the extent necessary in each case, to procure that PEDIFRI does such things as are necessary in order to fulfil the terms of this Agreement (whether or not any provision herein expressly refers to PEDIFRI) following completion of the transfer of the PEDIFRI units in accordance with clause 3. 6. REPRESENTATIONS AND WARRANTIES OF PEARSON 6.1. PEARSON represents and warrants to OFFEROR, as of the date hereof, as of the date of completion of the Offer and (provided that the Notarial Deed is executed) as of immediately prior to execution of the Notarial Deed, that: (i) Each of PEARSON, POHL and PEDIFRI is a limited liability company duly incorporated and validly existing under the laws of its respective jurisdiction of incorporation. (ii) Each of POHL and PEDIFRI is a wholly-owned direct or indirect subsidiary of PEARSON. (iii) Subject in each case to each of OFFEROR's representations and warranties in sub-clause 7.1(v) being true and accurate at each relevant time: (a) Each of PEARSON and POHL has full corporate power and authority and has taken all necessary corporate actions to enter into and perform its obligations under this Agreement. (b) No other consent, approval or authorization is required to be obtained by PEARSON and POHL in connection with the execution and consummation of this Agreement (and if PEDIFRI accepts the Offer, PEARSON will procure that (a) and (b) will be satisfied in respect of PEDIFRI). (iv) None of PEARSON, POHL and PEDIFRI is subject to any bankruptcy or insolvency proceedings, and there is no action underway or threatened to declare the bankruptcy or insolvency of any of them. (v) This Agreement, following execution thereof, will constitute a valid and legally binding obligation of PEARSON, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and other laws generally affecting the enforcement of creditors' rights. CONFORMED COPY (vi) Each of POHL and PEDIFRI has valid and full title of ownership of the Shares of RECOLETOS respectively referred to as being owned by each of them in Whereas II above, free and clear of any security interest, lien, charge, claim, right of pre-emption or first refusal or any other third party right or encumbrance of any kind. 6.2. In the event that the units in PEDIFRI are transferred to OFFEROR pursuant to the Notarial Deed, PEARSON represents and warrants to OFFEROR, as of the date of the Notarial Deed, that: (i) Subject in each case to OFFEROR's representations and warranties in sub- clause 7.1(v) being true and accurate at each relevant time: (a) POHL has full corporate power and authority and has taken all necessary corporate actions to enter into and perform its obligations under the Notarial Deed. (b) No other consent, approval or authorization is required to be obtained by POHL or PEDIFRI in connection with the execution and consummation of the Notarial Deed. (ii) The Notarial Deed, following execution thereof, will constitute a valid and legally binding obligation of POHL, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and other laws generally affecting the enforcement of creditors' rights. (iii) Immediately prior to the transfer to OFFEROR under the Notarial Deed, POHL has valid and full title of ownership of all of the issued units of PEDIFRI, free and clear of any security interest, lien, charge, claim, right of pre-emption or first refusal or any other third party right or encumbrance of any kind. (iv) The equity capital of PEDIFRI amounts to Euro 570,312.41, divided into 94,982 units, numbered 1 through 94,982 both inclusive, of Euro 6.010121 nominal value each, fully subscribed and paid up and no rights have been granted to any person entitling that person to subscribe for, or convert other rights into, shares in PEDIFRI. (v) The PEDIFRI 2004 Accounts and the Audited Completion Balance Sheet will be prepared in accordance with the basis of preparation set out therein and will give a fair and genuine representation of the financial position of PEDIFRI and of its assets and liabilities of the periods and as at the times stated therein and in accordance with the basis of preparation set out therein. PEDIFRI does not have any further liabilities (including hidden, contingent or off balance sheet liabilities) other than those which are or will be set out in or provided for in the Audited Completion Balance Sheet). (vi) PEDIFRI has no employees, has not performed any activities other than the holding of Shares of RECOLETOS and is not a party to any agreement CONFORMED COPY giving rise to obligations of the company vis-a-vis other companies within the PEARSON group or third parties. (vii) PEDIFRI is in compliance with its obligations under all applicable laws to which it is subject and has performed and is up to date with all of its obligations to pay taxes, file returns, documents and make payments. (viii) There are no writs, actions, claims, disputes, legal or administrative proceedings, arbitration proceedings, complaints, prosecutions or investigations in progress or pending (nor to the best of PEARSON's belief are there any contemplated), which affect PEDIFRI other than those which are or will be provided for in the Audited Completion Balance Sheet. (ix) Subsequent to 31 December 2004, there will be no material adverse change in the financial condition of PEDIFRI except to the extent that it changes as a consequence of the actions referred to in sub-clause 3.3(iii)(A) and (B) above or as otherwise reflected in the Audited Completion Balance Sheet. Notwithstanding anything to the contrary in this Agreement, neither PEARSON nor POHL shall be responsible for liabilities arising from matters, facts, occurrences or situations relating to or affecting PEDIFRI prior to 3 October 1996. No claim may be made under the representations and warranties in this sub-clause 6.2 to the extent that the matter is provided for in the Audited Completion Balance Sheet. Subject to the provisions of the following paragraphs in this sub-clause 6.2, PEARSON shall indemnify and hold harmless OFFEROR from and against any and all losses, liabilities, costs, claims, damages, expenses or demands (or actions in respect thereof) (excluding, for the avoidance of doubt, any indirect losses and loss of profits) ("Losses") which OFFEROR incurs or which is made against OFFEROR after Completion of OFFEROR's acquisition of PEDIFRI to the extent such Losses result from any breach or alleged breach of any of the representations or warranties set out in clause 6.2. If any action, claim or demand shall be brought or alleged against OFFEROR in respect of which the above indemnity is to be claimed against PEARSON, OFFEROR shall promptly (and in any event within 10 Business Days) notify PEARSON in writing and provide details of the relevant facts and circumstances, and PEARSON shall have the option either (A) to pay OFFEROR an amount equal to the amount claimed by the claimant, or (B) to assume the defence thereof with legal advisers satisfactory to OFFEROR (acting reasonably). If PEARSON fails to notify OFFEROR of its election between (A) and (B) within ten Business Days (or such other period as may be agreed between the Parties (acting reasonably)) after receipt of the notice of commencement of the action (or three Business Days prior to the date upon which the period for the defence of the claim in question expires, if earlier), OFFEROR shall be free to defend or settle the CONFORMED COPY claim in question and PEARSON's obligations under the above indemnity shall be unaffected. PEARSON's liability under the above indemnity shall not apply to the extent that OFFEROR is entitled to reimbursement for any Losses from any third party, including, without limitation, any insurer. 7. REPRESENTATIONS AND WARRANTIES OF OFFEROR 7.1. OFFEROR represents and warrants to PEARSON, as of the date hereof, as of the date of the exercise of the OFFEROR Call Option, as of each date when members of the PEARSON group accept the Offer, as of the date of any exercise by PEARSON of the PEDIFRI Put Option, as of the date of completion of the Offer and (provided that the Notarial Deed is executed) as of immediately prior to execution of the Notarial Deed, that: (i) OFFEROR is a limited liability company duly incorporated and validly existing under the laws of Spain. The share capital of OFFEROR amounts to Euros 12,950,000, divided into 12,950,000 shares of Euro 1.00 nominal value each, all belonging to a unique class and series and being entitled to the same number of voting rights and fully subscribed and paid up. OFFEROR has available cash, loan facilities or other financing arrangements that will: (A) at completion of the Offer provide in immediately available funds the necessary cash resources to satisfy its payment obligations under the Offer; and (B) provide in immediately available funds the necessary cash resources to satisfy its payment obligations under this Agreement and the Notarial Deed, and OFFEROR will be able to satisfy any conditions to such loan facilities or other financing arrangements at or prior to such payment obligations becoming due and payable. (ii) OFFEROR has full corporate power and authority and has taken all necessary corporate actions to enter into and perform its obligations under this Agreement. No consent, approval or authorization is required to be obtained by OFFEROR in connection with the execution and consummation of this Agreement other than the approval of the Offer by the CNMV and the approval by the authorities referred to in clause 1.4 above. (iii) OFFEROR is not subject to any bankruptcy or insolvency proceedings, and there is no action underway or threatened to declare its bankruptcy or insolvency. (iv) This Agreement, following execution thereof, will constitute a valid and legally binding obligation of OFFEROR, enforceable against it in CONFORMED COPY accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and other laws generally affecting the enforcement of creditors' rights. (v) In the context of the requirements of Chapter 11 of the United Kingdom Listing Rules, no person who is (or was within the 12 months preceding the date of this Agreement) a director (or a person in accordance with whose directions or instructions the directors of such body are accustomed to act (hereinafter, a "SHADOW DIRECTOR")) of PEARSON or of any other company which is (and, if he, she or it has ceased to be such, was while he, she or it was a director or a shadow director of such other company) PEARSON's subsidiary undertaking (hereinafter, a "RELATED PARTY") is directly or indirectly interested (or has a conditional or contingent entitlement to become interested) in OFFEROR or any parent undertaking or subsidiary undertaking of OFFEROR so that such person is (or would on the fulfilment of the condition or the occurrence of the contingency be) able: (a) to exercise or control the exercise of 30% or more of the votes able to be cast at general meetings of OFFEROR or any parent undertaking or subsidiary undertaking of OFFEROR on all, or substantially all, matters; or (b) to appoint or remove directors of OFFEROR or any parent undertaking or subsidiary undertaking of OFFEROR holding a majority of voting rights at board meetings on all, or substantially all, matters. The above representation and warranty remains true and accurate if the direct and indirect interests of each related party to which that representation and warranty applies are aggregated with the direct and indirect interests and conditional or contingent entitlements to become interested of: (c) all other related parties (taken together); (d) the members (taken together) of all related parties' families; (e) the trustees (acting as such) of any trust of which any related party and/or any related party's family is a beneficiary or discretionary object; (f) any company in whose equity shares one or more related parties or any member or members (taken together) of the related party's or related parties' family or the related party or related parties and any such member or members (taken together) are directly or indirectly interested (or have a conditional or contingent entitlement to become interested) so that they are (or would on the fulfilment of the condition or the occurrence of the contingency be) able: CONFORMED COPY (A) to exercise or control the exercise of 30% or more of the votes able to be cast at general meetings of such company or any parent undertaking or subsidiary undertaking of such company on all, or substantially all, matters; or (B) to appoint or remove directors of such company or any parent undertaking or subsidiary undertaking of such company holding a majority of voting rights at board meetings on all, or substantially all, matters. Further no member or members (taken together) of a related party's family or a related party and any such member or members (taken together) is or are directly or indirectly interested (or has or have a conditional or contingent entitlement to become interested) in OFFEROR or any parent undertaking or subsidiary undertaking of OFFEROR so that such person is or persons are (or would on the fulfilment of the condition or the occurrence of the contingency be) able to do any of the things set out in sub-clauses 7.1(v)(a) and 7.1(v)(b) above. Further, neither OFFEROR nor any person with a direct or indirect interest in the share capital of OFFEROR is or has been within the 12 months prior to the date of this Agreement entitled to exercise or to control the exercise of 10% or more of the votes able to be cast on all or substantially all matters at general meetings of PEARSON or any other company which is PEARSON's subsidiary undertaking (except the entitlements to exercise or to control the votes attributable directly to the Shares which are acquired pursuant to completion of the Offer and/or the Notarial Deed). Further, OFFEROR is not (nor has it been at any time within the 12 months preceding the date of this Agreement) a person in accordance with whose directions or instructions the directors of any subsidiary undertaking of PEARSON (or of any company which has ceased to be a subsidiary undertaking of PEARSON within the 12 months preceding the date of this Agreement) are accustomed to act. For the purposes of this Agreement an undertaking is a "PARENT UNDERTAKING" in relation to another undertaking, a "SUBSIDIARY UNDERTAKING", if: (g) it holds a majority of the voting rights in the undertaking; or (h) it has the right to appoint or remove a majority of its board of directors; or (i) it has the right to exercise a dominant influence over the undertaking: (A) by virtue of provisions contained in the undertaking's by-laws; or CONFORMED COPY (B) by virtue of a control contract; or (j) it controls alone, or pursuant to an agreement with other shareholders or members, a majority of the voting rights in the undertaking; or (k) it has a participating interest in the undertaking and: (A) it actually exercises a dominant influence over it; or (B) it and the subsidiary undertaking are managed on a unified basis. For the purposes of this Agreement an individual's "FAMILY" means that individual's spouse and children. (vi) The aggregate of the total paid up equity share capital and subordinated participating loans (prestamos participativos) of OFFEROR is not less than E83,000,000, the funds representing such share capital (to the extent not used for expenditure within sub-clause 7.1(vii) below) being currently held in the form of funds readily available to OFFEROR. (vii) Payments which would have to be made by OFFEROR if the Offer does not proceed (excluding any payments for which OFFEROR may be liable in respect of breach of any of its obligations under this Agreement) will not exceed E 13,000,000 and no person with security interests over the assets of OFFEROR would have any rights which, taken with payments owed to any other person, would exceed such amount in such circumstances. Apart from security interests, there are no other third party rights or interests in the assets of OFFEROR. (viii) Apart from any arrangement falling within clause 9.15 below, there exists at the date of this Agreement, no agreement, arrangement or undertaking, formal or informal, that would, but for the timing of entering into such agreement, arrangement or undertaking, trigger any of OFFEROR's obligations to pay any Deferred Contingent Offer Consideration. (ix) Except as disclosed in writing to PEARSON, neither OFFEROR nor any of its officers, advisers or agents is aware of any right to bring any claim against PEARSON or any of PEARSON's subsidiary undertakings or any of PEARSON's or PEARSON's subsidiary undertakings officers, employees, advisers or agents under this Agreement or in connection with any of the matters referred to in this Agreement. 7.2. In the event that the units in PEDIFRI are transferred to OFFEROR pursuant to the Notarial Deed, OFFEROR represents and warrants to PEARSON (for itself and on behalf of POHL), as of the date of the Notarial Deed, that: (i) OFFEROR has full corporate power and authority and has taken all necessary corporate actions to enter into and perform its obligations under the Notarial Deed. CONFORMED COPY (ii) No other consent, approval or authorization is required to be obtained by OFFEROR in connection with the execution and consummation of the Notarial Deed. (iii) The Notarial Deed, following execution thereof, will constitute a valid and legally binding obligation of OFFEROR, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and other laws generally affecting the enforcement of creditors' rights. 8. PUBLIC DISCLOSURE 8.1. Save as provided in sub-clauses 8.2 and 8.3, no formal public announcement or press release in connection with the signature or subject matter of this Agreement shall be made or issued by or on behalf of either Party without the prior written approval of the other Party (such approval not to be unreasonably withheld or delayed). 8.2. Upon the signature of this Agreement, the Parties shall disclose the basic contents of this Agreement and such other matters as are required in connection with the signature and subject matter of this Agreement to the CNMV and in accordance with the Listing Rules of the UK Listing Authorities, by filing the notice and announcements substantially in the form attached as Annex 7 hereto and a copy of this Agreement shall be delivered to the CNMV and may be attached to the Prospectus. 8.3. If a Party has an obligation to make or issue any announcement or filing or to take any other action, in each case required by law or by any stock exchange or by any governmental authority, the relevant Party shall give the other Party every reasonable opportunity to comment on any announcement, release or filing before it is made or issued (provided that this shall not have the effect of preventing the Party making the announcement, release or filing or taking any such other action from complying with its legal and/or stock exchange and/or other regulatory obligations). 9. DEFERRED CONTINGENT OFFER CONSIDERATION 9.1. OFFEROR shall include the following provisions of this clause 9 in the Offer. 9.2. Subject to the remaining provisions of this clause 9, if there shall occur during the Relevant Period any Disposal by a Relevant Party of a RECOLETOS Interest, OFFEROR shall pay to each Accepting Shareholder, in respect of each of the Accepted Shares for which the Offer was accepted by such Accepting Shareholder, the amount in cash in Euros of any Deferred Contingent Offer Consideration arising from such Disposal. For these purposes: CONFORMED COPY "RELEVANT PERIOD" means the period commencing on the date of this Agreement and ending at 23:59 (Madrid time) on the date which is 18 calendar months after the date for settlement pursuant to the Offer; "DEFERRED CONTINGENT OFFER CONSIDERATION" means the Upside Amount arising from any Disposal divided by: (i) (where the PEDIFRI Put Option has been exercised), the total number of Accepted Shares plus the number of shares in RECOLETOS held by PEDIFRI at the date of the Notarial Deed; or (ii) (where the PEDIFRI Put Option has not been exercised), the total number of Accepted Shares; "DISPOSAL" means any sale, transfer or any other disposal, whether for cash or otherwise; "FIRST UPSIDE PERIOD" means the period commencing on the date of this Agreement and ending at 23:59 (Madrid time) on the date which is 12 calendar months after the date for settlement pursuant to the Offer; "SECOND UPSIDE PERIOD" means the period commencing at the end of the First Upside Period and ending at 23:59 (Madrid time) on the date which is 6 calendar months thereafter; "RELEVANT PARTY" means: (i) OFFEROR or any subsidiary of OFFEROR; (ii) any person (which term in this Agreement includes any body corporate or other legal entity as well as any individual) which holds any interest in OFFEROR, whether: (A) directly; or (B) indirectly through any other person; provided that no shareholder in BANESTO or any holding company of BANESTO (where such person would, but for this proviso, be a Relevant Party solely by virtue of its shareholding in BANESTO or any holding company of BANESTO) shall be a Relevant Party; and (iii) (while any person within (i) or (ii) retains any interest (direct or indirect) in the shares of RECOLETOS), RECOLETOS or any subsidiary of RECOLETOS. "RECOLETOS INTEREST" means: (i) any interest in the RECOLETOS Shares; CONFORMED COPY (ii) any interest in any Relevant Party Shares; (iii) any interest in the RECOLETOS Assets, and "INTEREST" for these purposes means an interest of any type, whether legal or beneficial, conditional or absolute, joint or sole and including (without limitation): (A) any option to acquire; (B) any subscription, conversion or exchange rights into; (C) any interest held through or pursuant to a trust or similar arrangement in respect of; (D) any arrangement giving the ability to exercise voting rights attaching to or to receive the economic benefits deriving from; (E) any agreement, conditional or otherwise, to acquire or to call for the delivery of; in each case, any of the RECOLETOS Shares, Relevant Party Shares and RECOLETOS Assets; and (F) any agreement, conditional or otherwise, to acquire any of the interests falling within (A) to (E) above, both inclusive; "RECOLETOS SHARES" means the shares in the capital of RECOLETOS from time to time; "RELEVANT PARTY SHARES" means any shares (other than RECOLETOS Shares) or units in the capital of or participations in (or any other form of entitlement to share in assets on a dissolution, winding up or other termination of), in each case, any Relevant Party (other than a Relevant Party who is an individual); "RECOLETOS ASSETS" means the assets of any kind from time to time of RECOLETOS and its subsidiaries from time to time or of any of them including (without limitation) real estate, intellectual property, know-how, equipment, machinery, stock, debtors, the benefit of contracts, shares and other securities, goodwill, information and claims; "ACCEPTING SHAREHOLDERS" means the shareholders of RECOLETOS who accept the Offer; "UPSIDE AMOUNT" means: (i) in the case of a Disposal for cash or cash equivalent of the full beneficial interest in any RECOLETOS Share(s) (where there has been no change to the denomination or number of RECOLETOS Shares in issue from those existing at the date of this Agreement), an amount which is equal to: CONFORMED COPY C% (P x (A-B)) where, in each such case: C = 80 where the relevant Disposal takes place in the First Upside Period; or 50 where the relevant Disposal takes place in the Second Upside Period; P = the number of RECOLETOS Shares disposed of; A = the amount of the consideration received or receivable per RECOLETOS Share in respect of that disposal; and B = the Trigger Price. (ii) in the case of a Disposal for cash or cash equivalent of the full beneficial interest in a RECOLETOS Asset, then for the purpose of the calculation of any Upside Amount, the RECOLETOS Share Equivalent of that RECOLETOS Asset shall first be determined as follows: (A) the EBITDA generated by the business or businesses attributable to that RECOLETOS Asset as a percentage of the consolidated EBITDA generated by the whole of the RECOLETOS business shall be calculated by the Independent Assessor by reference to the most recently published audited consolidated annual financial statements of RECOLETOS and its subsidiaries and also (where no separate EBITDA attributable to such business is specifically stated in any such audited accounts of RECOLETOS for that period) such other factors (including individual subsidiaries' accounts or statements for divisions of the business) as the Independent Assessor, in its absolute discretion, thinks fit to determine such EBITDA); (B) that percentage is then applied to the total number of RECOLETOS Shares in issue at the time of settlement of the Offer; (C) this then gives a number which is the RECOLETOS Share Equivalent of the RECOLETOS Asset the subject of the Disposal and this number shall be P for the purposes of the formula in (i) above; (D) the amount for the purposes of A in that formula shall be the total consideration received or receivable in aggregate in respect of the relevant Disposal of the RECOLETOS Asset divided by the RECOLETOS Share Equivalent for the relevant RECOLETOS Asset. (iii) in the case of any other Disposal of a RECOLETOS Interest, the amount calculated by the Independent Assessor (using as its reference point the basis of calculation of Upside Amount in the circumstances referred to in (i) above or in the case of a Disposal of any interest in a RECOLETOS Asset, in (ii) above, but adjusting for such factors as the Independent Assessor (in its absolute discretion) thinks fit in the actual circumstances) as being (in the CONFORMED COPY case of a Disposal within the First Upside Period) 80% or (in the case of a Disposal within the Second Upside Period) 50% of the difference between: (A) the value of the consideration actually received or actually receivable in respect of the relevant Disposal; and (B) what would have been generated by the relevant Disposal of the relevant RECOLETOS Interest had the underlying RECOLETOS Shares been valued at the Trigger Price for the purposes of or in the context of the relevant Disposal and (in the case of a Disposal of a RECOLETOS Asset) had the value of all of RECOLETOS's business been valued at the multiple of the Trigger Price and the total number of RECOLETOS Shares in issue at the date for settlement pursuant to the Offer; "TRIGGER PRICE" means Euro 7.50; and "INDEPENDENT ASSESSOR" means LAZARD or any replacement appointed in accordance with clause 9.9. 9.3. Where any Disposal of a RECOLETOS Interest takes place otherwise than on arms length market terms, any subsequent Disposal (whether direct or by means of a Disposal of any interest in any entity which itself has an interest, direct or indirect, in the relevant RECOLETOS Interest) shall, if it falls within the Relevant Period, be treated as a Disposal of a RECOLETOS Interest for the purposes of sub-clause 9.2 above even though the Disposal would not, in such circumstances, be by a Relevant Party. 9.4. In calculating the amount of the consideration received or receivable in respect of the Disposal of a RECOLETOS Interest, the relevant amount shall be adjusted where there has been any payment or declaration of any dividend or where there has been any other distribution or any return of shareholders funds (including through share buy-backs) in the period from and including the date for settlement pursuant to the Offer to and including the date of the relevant Disposal of a RECOLETOS Interest so as to reflect the value which RECOLETOS would have had if no such dividend had been paid (or declared) or other distribution or return of shareholders funds been made. 9.5. Where any Disposal of a RECOLETOS Interest is of an interest (for example, an option) entitling the holder of that interest to acquire a further RECOLETOS Interest(s), then the acquisition of such further RECOLETOS Interest(s) shall be treated as the Disposal(s) of a RECOLETOS Interest falling within sub-clause 9.2 above even though such acquisition of further RECOLETOS Interest(s) itself falls outside the Relevant Period. Similarly, if any Disposal of such a RECOLETOS Interest falls within the First Upside Period, then even though the acquisition of the further RECOLETOS Interest(s) pursuant to that first Disposal falls inside the Second Upside Period or falls outside the Relevant Period, such acquisition of the further RECOLETOS Interest(s) shall be treated as falling within the First Upside Period. CONFORMED COPY 9.6. OFFEROR shall make any payment due to an Accepting Shareholder under sub-clause 9.2 above within ten (10) Business Days of receipt by the Relevant Party of the consideration in relation to the relevant Disposal of the RECOLETOS Interest (or, where the calculation of the Upside Amount has to be done by the Independent Assessor, within ten (10) Business Days of the Independent Assessor completing that calculation). Where the consideration is received in instalments OFFEROR shall pay the proportionate part as above following receipt of each instalment. The fact that receipt of consideration may fall outside the Relevant Period shall not relieve OFFEROR from its payment obligations to Accepting Shareholders where the Disposal of the RECOLETOS Interest to which the consideration relates took place within the Relevant Period or is a Disposal to which sub-clause 9.5 above applies. 9.7. The provisions of sub-clause 9.2 above shall not apply to Disposals of interests in RECOLETOS Assets where such Disposals: (i) are of a revenue nature and are made in the ordinary course of business of RECOLETOS or the relevant RECOLETOS subsidiary; or (ii) are Disposals where the aggregate RECOLETOS Share Equivalent of all such Disposals (calculated as referred to in sub-clause 9.2 above) does not, over the course of the Relevant Period, exceed 25% of the total RECOLETOS Shares in issue at the time of settlement of the Offer (but so that: (A) any further Disposal(s) pursuant to an initial disposal within the terms of sub-clause 9.5 above shall be treated as a Disposal within the Relevant Period for these purposes; and (B) the value of any Disposal involving instalment or deferred payment(s) outside the Relevant Period shall be calculated by reference to the discounted value of the payments on the date of the Disposal (as determined by the Independent Assessor)). 9.8. The provisions of sub-clause 9.2 above shall not apply to any Disposal of a RECOLETOS Interest to the extent that: (i) such RECOLETOS Interest is an interest in the RECOLETOS Shares or any interest in any Relevant Party Shares; and (ii) that Disposal, together with all other such Disposals up to and including that date would not amount to the disposal of interests (direct or indirect) of an aggregate of more than a 1% of the RECOLETOS Shares. 9.9. The following provisions shall apply in relation to the Independent Assessor: (i) OFFEROR shall pay the fees of the Independent Assessor. (ii) If the Independent Assessor delays or becomes unwilling or incapable of acting then the Parties shall request as soon as possible that the President of CONFORMED COPY the Spanish Institute of Financial Analysts (Presidente del Instituto Espanol de Analistas Financieros) nominate another in its place and the Parties shall co-operate to appoint such nominee as soon as possible after such nomination. The nominee shall, upon acceptance of its appointment become the Independent Assessor for the purposes of this clause 9. (iii) The Independent Assessor shall act as an expert and not as an arbitrator and its decision shall (in the absence of manifest error) be final and binding. (iv) The Parties shall co-operate fully with any request for documents and/or information reasonably requested by the Independent Assessor and the Parties undertake to use all reasonable endeavours to procure that other relevant persons subject to such requests do the same. (v) The Independent Assessor shall be appointed on terms that it carry out any analysis and calculation it is required to do as promptly as reasonably possible and shall notify both OFFEROR and PEARSON of its conclusions as soon as possible after the conclusion of its analysis and calculation. (vi) To the extent required by the CNMV, the Independent Assessor shall confirm to it any calculation of Upside Amount to be made under this clause 9. 9.10. OFFEROR undertakes to notify PEARSON and the Independent Assessor immediately upon OFFEROR or any of its officers becoming aware of any Disposal of a RECOLETOS Interest. 9.11. Subject as provided in clause 9.12, any subscription for new shares, units, participations or other equivalent rights in any Relevant Party at a price which reflects a value per existing RECOLETOS share (assuming no change to the number or denomination of RECOLETOS Shares in issue as at the date of settlement of the Offer and no return of capital) of more than the Trigger Price shall be treated as a Disposal of a RECOLETOS Interest for the purposes of clause 9.2 9.12. Any investment by new investors in OFFEROR (and any subsequent transfer by such new investor to another investor at an identical price within the period referred to below) which takes place in the period commencing on the date of this Agreement and ending at 23:59 (Madrid time) on the date which is four calendar months after the date for settlement pursuant to the Offer shall not give rise to an Upside Amount by virtue only of the fact that such investors pay a price for their shares in OFFEROR which includes a premium which would value the current number of RECOLETOS Shares above the Trigger Price, the purpose of such premium being to balance the subscription or purchase of shares in OFFEROR by RECOLETOS management (at prices which would value the current number of RECOLETOS Shares lower than the Trigger Price) under a management incentive scheme, provided that: CONFORMED COPY (i) the aggregate of such premiums shall not exceed the total of such shortfall on new shares of OFFEROR representing no more than 5% of the total share capital of OFFEROR as at the date of this Agreement; (ii) the provisions of this clause 9.12 shall apply only to the initial transfer to such a new investor (and any subsequent transfer by such new investor to another investor at an identical price within the period referred to above) and shall not apply to any subsequent transfers by any of them; (iii) OFFEROR shall procure that any public announcement by any such new investor (or any such transferee) shall require the prior written consent (not to be unreasonably withheld) of PEARSON and refer to the price as being the Offer Price plus a component for fees and a component related to the effective funding of a management incentive scheme rather than a specific figure. 9.13. The provisions of clause 9.2 above shall not apply to the following Disposals of RECOLETOS Interests: (i) Disposals to persons within the same group as the transferor provided that if any such person ceases to be the subsidiary company or holding company of the transferor the ceasing to be such a company shall itself be a Disposal of the relevant RECOLETOS interest; (ii) Disposals mortis causa where the transferor is an individual; (iii) Disposals for no consideration; (iv) Disposals involving the buy back and redemption by RECOLETOS of its own shares; and (v) a merger of OFFEROR and RECOLETOS by means of the Spanish process of fusion, provided that in this case in this clause 9 RECOLETOS Assets shall be read as OFFEROR Assets and any reference to RECOLETOS Shares shall be read as with appropriate changes to take account of the fusion into OFFEROR, provided that the provisions of sub-clause 9.2 above will apply to subsequent Disposals of RECOLETOS Interests by the relevant transferees and to any disposals of interests in such transferees (unless such subsequent Disposals are in the circumstances specified above). 9.14. Notwithstanding anything to the contrary in this clause 9, the maximum amount of Deferred Contingent Offer Consideration payable in respect of each Accepted Share shall not exceed Euro 10 in aggregate. 9.15. The provisions of clause 9.2 shall not apply to any Disposal of RECOLETOS Shares where the disposal in question is in exercise by a creditor of OFFEROR of CONFORMED COPY security rights over the RECOLETOS Shares pursuant to any financing to OFFEROR, including call option rights taken as security. 10. LIABILITY 10.1. Save as otherwise provided herein, each Party shall be liable to the other Party for any damages, losses, costs and expenses caused to or incurred by the latter arising out of or resulting from any breach or infringement by the former Party of the obligations assumed under this Agreement. 10.2. Where one of the Parties considers that a breach or infringement of this Agreement (hereinafter, a "BREACH") has occurred which is attributable to the other Party, the former shall serve written notice on the latter (hereinafter, a "NOTICE OF DISPUTE"), and, if the Breach may be remedied, the Party in breach shall have to do so within a period of five (5) Business Days, without prejudice to its liability vis-a-vis the other Party for any damages and prejudices caused by the Breach. In the event that it is not possible to remedy the Breach or should the Party in breach fail to do so within such period, the Party in breach shall be liable vis-a-vis the other Party for damages and prejudice caused by the Breach. 11. COSTS AND EXPENSES Each of the Parties shall bear its own costs, legal and advisory expenses, charges and other expenses (including taxation) arising out of the negotiation, preparation, execution and performance of this Agreement. OFFEROR shall pay all costs and expenses related to the preparation, filing, completion and settlement of the Offer, including in relation to obtaining the Authorization and any other regulatory clearances. 12. NOTICES 12.1. All notices or communications between the Parties with respect to this Agreement must be made in writing by (i) hand delivery, (ii) registered mail with acknowledgement of receipt, (iii) courier service, (iv) facsimile, or (v) e-mail, in any case sent to the addresses or numbers set forth in sub-clause 12.2 below. 12.2. The contact details of each Party for all notices to be made in connection with this Agreement are the following: For PEARSON: Address: 80 Strand, London WC2R 0RL, England Attention: Marjorie Scardino (CEO) and Robert Dancy (General Counsel) Copy: The Company Secretary Facsimile: +44 20 7010 6633 and +44 20 7010 6060 CONFORMED COPY E-mail: marjorie.scardino@pearson.com and robert.dancy@pearson.com For OFFEROR: Address: C/ Carbonero y Sol, n(degrees) 12, Madrid, Spain Attention: Jose Garay Facsimile: +34 91 411 69 89 E-mail: fmanagers@fmanagers.com 12.3. Any notice sent to the above-referred addresses shall be deemed to have been received by the addressee, except if prior to the sending of such notice the addressee had notified the sender of a change of address. 13. GOVERNING LAW, DISPUTE RESOLUTION, ENGLISH LANGUAGE AND MISCELLANEOUS 13.1. This Agreement shall be governed by the laws of Spain. 13.2. Any dispute under this Agreement which has not been resolved between the Parties within thirty (30) Business Days of service of a Notice of Dispute may be referred by either Party to and, following any such referral, shall be finally resolved by arbitration under the Rules of Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with those Rules. The seat of arbitration shall be Paris, France. The language to be used in the arbitral proceedings shall be English. The Parties shall have the right to seek interim relief from a court of competent jurisdiction, at any time before and after the arbitrator has been appointed, up until the arbitrator has made his final award. 13.3. The parties may append to this Agreement or attach this Agreement to documents in Spanish and documents the originals of which are in Spanish, subject always to the following provisions: the language of this Agreement and the transactions envisaged by it is English and all notices, demands, requests, statements, certificates or other documents or communications between the Parties shall be in English unless otherwise agreed. For the avoidance of doubt, the English language version of this agreement shall prevail to the exclusion of any translation of it into any other language. 13.4. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all agreements, understandings, negotiations and discussions, whether written or verbal, between the parties prior to the date hereof. 13.5. The Annexes to this Agreement form an integral part thereof. CONFORMED COPY IN WITNESS WHEREOF, the Parties execute this Agreement in two counterparts, one for each of them, in the place and on the date first above written. PEARSON PLC By /s/ TIMOTHY SCOTT HENDERSON - --------------------------- Mr. Timothy Scott Henderson RETOS CARTERA, S.A. By /s/ JAIME CASTELLANOS BORREGO - ----------------------------- Mr. Jaime Castellanos Borrego EX-8.1 5 u48506exv8w1.txt EX-8.1 . . . EXHIBIT 8.1 LIST OF SIGNIFICANT SUBSIDIARIES

PERCENTAGE INTEREST/ NAME COUNTRY OF INCORPORATION VOTING POWER - ------------------------------------- ------------------------ ------------ Pearson Education Inc. United States 100% Pearson Education Ltd England and Wales 100% NCS Pearson Inc. United States 100% Pearson Longman Inc. United States 100% Pearson Education Holdings Inc. United States 100% PN Holdings Inc. United States 100% The Financial Times Limited England and Wales 100% Financial Times Business Ltd England and Wales 100% Interactive Data Corporation United States 61% Recoletos Grupo de Comunicacion SA Spain 79% Les Echos SA France 100% Penguin Group (USA) Inc. United States 100% The Penguin Publishing Co Ltd England and Wales 100% Dorling Kindersley Holdings Ltd England and Wales 100% Pearson Inc. United States 100% Pearson Holdings Inc. United States 100% Pearson Overseas Holdings Ltd England and Wales 100% Pearson International Finance Ltd England and Wales 100% West Thurrock Estates Ltd England and Wales 100% Pearson Capital Company LLC United States 100% Pearson Finance Partnership (Bermuda) Bermuda 100% Testchange Ltd England and Wales 100% Pearson Netherlands BV Netherlands 100% Pearson AG Switzerland 100% Blue Wharf Ltd England and Wales 100% Themescene Ltd England and Wales 100% Pearson Investments BV Netherlands 100% Pearson DBC Holdings Inc. United States 100% Rycade Capital Corporation United States 100% Data Broadcasting Corporation British Virgin Islands 61% - ---------------------------------------------------------------------------------------

EX-10 6 u48506exv10.txt EX-10 EXHIBIT 10 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No.s. 333-66444, 333-45070 and 333-44590) of Pearson plc of our report dated June 27, 2005 relating to the financial statements which appear in this Annual Report on Form 20-F for the year ended December 31, 2004. PricewaterhouseCoopers LLP London, England June 27, 2005 EX-12.1 7 u48506exv12w1.txt EX-12.1 EXHIBIT 12.1 CERTIFICATIONS I, Marjorie Scardino, certify that: 1. I have reviewed this annual report on Form 20-F of Pearson plc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Pearson plc as of, and for, the periods presented in this annual report; 4. Pearson plc's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Pearson plc and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Pearson plc, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of Pearson plc's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and c) disclosed in this annual report any change in Pearson plc's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, Pearson plc's internal control over financial reporting. 5. Pearson plc's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Pearson plc's auditors and the audit committee of Pearson plc's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Pearson plc's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Pearson plc's internal control over financial reporting. Date: June 27, 2005 /s/ Marjorie Scardino - ----------------------------- Marjorie Scardino Chief Executive Officer EX-12.2 8 u48506exv12w2.txt EX-12.2 EXHIBIT 12.2 CERTIFICATIONS I, Rona Fairhead, certify that: 1. I have reviewed this annual report on Form 20-F of Pearson plc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Pearson plc as of, and for, the periods presented in this annual report; 4. Pearson plc's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Pearson plc and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Pearson plc, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of Pearson plc's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and c) disclosed in this annual report any change in Pearson plc's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, Pearson plc's internal control over financial reporting. 5. Pearson plc's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Pearson plc's auditors and the audit committee of Pearson plc's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Pearson plc's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Pearson plc's internal control over financial reporting. Date: June 27, 2005 /s/ Rona Fairhead - ----------------------------- Rona Fairhead Chief Financial Officer EX-13.1 9 u48506exv13w1.txt EX-13.1 EXHIBIT 13.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 20-F of Pearson plc (the "Company") for the fiscal year ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marjorie Scardino, Chief Executive Officer of the Company, certify to my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: June 27, 2005 /s/ Marjorie Scardino ------------------------------------------- Marjorie Scardino Chief Executive Officer EX-13.2 10 u48506exv13w2.txt EX-13.2 EXHIBIT 13.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 20-F of Pearson plc (the "Company") for the fiscal year ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Rona Fairhead, Chief Financial Officer of the Company, certify to my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: June 27, 2005 /s/ Rona Fairhead ------------------------------------------- Rona Fairhead Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----

EX-2.2

                                                                     Exhibit 2.2


                                                               EXECUTION VERSION





                           PEARSON DOLLAR FINANCE PLC
                                    AS ISSUER



                                  PEARSON PLC,
                                  AS GUARANTOR



                                       AND



                              THE BANK OF NEW YORK,
                 AS TRUSTEE, PAYING AGENT AND CALCULATION AGENT





               $350,000,000 4.70% GUARANTEED SENIOR NOTES DUE 2009

               $400,000,000 5.70% GUARANTEED SENIOR NOTES DUE 2014


                                    INDENTURE


                            DATED AS OF MAY 25, 2004

















                       SIDLEY AUSTIN BROWN & WOOD, LONDON






                                TABLE OF CONTENTS




                                                                                                           PAGE
                                                                                                           ----
                                                                                                     
                                                             ARTICLE I
                                            DEFINITIONS AND INCORPORATION BY REFERENCE

Section 1.1           Definitions............................................................................1
Section 1.2           Rules of Construction..................................................................8

                                                            ARTICLE II
                                                            THE NOTES

Section 2.1           Form and Dating........................................................................9
Section 2.2           Execution and Authentication...........................................................9
Section 2.3           Registrar and Paying Agent; Calculation Agent.........................................12
Section 2.4           Paying Agent to Hold Money in Trust...................................................12
Section 2.5           Holder Lists..........................................................................13
Section 2.6           Global Note Provisions................................................................13
Section 2.7           Legends...............................................................................14
Section 2.8           Transfer and Exchange.................................................................14
Section 2.9           Mutilated, Destroyed, Lost or Stolen Notes............................................17
Section 2.10          Cancellation..........................................................................17
Section 2.11          Add On Notes..........................................................................17
Section 2.12          Default Interest......................................................................19
Section 2.13          CUSIP Numbers.........................................................................19

                                                            ARTICLE III
                                                             COVENANTS

Section 3.1           Payment of Notes......................................................................19
Section 3.2           Maintenance of Office or Agency.......................................................20
Section 3.3           Corporate Existence...................................................................20
Section 3.4           Payment of Taxes and Other Claims.....................................................20
Section 3.5           Further Instruments and Acts..........................................................20
Section 3.6           Waiver of Stay, Extension or Usury Laws...............................................20
Section 3.7           Payment of Additional Amounts.........................................................21
Section 3.8           Limitation on Liens...................................................................22
Section 3.9           Reports to Holders....................................................................22

                                                            ARTICLE IV
                                                       TRANSFEREE COMPANY

Section 4.1           Assumption of Obligations.............................................................22
Section 4.2           Transferee Company Substituted for Company............................................23

                                                            ARTICLE V
                                                        SUCCESSOR COMPANY

Section 5.1           Consolidation, Merger and Sale of Assets of the Company...............................23
Section 5.2           Consolidation, Merger and Sale of Assets of the Guarantor.............................24
Section 5.3           Successor Guarantor Substituted for Guarantor.........................................25



                                       i





                                                                                                           PAGE
                                                                                                           ----
                                                                                                     

                                                            ARTICLE VI
                                                  OPTIONAL REDEMPTION OF NOTES

Section 6.1           Optional Tax Redemption...............................................................25
Section 6.2           Optional Redemption...................................................................26
Section 6.3           Election to Redeem....................................................................26
Section 6.4           Notice of Redemption..................................................................26
Section 6.5           Selection of Notes to be Redeemed in Part Pursuant to an Optional Redemption..........27
Section 6.6           Deposit of Redemption Price...........................................................28
Section 6.7           Notes Payable on Redemption Date......................................................28
Section 6.8           Unredeemed Portions of Partially Redeemed Note........................................28

                                                            ARTICLE VII
                                                      DEFAULTS AND REMEDIES

Section 7.1           Events of Default.....................................................................28
Section 7.2           Acceleration..........................................................................30
Section 7.3           Other Remedies........................................................................30
Section 7.4           Waiver of Past Defaults...............................................................31
Section 7.5           Control by Majority...................................................................31
Section 7.6           Limitation on Suits...................................................................31
Section 7.7           Rights of Holders to Receive Payment..................................................32
Section 7.8           Collection Suit by Trustee............................................................32
Section 7.9           Trustee May File Proofs of Claim, etc.................................................32
Section 7.10          Priorities............................................................................32
Section 7.11          Undertaking for Costs.................................................................33

                                                           ARTICLE VIII
                                                              TRUSTEE

Section 8.1           Duties of Trustee.....................................................................33
Section 8.2           Rights of Trustee.....................................................................34
Section 8.3           Individual Rights of Trustee..........................................................35
Section 8.4           Trustee's Disclaimer..................................................................35
Section 8.5           Notice of Defaults....................................................................35
Section 8.6           Reports by Trustee to Holders.........................................................35
Section 8.7           Compensation and Indemnity ...........................................................35
Section 8.8           Replacement of Trustee................................................................36
Section 8.9           Successor Trustee by Merger...........................................................37
Section 8.10          Eligibility; Disqualification.........................................................37
Section 8.11          Preferential Collection of Claims Against Company.....................................38
Section 8.12          Paying Agent and Calculation Agent....................................................38

                                                            ARTICLE IX
                                     SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONIES

Section 9.1           Satisfaction and Discharge............................................................38
Section 9.2           Application by Trustee of Funds Deposited for Payment of Notes........................38
Section 9.3           Repayment of Monies Held by Paying Agent..............................................39
Section 9.4           Return of Monies Held by Trustee and Paying Agent Unclaimed for Two
                      Years.................................................................................39




                                       ii






                                                                                                           PAGE
                                                                                                           ----
                                                                                                     


                                                            ARTICLE X
                                                            AMENDMENTS

Section 10.1          Without Consent of Holders............................................................39
Section 10.2          With Consent of Holders...............................................................40
Section 10.3          Compliance with Trust Indenture Act...................................................41
Section 10.4          Acts of Holders; Record Dates.........................................................41
Section 10.5          Notation on or Exchange of Notes......................................................42
Section 10.6          Trustee to Sign Amendments............................................................42

                                                            ARTICLE XI
                                                            GUARANTEES

Section 11.1          The Guarantees........................................................................42
Section 11.2          Guarantees Unconditional..............................................................43
Section 11.3          Reinstatement.........................................................................43
Section 11.4          Subrogation...........................................................................43

                                                            ARTICLE XII
                                                           MISCELLANEOUS

Section 12.1          Trust Indenture Act Controls..........................................................43
Section 12.2          Notices...............................................................................43
Section 12.3          Communication by Holders with Other Holders...........................................45
Section 12.4          Certificate and Opinion as to Conditions Precedent....................................45
Section 12.5          Statements Required in Certificate or Opinion.........................................45
Section 12.6          Form of Documents Delivered to Trustee................................................45
Section 12.7          Rules by Trustee, Paying Agent and Registrar..........................................46
Section 12.8          Payment on Business Days..............................................................46
Section 12.9          Governing Law, etc....................................................................46
Section 12.10         Successors............................................................................47
Section 12.11         Duplicate and Counterpart Originals...................................................47
Section 12.12         Severability..........................................................................47
Section 12.13         Currency Indemnity....................................................................47
Section 12.14         Benefits of Indenture.................................................................48
Section 12.15         Table of Contents; Headings...........................................................48


EXHIBITS
- --------

Exhibit A              Form of 2009 Notes...................................................................50
Exhibit B              Form of 2014 Notes...................................................................61
Exhibit C              Form of Transfer Certificate for Transfer to QIB.....................................72
Exhibit D              Form of Certificate to be Delivered in Connection with Transfers Pursuant to
                       Regulation S.........................................................................73
Exhibit E              Form of Rule 144 Certification.......................................................75




                                      iii



         This INDENTURE, dated as of May 25, 2004, among Pearson Dollar Finance
plc, a public company incorporated with limited liability under the laws of
England (the "Company"), Pearson PLC, a public company incorporated with limited
liability under the laws of England (the "Guarantor") and The Bank of New York,
a New York banking corporation (the "Trustee"), as Trustee, Paying Agent, and
Calculation Agent in New York.

         Each party agrees as follows for the benefit of the other parties and
for the benefit of the Holders of the Company's 4.70% Guaranteed Senior Notes
due 2009 (the "2009 Notes") and the Company's 5.70% Guaranteed Senior Notes due
2014 (the "2014 Notes") issued hereunder (together with the 2009 Notes, the
"Notes").

                                   ARTICLE I

                   DEFINITIONS AND INCORPORATION BY REFERENCE

Section 1.1       Definitions.

         "Actual Knowledge" means, with respect to the Trustee, actual knowledge
of any Trust Officer of the Trustee, which shall include within its scope any
matter which shall have been notified in writing to the Trustee.

         "Additional Amounts" has the meaning assigned to it in Section 3.7.

          "Add On Note Board Resolutions" means resolutions duly adopted by the
Board of Directors of the Company and delivered to the Trustee in an Officers'
Certificate providing for the issuance of Add On Notes.

         "Add On Note Supplemental Indenture" means a supplement to this
Indenture duly executed and delivered by the Company, the Guarantor and the
Trustee pursuant to Section 2.11 providing for the issuance of Add On Notes.

         "Add On Notes" means any Notes originally issued after the Issue Date
pursuant to Section 2.11, including any replacement Notes as specified in the
relevant Add On Note Board Resolutions or Add On Note Supplemental Indenture
issued therefor in accordance with this Indenture.

          "Affiliate" shall have the meaning provided in Rule 405 of the
Securities Act.

         "Agent Members" has the meaning assigned to it in Section 2.6(b).

         "Authenticating Agent" has the meaning assigned to it in Section
2.2(d).

         "Authorized Agent" has the meaning assigned to it in Section 12.9(d).

         "Bankruptcy Default" means any of the Events of Default specified in
Section 7.1(a)(v) or (vi) (with respect to the dissolution, winding up or
reorganization of the Company or the Guarantor).

         "Bankruptcy Law" means, with respect to any jurisdiction in which the
Guarantor or any of its Principal Subsidiaries (including, without limitation,
the Company) are incorporated, any laws or regulations and any judicial
decisions pertaining to proceedings that are initiated either by an entity or by
creditors thereof seeking a general moratorium in relation to such entity's
debts, to appoint a receiver for such entity, to have such insolvent entity's
assets or businesses sold or distributed among such entity's creditors or to
restructure and reorganize the entity's debts for the benefit of such creditors.


                                       1



         "Board of Directors" means, as to any Person, the board of directors,
management committee or similar governing body of such Person or any duly
authorized committee thereof.

         "Board Resolution" means, with respect to any Person, a copy of a
resolution certified by an Officer or the General Counsel of such Person to have
been duly adopted by the Board of Directors of such Person and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.

         "Business Day" means any day other than a Saturday or Sunday or a day
on which commercial banks and trust companies located in New York City, London
or the Place of Payment with respect to the Notes are authorized or required by
law, regulation or executive order to be closed.

         "Calculation Agent" means the calculation agent appointed by the
Company, who shall initially be The Bank of New York.

         "Capital Employed" means, in respect of the Guarantor and for the
purposes of Section 3.8 herein, the amount of the issued and paid-up share
capital plus or minus: (i) the aggregate amount standing to the credit or debit
of the consolidated reserves (including profit and loss account and any share
premium account), plus (ii) the amount of minority interests in any Subsidiary,
plus (iii) any reserves for deferred tax, plus (iv) all gross borrowings,
whether such borrowing is made within the Group or otherwise, but excluding all
such borrowings other than borrowings within the Group repayable on demand or
repayable within one year, all of the foregoing as included in the Guarantor's
latest published audited consolidated balance sheet or the latest audited
balance sheet of such Subsidiary or pro forma consolidated financial statements,
as the case may be. For the purpose of this definition only, borrowings shall be
construed in accordance with normal accounting principles in the relevant
jurisdiction as adopted from time to time in preparing the relevant companies'
audited financial statements.

         "Certificated Note" means any Note issued in fully-registered
certificated form (other than a Global Registered Note), which shall be
substantially in the form of Exhibit A or Exhibit B, as applicable, with
appropriate legends as specified in Section 2.7 and Exhibit A, in the case of
the 2009 Notes, or Exhibit B, in the case of the 2014 Notes.

         "Code" means the Internal Revenue Code of 1986, as amended.

         "Company" means the party named as such in the introductory paragraph
to this Indenture and its successors and assigns, including any Transferee
Company that becomes such in accordance with Article IV and any Successor
Company that becomes such in accordance with Article V.

         "Company Order" has the meaning assigned to it in Section 2.2(c).

         "Comparable Treasury Issue" means, with respect to any Redemption Date
for any Notes being redeemed, the United States Treasury security selected by an
Independent Investment Banker as having the maturity comparable to the remaining
term of the Notes to be redeemed that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of such Notes.

         "Comparable Treasury Price" means, with respect to any Redemption Date
for any of the Notes being redeemed:

              (i)    the average of three Reference Treasury Dealer Quotations
         for the Redemption Date obtained by the Calculation Agent, after
         excluding the highest and lowest of those Reference Treasury Dealer
         Quotations, or


                                       2



              (ii)   if the Calculation Agent obtains fewer than three Reference
         Treasury Dealer Quotations, the average of all Reference Treasury
         Dealer Quotations obtained.

         "Corporate Trust Office" means the corporate trust office of the
Trustee at which at any particular time its corporate trust business shall be
administered, which office on the date of execution of this Indenture is located
at One Canada Square, 48th floor, London, E14 5AL, England, telephone number +44
207 964 6402, Attention: Alison Mitchell.

         "Default" means an event or condition the occurrence of which is, or
with the lapse of time or giving of notice or both would be, an Event of
Default.

         "Directive" has the meaning assigned to it in Section 3.7(d).

         "Distribution Compliance Period" means, in respect of any Regulation S
Global Note, the 40 consecutive days beginning on and including the later of (a)
the day on which any Notes represented thereby are offered to persons other than
distributors (as defined in Regulation S under the Securities Act) pursuant to
Regulation S and (b) the Issue Date for such Notes.

         "DTC" means The Depository Trust Company, its nominees and their
respective successors and assigns, or such other depositary institution
hereinafter appointed by the Company that is a clearing agency registered under
the Exchange Act.

         "Event of Default" has the meaning assigned to it in Section 7.1.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "GAAP" means generally accepted accounting practices in the United
Kingdom.

         "Global Registered Note" means any Note issued in fully-registered
book-entry form to DTC (or its nominee), which shall be substantially in the
form of Exhibit A, in the case of the 2009 Notes, or Exhibit B, in the case of
the 2014 Notes, with appropriate legends as specified in Section 2.7 and Exhibit
A or Exhibit B, as applicable.

         "Group" means, together, the Guarantor and its Subsidiaries, including
the Company.

         "Guarantees" mean the unconditional and irrevocable guarantees of the
payment of the principal of, any premium or interest on, and any Additional
Amounts with respect to, each series of the Notes by the Guarantor, as more
fully set forth in Article XI.

         "Guarantor" means the party named as such in the introductory paragraph
to this Indenture and its successors and assigns, including any Successor
Guarantor that becomes such in accordance with Article V.

         "Holder" means the Person in whose name a Note is registered in the
Note Register.

         "Indenture" means this Indenture as amended or supplemented from time
to time.

         "Independent Investment Banker" means one of the Reference Treasury
Dealers selected by the Trustee in consultation with the Company and the
Guarantor.

         "Interest Payment Date" means June 1 and December 1 in each year,
commencing on December 1, 2004 and ending on the relevant Maturity Date.

         "Issue Date" means May 25, 2004.


                                       3


         "Issue Date Notes" means the Notes originally issued on the Issue Date,
and any replacement Notes issued therefor in accordance with this Indenture.

         "Lien" has the meaning assigned to it in Section 3.8.

         "Maturity Date" with respect to the 2009 Notes means June 1, 2009, and
with respect to the 2014 Notes means June 1, 2014.

         "Non-U.S. Person" means a person who is not a U.S. person, as defined
in Regulation S under the Securities Act.

         "Note Register" has the meaning assigned to it in Section 2.3(a).

         "Noteholder Meeting" means a meeting of Holders of Outstanding Notes.

         "Notes" has the meaning assigned to it in the preamble hereto.

         "2009 Notes" has the meaning assigned to it in the preamble hereto.

         "2014 Notes" has the meaning assigned to it in the preamble hereto.

         "Obligor" of the Notes means the Company, the Guarantor and any other
obligor of the Notes.

         "Officer" means, when used in connection with any action to be taken by
the Company or the Guarantor, as the case may be, the Chairman of the Board, the
Chief Executive Officer, any executive Director of the Company or the Guarantor,
as the case may be, or any authorized representative of such persons.

         "Officers' Certificate" means, when used in connection with any action
to be taken by the Company or the Guarantor, as the case may be, a certificate
signed by an Officer or Officers of the Company or the Guarantor, as the case
may be, that complies with the requirements of Section 10.4 and is delivered to
the Trustee.

         "Opinion of Counsel" means a written opinion of counsel for the Company
or the Guarantor, as the case may be, who may be an employee of or counsel for
the Company or the Guarantor, as the case may be.

         "Optional Redemption" has the meaning assigned to it in Section 6.2.

         "Optional Tax Redemption" has the meaning assigned to it in Section
6.1.

         "Outstanding" means, as of the date of determination, all Notes of a
series theretofore authenticated and delivered under this Indenture, except:

              (i)    Notes theretofore cancelled by the Trustee or delivered to
         the Trustee for cancellation;

              (ii)   Notes, or portions thereof, for whose payment or redemption
         money in the necessary amount has been theretofore deposited with the
         Trustee or any Paying Agent (other than the Company or the Guarantor)
         in trust or set aside and segregated in trust by the Company or the
         Guarantor (if the Company shall act as, or shall authorize the
         Guarantor to act as, Paying Agent) for the Holders of Notes; provided
         that, if the Notes are to be redeemed, notice of such redemption has
         been duly given pursuant to this Indenture or provision therefor
         satisfactory to the Trustee has been made; and



                                       4


              (iii)  Notes which have been surrendered pursuant to Section 2.9
         or in exchange for or in lieu of which other Notes have been
         authenticated and delivered pursuant to this Indenture, other than any
         such Notes in respect of which there shall have been presented to the
         Trustee proof satisfactory to it that such Notes are held by a bona
         fide purchaser in whose hands such Notes are valid obligations of the
         Company;

provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Notes of a series have given any request,
demand, authorization, direction, notice, consent or waiver hereunder, Notes
owned by the Company, the Guarantor or any other obligor upon the Notes or any
Affiliate of the Company, the Guarantor or of such other obligor shall be
disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Notes which a Trust
Officer of the Trustee actually knows to be so owned shall be so disregarded.
Notes so owned which have been pledged in good faith may be regarded as
Outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgee's right so to act with respect to such Notes and that the pledgee is not
the Company, the Guarantor or any other obligor upon the Notes or any Affiliate
of the Company, the Guarantor or of such other obligor.

         "Paying Agent" has the meaning assigned to it in Section 2.3(a).

         "Person" means an individual, partnership, corporation, limited
liability company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof, or any other entity.

         "Place of Payment" means, with respect to a Note, the place or places
where the principal of, any premium and interest on, and any Additional Amounts
with respect to, the Notes are payable as specified in the Notes.

         "Principal Subsidiary" means any Subsidiary at any relevant time of the
Guarantor: (a) whose Capital Employed or unconsolidated profit before tax and
extraordinary items, calculated by reference to such Subsidiary's latest audited
financial statements, is 10% or more of the Group's consolidated Capital
Employed or consolidated profit before tax and extraordinary items, as the case
may be, calculated by reference to the latest audited financial statements of
the Group, provided that if a Subsidiary itself has Subsidiaries, the reference
above to Capital Employed of such Subsidiary shall be construed as a reference
to the consolidated Capital Employed of such Subsidiary and its Subsidiaries, or
(b) to which is transferred the whole or substantially the whole of the assets
and undertakings of a Subsidiary which immediately prior to such transfer is a
Principal Subsidiary, provided that the transferor Subsidiary shall upon such
transfer forthwith cease to be a Principal Subsidiary and the transferee
Subsidiary shall cease to be a Principal Subsidiary pursuant to this paragraph
(b) on the date on which the audited consolidated financial statements of the
Group for the financial period current at the date of such transfer are
published, but such transferor Subsidiary or such transferee Subsidiary may be a
Principal Subsidiary on or at any time after such date by virtue of the
provisions of paragraph (a) above, provided that references to the audited
consolidated financial statements of any Subsidiary shall be construed as
references to the audited consolidated financial statements of such Subsidiary
and its subsidiaries for the relevant financial period if such audited
consolidated financial statements were produced (or, if no such audited
consolidated financial statements were produced, to unaudited consolidated
financial statements produced on the basis of the relevant audited financial
statements of such Subsidiary and its subsidiaries), and further provided that
if a Subsidiary is acquired after the end of the financial period to which the
latest audited consolidated financial statements relate, references to such
audited consolidated financial statements for the purpose of the calculations
above shall, until consolidated financial statements for the financial period in
which the acquisition is made have been prepared and audited, be deemed to refer
to such first-mentioned financial statements as if such Subsidiary had been
shown in such financial statements by reference to its then latest relevant
audited financial statements, adjusted as deemed appropriate by the Guarantor's
auditors. The term "Principal Subsidiary" shall also include the Company.


                                       5


         "Private Placement Legend" has the meaning assigned to it in Section
2.7.

         "Purchase Agreement" means the purchase agreement, dated as of May 18,
2004, between the Company, the Guarantor and ANZ Securities, Inc., Banc of
America Securities LLC, Deutsche Bank Securities Inc. and JP Morgan Chase
Securities Inc. as initial purchasers.

         "QIB" means any "qualified institutional buyer" (as defined in Rule
144A under the Securities Act).

         "Qualified Majority" means a vote of a majority of the aggregate
principal amount of the applicable series of Notes at a Noteholder Meeting at
which more than one-half of the aggregate principal amount of the Outstanding
Notes of such series are represented or voting pursuant to a written instrument;
provided, however, that if representation, including representation pursuant to
a written instrument, of the applicable series of Notes does not reach a
majority of the aggregate principal amount of the Outstanding Notes of such
series at the initial Noteholder Meeting, a Qualified Majority will nonetheless
exist if at a second Noteholder Meeting a majority vote is cast with respect to
the aggregate principal amount of the Outstanding Notes of such series
represented and voting at such meeting, provided that such amount voting at such
meeting shall not be less than 25% in aggregate principal amount of the
Outstanding Notes of such series at such date.

         "Record Date" means any of the dates indicated under the heading
"Record Dates" on the face of any of the Global Registered Notes.

         "Redemption Date" means, with respect to any redemption of the Notes of
such series, the date of redemption with respect thereto.

         "Reference Treasury Dealer" means Banc of America Securities LLC,
Deutsche Bank Securities Inc. and JP Morgan Chase Securities Inc. If any
Reference Treasury Dealer ceases to be a primary U.S. government securities
dealer, the Trustee will in consultation with the Company and the Guarantor
substitute another primary U.S. government securities dealer for that dealer.

         "Reference Treasury Dealer Quotations" means, with respect to any
Redemption Date, the average, as determined by the Calculation Agent, of the bid
and asked prices for the Comparable Treasury Issue (expressed in each case as a
percentage of its principal amount) quoted to the Calculation Agent by that
Reference Treasury Dealer at 5:00 p.m., New York City time, on the third
Business Day preceding the Redemption Date.

         "Registrar" has the meaning assigned to it in Section 2.3(a).

         "Regulation S" means Regulation S under the Securities Act or any
successor regulation.

         "Regulation S Global Note" has the meaning assigned to it in Section
2.1(e).

         "Relevant Date" means, in relation to any Note, the later of (a) the
date on which the payment of an Additional Amount in question first becomes due,
and (b) if the full amount of the monies payable has not been duly received in
New York by the Paying Agent on or prior to such due date, Relevant Date means
the date on which the full amount of such monies have been so received, provided
notice to that effect is duly given to the holders of the Notes in the manner
set forth in Section 12.2.

         "Relevant Indebtedness" means any indebtedness for borrowed money which
is in the form of, or represented or evidenced by, bonds, notes, debentures,
loan stocks, depositary receipts or other securities issued otherwise than to
constitute or represent advances made by banks and/or other lending
institutions; and at its date of issue is, or is intended by the Company or the
Guarantor to become, quoted or listed on or by, or dealt in or traded on, any
stock exchange, over-the-counter


                                       6



market or other organized securities market (whether or not initially
distributed by means of private placement).

         "Resale Restriction Termination Date" means, (i) for any Restricted
Note (or beneficial interest therein) sold pursuant to Rule 144A, two years (or
such other period specified in Rule 144(k) under the Securities Act) from the
Issue Date or, if any Add On Notes that are Restricted Notes have been issued
before the Resale Restriction Termination Date for any Restricted Notes, from
the latest such original issue date of such Add On Notes and (ii) for any
Restricted Note sold pursuant to Regulation S, 40 days after the later of the
Issue Date with respect to the Restricted Note and the day on which such
Restricted Notes are offered to persons other than distributors (as defined in
Regulation S).

         "Restricted Note" means each Issue Date Note and each related Add On
Note until the Resale Restriction Termination Date with respect thereto.

         "Rule 144" means Rule 144 under the Securities Act (or any successor
rule).

         "Rule 144A" means Rule 144A under the Securities Act (or any successor
rule).

         "Rule 144A Global Note" has the meaning assigned to it in Section
2.1(d).

         "SEC" means the United States Securities and Exchange Commission.

         "Securities Act" means the Securities Act of 1933, as amended.

         "Special Record Date" has the meaning assigned to it in Section 2.12.

         "Subsidiary" means one of the Guarantor's subsidiaries within the
meaning of Section 736 of the United Kingdom Companies Act 1985, as modified or
re-enacted from time to time, and any orders or regulations made under that
Section.

         "Successor Company" has the meaning assigned to it in Section 5.1(a).

         "Successor Guarantor" has the meaning assigned to it in Section 5.2(a).

         "Tax-Free Exchange" means that, in connection with any proposed
transfer and assumption of indebtedness under either series of Notes of the type
envisaged by Article IV of this Indenture, (i) no gain or loss will be
recognized by Holders of such Notes for United States federal income tax
purposes and no capital gain will arise for United Kingdom tax purposes as a
direct result of such transfer; (ii) no transfer or similar taxes will be
imposed on Holders of such Notes under the laws of the United States or the
United Kingdom as a direct result of such transfer; and (iii) such series of
Notes will continue to be classified as debt and will not be classified as
equity for United States federal income tax purposes.

         "Taxes" has the meaning assigned to it in Section 3.7.

         "TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended, as in effect on the date of this Indenture (except as otherwise
provided in this Indenture).

         "Transferee Company" has the meaning assigned to it in Section 4.1.

         "Treasury Rate" means, with respect to any Redemption Date for Optional
Redemption:

              (a) the yield for the maturity corresponding to the Comparable
Treasury Issue under the heading that represents the average for the immediately
preceding week, appearing in the most recently published statistical release
designated "H.15(519)" or any successor publication that is


                                       7



published weekly by the Board of Governors of the Federal Reserve System and
that establishes yields on actively traded United States Treasury securities
adjusted to constant maturity under the caption "Treasury Constant Maturities,"
provided, that if no maturity is within three months before or after the
relevant Maturity Date for the Notes being redeemed the yields for the two
published maturities most closely corresponding to the Comparable Treasury Issue
will be determined and the Treasury Rate shall be interpolated or extrapolated
from those yields on a straight line basis, rounding to the nearest month; or

              (b) if the release referred to in (a) (or any successor release)
is not published during the week preceding the calculation date or does not
contain the yields referred to above, the rate per annum equal to the
semi-annual equivalent yield to maturity of the Comparable Treasury Issue,
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price for
that Redemption Date, as calculated on the third Business Day preceding the
Redemption Date.

         "Trustee" means the Person named as such in the introductory paragraph
of this Indenture until a successor replaces it in accordance with the terms of
this Indenture and, thereafter, means the successor.

         "Trust Officer" means, when used with respect to the Trustee, any vice
president, assistant vice president, assistant treasurer, trust officer or any
other officer of such Trustee customarily performing corporate trust functions
on behalf of the Trustee and also means, with respect to a particular corporate
trust matter, any other officer to whom such matter is referred because of such
person's knowledge of and familiarity with the particular subject and who shall
have direct responsibility for the administration of this Indenture.

         "U.S. Government Securities" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.

         "U.S. dollars" and "U.S.$" mean the lawful currency of the United
States of America that as at the time of payment shall be legal tender for the
payment of public and private debts.

         All TIA terms used in this Indenture that are defined by the TIA,
defined in the TIA by reference to another statute or defined by SEC rule have
the meanings assigned to them by such definitions.

         Section 1.2   Rules of Construction. Unless the context otherwise
requires:

         (a)  a term has the meaning assigned to it in this Indenture;

         (b)  an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;

         (c)  "or" is not exclusive;

         (d)  "including" means including without limitation;

         (e)  words in the singular include the plural and words in the plural
include the singular;

         (f)  references to the payment of principal of any Notes shall include
applicable premium, if any;


                                       8







              (g) references to payments of interest on any Notes shall include
Additional Amounts pursuant to Section 3.7, if any; and

              (h) references to England or to English law shall be deemed to be
a reference to the jurisdiction of incorporation of the Company and the
Guarantor or the law of the jurisdiction of incorporation of the Company or the
Guarantor in the event the Company or the Guarantor, as the case may be, is no
longer incorporated under the laws of England.

                                   ARTICLE II

                                    THE NOTES

         Section 2.1  Form and Dating.

                  (a) The Notes shall be issued under this Indenture in two
series in accordance with the requirements of the Purchase Agreement. The Notes
will be issued in fully-registered global form without coupons, and only in
denominations of U.S.$1,000 and any integral multiples thereof in excess
thereof. The Notes and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A, in the case of the 2009 Notes, and
Exhibit B, in the case of the 2014 Notes.

                  (b) The terms and provisions of the Notes shall constitute,
and are hereby expressly made, a part of this Indenture and each of the Company
and the Guarantor, by execution and delivery of this Indenture, expressly agrees
to such terms and provisions and to be bound thereby. In the event of an
inconsistency between the terms of the Notes set forth in Exhibit A or Exhibit
B, as applicable, and other terms of this Indenture, the terms set forth in any
part of this Indenture other than in Exhibit A, or Exhibit B, as applicable,
shall govern. Except as otherwise expressly permitted in this Indenture, all
Notes of a series shall be identical in all respects. Notwithstanding any
differences among them, all Notes of a series shall vote and consent together on
all matters as one class.

                  (c) The Notes may have notations, legends or endorsements as
specified in Section 2.7 or as otherwise required by law, stock exchange rule,
DTC rule or usage. The Company and the Trustee shall approve the forms of Notes
and any notation, legend or endorsement on them. Each Note shall be dated the
date of its authentication.

                  (d) Notes originally offered and sold to QIBs in reliance on
Rule 144A will be initially issued in the form of one or more permanent Global
Registered Notes (each, a "Rule 144A Global Note").

                  (e) Notes originally offered and sold outside the United
States of America in accordance with Regulation S under the Securities Act will
be initially issued in the form of one or more permanent Global Registered Notes
(each, a "Regulation S Global Note").

         Section 2.2  Execution and Authentication.

                  (a) Any Officer shall sign the Notes for the Company, which
may be via facsimile. If an Officer whose signature is on a Note no longer holds
that office at the time the Trustee authenticates the Note, the Note shall be
valid nevertheless.

                  (b) A Note shall not be valid or enforceable unless and until
an authorized signatory of the Trustee, upon Company Order, authenticates the
Note substantially in the form of the Trustee's certificate of authentication
provided for in Section 2.2(d) hereof. The signature of the Trustee on a Note
shall be conclusive evidence that such Note has been duly and validly
authenticated and issued under this Indenture.


                                       9



                  (c) At any time and from time to time after the execution and
delivery of this Indenture, the Trustee shall authenticate and make available
for delivery Notes upon a written order of the Company signed by an Officer (the
"Company Order"). A Company Order shall specify the amount of the Notes to be
authenticated, the applicable series and the date on which the original issue of
Notes is to be authenticated.

                  (d) The Trustee may appoint an agent or agents with respect to
the Notes which shall be authorized to act on behalf of the Trustee to
authenticate Notes issued upon original issue and upon exchange, registration of
transfer or partial conversion or partial redemption thereof or pursuant to
Section 6.8 (an "Authenticating Agent"), and Notes so authenticated shall be
entitled to the benefits of this Indenture and shall be valid and enforceable
for all purposes as if authenticated by the Trustee hereunder. Wherever
reference is made in this Indenture to the authentication and delivery of Notes
by the Trustee or the Trustee's certificate of authentication, such reference
shall be deemed to include authentication and delivery on behalf of the Trustee
by an Authenticating Agent and a certificate of authentication executed on
behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent
shall be acceptable to the Company and the Guarantor and shall at all times be
either (i) a branch of the Trustee or (ii) a Person organized and doing business
under the laws of the United States of America, any State thereof or the
District of Columbia, authorized under such laws to act as Authenticating Agent,
having a combined capital and surplus of not less than U.S.$50,000,000 and
subject to supervision or examination by any federal or state authority in the
United States. If such Authenticating Agent publishes reports of condition at
least annually, pursuant to law or to the requirements of said supervising or
examining authority, then for the purposes of this Section, the combined capital
and surplus of such Authenticating Agent shall be deemed to be its combined
capital and surplus as set forth in its most recent reports of condition so
published. If at any time an Authenticating Agent shall cease to be eligible in
accordance with the provisions of this Section, such Authenticating Agent shall
resign immediately in the manner and with the effect specified in this Section.

         Any Person into which an Authenticating Agent may be merged or with
which it may be consolidated, or any Person resulting from any merger or
consolidation to which such Authenticating Agent shall be a party, or any Person
succeeding to the corporate agency or corporate trust business of an
Authenticating Agent, shall continue to be an Authenticating Agent without the
execution or filing of any paper or any further act on the part of the Trustee
or the Authenticating Agent, provided such Person shall be otherwise eligible
under this Section.

         An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee; to the Company and the Guarantor. The Trustee may at any
time terminate the agency of an Authenticating Agent by giving written notice
thereof to such Authenticating Agent, the Company and the Guarantor. Upon
receiving such a notice of resignation or upon such a termination, or in case at
any time such Authenticating Agent shall cease to be eligible in accordance with
the provisions of this Section, the Trustee may appoint a successor
Authenticating Agent which shall be acceptable to the Company and the Guarantor
and shall give notice of such appointment in the manner provided in Section 12.2
to all Holders of Notes with respect to which such Authenticating Agent will
serve. Any successor Authenticating Agent upon acceptance of its appointment
hereunder shall become vested with all the rights, powers and duties of its
predecessor hereunder, with like effect as if originally named as an
Authenticating Agent. No successor Authenticating Agent shall be appointed
unless eligible under the provisions of this Section.

         Each of the Company and the Guarantor agrees to pay to each
Authenticating Agent from time to time reasonable compensation for its services
under this Indenture.

         If an appointment is made pursuant to this Section, the Notes of a
series may have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternative certificate of authentication in the following
form:



                                       10


         "This is one of the [__] [__] Notes referred to in the within-mentioned
Indenture.

                                                   The Bank of New York,
                                                   as Trustee

                                                   By:  ________________________
                                                   as Authenticating Agent


                                                   By:  ________________________
                                                   Authorized Signatory
         Date:  ___________________"

         If any of the Notes of a series may not be originally issued at one
time, and if the Trustee does not have an office capable of authenticating Notes
upon original issuance located in a Place of Payment where the Company wishes to
have Notes authenticated upon original issuance, the Trustee, if so requested by
the Company in writing (which writing need not be an Officers' Certificate or be
accompanied by an Opinion of Counsel), shall appoint in accordance with this
Section an Authenticating Agent having an office in a Place of Payment
designated by the Company with respect of such Notes.

                  (e) In case the Company:

                      (i)  shall be consolidated with or merged into any other
                  Person,

                     (ii)  shall convey, transfer, lease or otherwise dispose of
                  its properties and assets substantially as an entirety, or

                     (iii) shall transfer its obligations in respect of the 2009
                  Notes or the 2014 Notes in accordance with Articles IV or V of
                  this Indenture.

and the Successor Company or Transferee Company, as the case may be, resulting
from such consolidation, or surviving such merger, or which shall have received
a conveyance, transfer, lease or other disposition as aforesaid, shall assume
the rights, responsibilities and obligations of the Company pursuant to Article
IV or Article V, as the case may be, any of the Notes authenticated or delivered
prior to such transaction may, from time to time, at the request of the
Successor Company or Transferee Company, as the case may be, be exchanged for
other Notes executed in the name of the Successor Company or Transferee Company,
as the case may be, with such changes in phrasing and form as may be appropriate
(but which shall not affect the rights or duties of the Trustee), but otherwise
identical to the Notes surrendered for such exchange and of like principal
amount; and the Trustee, upon Company Order of the Successor Company or
Transferee Company, as the case may be, shall authenticate and deliver Notes as
specified in such order for the purpose of such exchange. If Notes shall at any
time be authenticated and delivered in any new name of a Successor Company or
Transferee Company, as the case may be, pursuant to this Section 2.2 in exchange
or substitution for or upon registration of transfer of any Notes, such
Successor Company or Transferee Company, as the case may be, at the option of
the Holders of Notes but without expense to them, shall provide for the exchange
of all Notes at the time Outstanding for Notes of the same series authenticated
and delivered in such new name.

         Section 2.3  Registrar and Paying Agent; Calculation Agent.

                  (a) The Company shall (and the Guarantor shall cause the
Company to) cause to be maintained an office or agency in the Borough of
Manhattan, City of New York, where Global Registered Notes and Certificated
Notes may be presented for registration of transfer or for exchange (a
"Registrar"), for the service of notices and demands to or upon the Company and
the Guarantor in


                                       11




respect of the Notes and this Indenture, and where Notes may be presented for
payment (a "Paying Agent"). The Registrar shall keep a register of the Global
Registered Notes and Certificated Notes and of their transfer and exchange (the
"Note Register") and shall maintain such Note Register outside the United
Kingdom on behalf of the Company and the Guarantor. The Company may have one or
more co-Registrars and one or more additional Paying Agents. The term "Paying
Agent" includes any additional Paying Agent. The Company and the Guarantor shall
inform the Trustee in writing of any appointment or payment with respect to the
Notes or the Guarantees made to any Paying Agent or co-Registrar.

                  (b) The Company and the Guarantor shall enter into an
appropriate agency agreement with any Registrar, Paying Agent or co-Registrar
not a party to this Indenture. The agreement shall implement the provisions of
this Indenture that relate to such agent. The Company and the Guarantor shall
notify the Trustee in writing of the name and address of each such agent. If the
Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as
such and shall be entitled to appropriate compensation therefor pursuant to
Section 7.7. The Company may act as, or may authorize the Guarantor to act as,
Paying Agent, Registrar, co-Registrar or transfer agent.

                  (c) The Company initially appoints the Trustee at its
Corporate Trust Office as Registrar and Paying Agent and shall also appoint The
Bank of New York (Luxembourg) in Luxembourg as an additional Paying Agent with
respect to any Certificated Notes, until such time as another Person is
appointed as such. For so long as any Notes are listed on the Luxembourg Stock
Exchange and the rules of the Luxembourg Stock Exchange so require, the Company
shall (and the Guarantor shall cause the Company to) maintain a Paying Agent in
Luxembourg with respect to any Certificated Notes, if any.

                  (d) The Company initially appoints the Trustee as Calculation
Agent. For so long as any Notes are Outstanding, the Company shall maintain a
Calculation Agent.

                  (e) European Council Directive 2003/48/EC or any other
directive implementing the conclusions of the ECOFIN Council meeting of November
26-27, 2000 is brought into force, the Company will ensure that it maintains a
paying agent in a Member State of the European Union that will not be obliged to
withhold or deduct tax pursuant to such Directive.

         Section 2.4 Paying Agent to Hold Money in Trust. | The Company and the
Guarantor shall require each Paying Agent (other than the Trustee) to agree in
writing that such Paying Agent shall hold in trust for the benefit of the
Holders or the Trustee all money held by such Paying Agent for the payment of
principal of or interest on the Notes and shall notify the Trustee in writing of
any Default by the Company or the Guarantor in making any such payment. If the
Company, the Guarantor or an Affiliate of the Company or the Guarantor acts as
Paying Agent, it shall segregate the money held by it as Paying Agent and hold
it as a separate trust account. The Company and the Guarantor at any time may
require a Paying Agent (other than the Trustee) to pay all money held by it to
the Trustee and to account for any funds disbursed by such Paying Agent. Upon
complying with this Section 2.4, the Paying Agent (if other than the Company or
the Guarantor) shall have no further liability for the money delivered to the
Trustee. Upon any proceeding under any Bankruptcy Law with respect to the
Company, the Guarantor or any Affiliate of the Company or the Guarantor, if the
Company, the Guarantor or such Affiliate is then acting as Paying Agent, the
Trustee shall replace the Company, the Guarantor or such Affiliate as Paying
Agent.

         Section 2.5 Holder Lists. | The Trustee shall preserve in as current a
form as is reasonably practicable the most recent list available to it of the
names and addresses of Holders of Notes. If the Trustee is not the Registrar, or
to the extent otherwise required under the TIA, the Company shall furnish to the
Trustee, in writing at least seven Business Days before each Interest Payment
Date and at such other times as the Trustee may request in writing, a list in
such form and as of such date as the Trustee may reasonably require of the names
and addresses of Holders of Notes.


                                       12



         Every Holder of Notes, by receiving and holding the same, agrees with
the Company, the Guarantor and the Trustee that none of the Company, the
Guarantor, the Trustee or any agent of any of them shall be held accountable by
reason of any disclosure of information as to names and addresses of Holders
made pursuant to the Trust Indenture Act.

         Section 2.6  Global Note Provisions. |

                  (a) Each Global Registered Note initially shall (i) be
registered in the name of DTC or the nominee of DTC and (ii) bear the
appropriate legend, as set forth in Section 2.7 and Exhibit A or Exhibit B, as
applicable. The Notes may be represented by one or more Global Registered Notes.
The aggregate principal amount of each Global Registered Note may from time to
time be increased or decreased by adjustments made on the records of the Paying
Agent, as provided in this Indenture.

                  (b) Members of, or participants in, DTC ("Agent Members")
shall have no rights under this Indenture with respect to any Global Registered
Note held on their behalf by DTC and DTC may be treated by the Company, the
Guarantor, the Trustee, the Paying Agent and the Registrar and any of their
agents as the absolute owner and Holder of such Global Registered Note for all
purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent
the Company, the Guarantor, the Trustee, the Paying Agent or the Registrar or
any of their agents from giving effect to any written certification, proxy or
other authorization furnished by DTC or impair, as between DTC and its Agent
Members, the operation of customary practices of DTC governing the exercise of
the rights of an owner of a beneficial interest in any Global Registered Note.
The Holder of a Global Registered Note may grant proxies and otherwise authorize
any Person, including Agent Members and Persons that may hold interests through
Agent Members, to take any action that a Holder is entitled to take under this
Indenture or the Notes.

                  (c) Except as provided below, owners of beneficial interests
in Global Registered Notes will not be entitled to receive Certificated Notes.
Certificated Notes of the same series shall be issued to all owners of
beneficial interests in a Global Registered Note of such series in exchange for
such interests if:

                     (i) DTC, as depositary for the Global Registered Notes, has
         discontinued providing its services as a securities depositary and the
         Company fails to appoint a successor within 90 days of notice of the
         foregoing or if DTC or any successor depositary ceases to be a clearing
         agency registered under the Exchange Act, at a time when DTC or such
         successor depositary is required to be so registered in order to act as
         depositary and a successor securities clearing system with respect to
         such Global Registered Note is not appointed by the Company within 90
         days of such notice, or

                     (ii) an Event of Default has occurred and is continuing
         with respect to the Notes of such series and the Registrar has received
         a written request from the Holder of the Global Registered Note.

In connection with the exchange of an entire Global Registered Note for
Certificated Notes pursuant to this paragraph (c), such Global Registered Note
shall be deemed to be surrendered to the Trustee for cancellation, and the
Company shall execute, and upon Company Order the Trustee shall authenticate and
deliver, to each beneficial owner identified by the Depositary for such Global
Registered Note in exchange for its beneficial interest in such Global
Registered Note, an equal aggregate principal amount of Certificated Notes of
the same series in authorized denominations.

                  (d) In connection with the exchange of a portion of a
Certificated Note for a beneficial interest in a Global Registered Note, the
Trustee shall cancel such Certificated Note, and the Company shall execute, and
upon Company Order the Trustee shall authenticate and deliver to the exchanging
Holder, a new Certificated Note representing the principal amount not so
exchanged.


                                       13



         Section 2.7  Legends.

         Each Global Registered Note shall bear the applicable legend or legends
specified therefor in Exhibit A or Exhibit B, as applicable, on the face thereof
(the "Private Placement Legend").

         Section 2.8  Transfer and Exchange. |

                  (a) If (1) the owner of a beneficial interest in a Rule 144A
Global Note wishes to transfer such interest (or portion thereof) to a Non-U.S.
Person pursuant to Regulation S and (2) such Non-U.S. Person wishes to hold its
interest in the Notes through a beneficial interest in a Regulation S Global
Note, (x) upon receipt by the Registrar of:

                      (A)  written instructions from the Holder of the Rule 144A
Global Note directing the Registrar to credit or cause to be credited a
beneficial interest in the Regulation S Global Note equal to the principal
amount of the beneficial interest in the Rule 144A Global Note to be
transferred, and

                      (B) a certificate in the form of Exhibit D from the
transferor, and (y) subject to the rules and procedures of DTC with respect to
the Rule 144A and the Regulation S Global Note, the Registrar shall increase the
applicable Regulation S Global Note and decrease the related Rule 144A Global
Note by such amount in accordance with the foregoing.

                  (b) If the owner of an interest in a Regulation S Global Note
wishes to transfer such interest (or any portion thereof) to a QIB pursuant to
Rule 144A prior to the expiration of the Distribution Compliance Period
therefor, (x) upon receipt by the Registrar of:

                      (A) written instructions from the Holder of the
Regulation S Global Note directing the Registrar to credit or cause to be
credited a beneficial interest in the Rule 144A Global Note equal to the
principal amount of the beneficial interest in the Regulation S Global Note to
be transferred, and

                      (B) a certificate in the form of Exhibit C duly executed
by the transferor, and (y) in accordance with the rules and procedures of DTC
with respect to the Rule 144A and the Regulation S Global Note, the Registrar
shall increase the applicable Rule 144A Global Note and decrease the related
Regulation S Global Note by such amount in accordance with the foregoing.

                  (c) Certificated Notes, if issued, may be exchanged or
transferred in whole or in part in the principal amount of authorized
denominations by surrendering such Certificated Notes at the Corporate Trust
Office or the office of a Paying Agent with a written instrument of transfer as
set forth in Exhibit A or Exhibit B, as applicable, duly executed by the Holder
thereof or its attorney duly authorized in writing. In exchange for any
Certificated Note properly presented for exchange or transfer, the Trustee will
promptly, upon Company Order, authenticate and deliver or cause to be
authenticated and delivered at the Corporate Trust Office of the Trustee, to the
Holder entitled to such Certificated Note, or send by mail (at the risk of such
Holder) to such address as such Holder may request in writing, a Certificated
Note or Notes of the same series. The costs and expenses of effecting any
exchange or transfer pursuant to this paragraph will be borne by the Company and
the Guarantor, except that the expense of delivery by other than regular mail
(if any) and the payment of a sum sufficient to cover any tax or other
government charges or insurance that may be imposed in relation thereto, will be
borne solely by the Holder requesting such transfer or exchange. Any transfer or
exchange by a Holder of a Certificated Note must occur in accordance with
applicable law.

                  (d) Any transfer of Restricted Notes not described above
(other than a transfer of a beneficial interest in a Global Registered Note that
does not involve an exchange of such interest for



                                       14



a Certificated Note or a beneficial interest in another Global Registered Note,
which must be effected in accordance with applicable law and the rules and
procedures of DTC with respect to a Restricted Note, but is not subject to any
procedure required by this Indenture) shall be made only upon receipt by the
Registrar of such Opinions of Counsel, certificates and/or other information
reasonably required to ensure compliance with the Securities Act or in
accordance with paragraph (e) of this Section 2.8.

                  (e) Upon the transfer, exchange or replacement of Notes (or
beneficial interests in a Global Registered Note) not bearing a Private
Placement Legend, the Registrar shall exchange such Notes (or beneficial
interests) for beneficial interests in a Global Registered Note of the same
series (or Certificated Notes of the same series if they have been issued
pursuant to Section 2.6(d)) that does not bear a Private Placement Legend. Upon
the transfer, exchange or replacement of Notes (or beneficial interests in a
Global Registered Note) bearing a Private Placement Legend, the Registrar shall
deliver only Notes of the same series (or beneficial interests in a Global
Registered Note of the same series) that bear a Private Placement Legend unless:

                      (i)  such Notes (or beneficial interests) are transferred
         pursuant to Rule 144 upon delivery to the Registrar of a certificate of
         the transferor in the form of Exhibit E and an Opinion of Counsel;

                      (ii) such Notes (or beneficial interests) are transferred,
         replaced or exchanged after the Resale Restriction Termination Date
         therefor; or

                     (iii) in connection with such transfer, exchange or
         replacement the Registrar shall have received an Opinion of Counsel and
         other evidence reasonably requested by it to the effect that neither
         such Private Placement Legend nor the related restrictions on transfer
         are required in order to maintain compliance with the provisions of the
         Securities Act.

The Private Placement Legend on any Note shall be removed at the written request
of the Holder on or after the Resale Restriction Termination Date thereof. The
Holder of a Global Registered Note may exchange an interest therein for an
equivalent interest in a Global Registered Note of the same series not bearing a
Private Placement Legend (other than a Regulation S Global Note) upon transfer
of such interest pursuant to any of clauses (i) through (iii) of this
paragraph (e).

                  (f) The Registrar shall retain copies of all letters, notices
and other written communications received pursuant to this Article II. The
Company and the Guarantor shall have the right to inspect and make copies of all
such letters, notices or other written communications during the Registrar's
normal business hours upon the giving of reasonable written notice to the
Registrar.

                  (g) (i) Subject to the other provisions of this Section 2.8,
         when Notes are presented to the Registrar or a co-Registrar with a
         request to register the transfer of such Notes or to exchange such
         Notes for an equal principal amount of Notes of the same series in
         other authorized denominations, the Registrar or co-Registrar shall
         register the transfer or make the exchange as requested if its
         requirements for such transaction are met; provided that any Notes
         presented or surrendered for registration of transfer or exchange shall
         be duly endorsed or accompanied by a written instrument in the form of
         Exhibit C, D or E, as applicable, to the Registrar or co-Registrar,
         duly executed by the Holder thereof or his attorney duly authorized in
         writing. To permit registrations of transfers and exchanges and subject
         to the other terms and conditions of this Article II, the Company will
         execute and upon Company Order the Trustee will authenticate
         Certificated Notes and Global Registered Notes.

                      (ii) No service charge shall be made to a Holder for
         any registration of transfer or exchange, but the Company may require
         payment of a sum sufficient to cover any transfer tax, assessments, or
         similar governmental charge payable in connection therewith


                                       15



         (other than any such transfer taxes, assessments or similar
         governmental charges payable upon exchange or transfer pursuant to
         Article V or Section 561 or Section 10.5).

                      (iii) The Registrar or co-Registrar shall not be required
         to register the transfer of or exchange of any Note for a period
         beginning: (1) 15 days before the mailing of a notice of an offer to
         repurchase or redeem Notes and ending at the close of business on the
         day of such mailing or (2) 15 days before an Interest Payment Date and
         ending on such Interest Payment Date.

                       (iv) Prior to the due presentation for registration
         of transfer of any Note, the Company, the Guarantor, the Trustee, the
         Paying Agent, the Registrar or any co-Registrar and any agent of any of
         them may deem and treat the Person in whose name a Note is registered
         as the absolute owner and Holder of such Note for the purpose of
         receiving payment of principal of and interest on such Note and for all
         other purposes whatsoever, whether or not such Note is overdue, and
         none of the Company, the Guarantor, the Trustee, the Paying Agent, the
         Registrar or any co-Registrar and any agent of any of them shall be
         affected by notice to the contrary.

                        (v) All Notes issued upon any transfer or exchange
         pursuant to the terms of this Indenture shall evidence the same debt
         and shall be entitled to the same benefits under this Indenture as the
         Notes surrendered upon such transfer or exchange.

                  (h) The Trustee shall have no responsibility or obligation to
and shall not incur any liability with respect to any beneficial owner of an
interest in a Global Registered Note, a member of, or a participant in, DTC or
any other Person with respect to the accuracy of the records of DTC or its
nominee or of any participant or member thereof, with respect to any ownership
interest in the Notes or with respect to the delivery to any participant,
member, beneficial owner or other Person (other than DTC) of any notice
(including any notice of redemption) or the payment of any amount or delivery of
any Notes (or other security or property) under or with respect to such Notes.
All notices and communications to be given to the Holders and all payments to be
made to Holders in respect of the Notes shall be given or made only to or upon
the order of the registered Holders (which shall be DTC or its nominee in the
case of a Global Registered Note). The Trustee may rely and shall be fully
authorized and protected in relying upon information furnished by DTC with
respect to its members, participants and any beneficial owners.

                  (i) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer imposed
under this Indenture or under applicable law with respect to any transfer of any
interest in any Note (including any transfers between or among DTC participants,
members or beneficial owners in any Global Registered Note) other than to
require delivery of such certificates and other documentation or evidence as are
expressly required by, and to do so if and when expressly required by, the terms
of this Indenture, and to examine the same to determine substantial compliance
as to form with the express requirements hereof.

         Section 2.9  Mutilated, Destroyed, Lost or Stolen Notes. |

                  (a) If a mutilated Note is surrendered to the Paying Agent in
New York City or if the Holder of a Note claims that the Note has been lost,
destroyed or wrongfully taken, the Company shall execute and upon Company Order
the Trustee shall authenticate a replacement Note of the same series if such
Holder shall furnish an affidavit of loss and indemnity bond sufficient in the
judgment of the Company, the Guarantor and the Trustee to protect the Company,
the Guarantor, the Trustee, the Paying Agent, the Registrar and any co-Registrar
from any loss that any of them may suffer if a Note is replaced, and, in the
absence of notice to the Company, the Guarantor or the Trustee that such Note
has been acquired by a bona fide purchaser, the Company and the Guarantor shall
execute and upon Company Order the Trustee shall authenticate and make available
for delivery, in exchange for


                                       16


any such mutilated Note or in lieu of any such destroyed, lost or stolen Note, a
new Note of the same series and principal amount, bearing a number not
contemporaneously Outstanding.

                  (b) Upon the issuance of any new Note under this Section 2.9,
the Company may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and any other
expenses (including the reasonable fees and expenses of the Trustee, its agents
and counsel) in connection therewith.

                  (c) Every new Note issued pursuant to this Section 2.9 in
exchange for any mutilated Note, or in lieu of any destroyed, lost or stolen
Note shall constitute an original additional contractual obligation of the
Company, the Guarantor and any other obligor upon the Notes, whether or not the
mutilated, destroyed, lost or stolen Note shall be at any time enforceable by
anyone, and shall be entitled to all benefits of this Indenture equally and
proportionately with any and all other Notes duly issued hereunder.

         Section 2.10 Cancellation. | The Company at any time may deliver Notes
to the Trustee for cancellation. The Registrar and the Paying Agent shall
forward to the Trustee any Notes surrendered to them for registration of
transfer, exchange or payment. The Trustee and no one else shall cancel and
dispose of cancelled Notes in accordance with its policy of disposal. The
Company may not issue new Notes to replace Notes it has paid or delivered to the
Trustee for cancellation for any reason other than in connection with a transfer
or exchange upon Company Order.

         Section 2.11  Add On Notes. |

                  (a) The Company may, from time to time, subject to compliance
with any other applicable provisions of this Indenture, without the consent of
the Holders, create and issue pursuant to this Indenture additional notes of a
series ("Add On Notes") having terms and conditions identical to those of
Outstanding Notes of such series issued under this Indenture, except that Add On
Notes:

                       (i)  may have a different issue date from such other
         Outstanding Notes;

                      (ii)  may have a different amount of interest payable on
         the first Interest Payment Date after issuance than is payable on such
         other Outstanding Notes; and

                     (iii)   may have terms specified in the Add On Note Board
         Resolution or Add On Note Supplemental Indenture for such Add On Notes
         making appropriate adjustments to this Article II and Exhibit A or
         Exhibit B, as applicable (and related definitions), applicable to such
         Add On Notes in order to conform to and ensure compliance with the
         Securities Act (or other applicable securities laws) which are not
         adverse in any material respect to the Holder of any such Outstanding
         Notes (other than such Add On Notes) and which shall not affect the
         rights or duties of the Trustee.

                  (b) In authenticating any Add On Notes, and accepting the
additional responsibilities under this Indenture in relation to such Add On
Notes, the Trustee shall be entitled to receive, and shall be fully protected in
relying upon:

                       (i)  Company Order;

                      (ii)  the Add On Note Board Resolutions or Add On Note
         Supplemental Indenture relating thereto;

                     (iii)  an Officers' Certificate with respect to the Company
         complying with Section 12.4; and

                      (iv)  an Opinion of Counsel for the Company complying with
         Section 12.4 stating,



                                       17



                           (A) that the forms of such Notes have been
                  established by or pursuant to Add On Note Board Resolutions or
                  by an Add On Note Supplemental Indenture, as permitted by this
                  Section 2.11 and in conformity with the provisions of this
                  Indenture;

                           (B) the terms of such Notes have been established by
                  or pursuant to Add On Note Board Resolutions or by an Add On
                  Note Supplemental Indenture, as permitted by this Section 2.11
                  and in conformity with the provisions of this Indenture;

                           (C) that such Notes, when authenticated and delivered
                  by the Trustee and issued by the Company in the manner and
                  subject to any customary conditions specified in such Opinion
                  of Counsel, will constitute valid and legally binding
                  obligations of the Company and the Guarantor entitled to the
                  benefits provided in the Indenture, enforceable in accordance
                  with their respective terms, except to the extent that the
                  enforcement of such obligations may be subject to bankruptcy
                  laws or insolvency laws or other similar laws, general
                  principles of equity and such other qualifications as such
                  counsel shall conclude are customary or do not materially
                  affect the rights of the Holders of such Notes;

                           (D) that all laws and requirements in respect of the
                  execution and delivery of the Notes have been complied with;
                  and

                           (E) such other matters as the Trustee may reasonably
                  request.

                     (v) an Opinion of Counsel for the Guarantor complying with
         Section 12.4 stating that the Guarantee with respect to the Add On
         Notes, when such Add On Notes are issued, authenticated and delivered,
         will constitute a valid and legally binding obligation of the
         Guarantor, enforceable in accordance with its terms, except to the
         extent that the enforcement of such obligation may be subject to
         bankruptcy laws or insolvency laws or other similar laws, general
         principles of equity and such other qualifications as such counsel
         shall conclude are customary or do not materially affect the rights of
         the Holders of such Notes.

                  (c) If such forms or terms have been so established by or
pursuant to Add On Note Board Resolutions or an Add On Note Supplemental
Indenture, the Trustee shall have the right to decline to authenticate and
deliver any Notes:

                      (i)  if the Trustee, being advised by counsel, determines
         that such action may not lawfully be taken;

                     (ii)  if the Trustee by its committee of Trust Officers in
         good faith determines that such action would expose the Trustee to
         personal liability to Holders of any Outstanding Notes of the same
         series; or

                     (iii) if the issue of such Add On Notes pursuant to this
         Indenture will affect the Trustee's own rights, duties and immunities
         under the related Notes and this Indenture or otherwise in a manner
         which is not reasonably acceptable to the Trustee.

         Notwithstanding anything in this Section 2.11, the Company may not
issue Add On Notes if an Event of Default shall have occurred and be continuing.

         Section 2.12  Defaulted Interest |

         If the Company defaults in a payment of interest on the Notes, the
Company or the Guarantor shall pay the defaulted amounts to the persons who are
Holders thereof on a subsequent special record



                                       18





date (the "Special Record Date"). The Company or the Guarantor shall fix the
Special Record Date and payment date in a manner satisfactory to the Trustee and
provide the Trustee at least 20 days notice of the proposed date. At least 15
days before the Special Record Date, the Company or the Guarantor shall mail or
cause to be mailed to Holder at its address as it appears on the Notes Register
maintained by the Registrar a notice that states the Special Record Date, the
payment date (which shall be not less than five nor more than ten days after the
Special Record Date), and the amount to be paid. In lieu of the foregoing
procedures, the Company or the Guarantor may pay defaulted interest in any other
lawful manner satisfactory to the Trustee.

         Section 2.13  CUSIP Numbers

         The Company in issuing the Notes may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Notes or as contained in any notice of a redemption and
that reliance may be placed only on the other identification numbers printed on
the Notes, and any such redemption shall not be affected by any defect in or
omission of such numbers. The Company will promptly notify the Trustee of any
change in the "CUSIP" numbers.

                                   ARTICLE III

                                    COVENANTS

         Section 3.1  Payment of Notes. |

                  (a) The Company shall pay the principal of and interest on the
Notes in U.S. dollars on the dates and in the manner provided in the Notes and
in this Indenture. On or prior to 10:00 a.m. local time on each Interest Payment
Date and the relevant Maturity Date, the Company shall deposit or have deposited
with the Paying Agent in the Place of Payment with respect to such Notes
immediately available U.S. dollar funds sufficient to make cash payments due on
such Interest Payment Date or relevant Maturity Date, as the case may be. If the
Company, the Guarantor or an Affiliate of the Company is acting as Paying Agent,
the Company, the Guarantor or such Affiliate shall, prior to 10:00 a.m. local
time in the Place of Payment with respect to the Notes on each Interest Payment
Date and the relevant Maturity Date, segregate and hold in trust U.S. dollar
funds sufficient to make cash payments due on such Interest Payment Date or
relevant Maturity Date, as the case may be, with respect to the Notes. Principal
and interest shall be considered paid on the date due if on such date the
Trustee or the Paying Agent (other than the Company, the Guarantor or an
Affiliate of the Company) holds in accordance with this Indenture U.S. dollar
funds designated for and sufficient to pay all principal and interest then due
and the Trustee or the Paying Agent, as the case may be, is not prohibited from
paying such money to the Holders of Notes on that date pursuant to the terms of
this Indenture.

                  (b) Each Paying Agent shall notify the Trustee promptly in
writing when it has received from the Company payment of the principal and/or
interest on the Notes with respect to each Interest Payment Date and/or relevant
Maturity Date.

                  (c) Notwithstanding anything to the contrary contained in this
Indenture, the Company (but without prejudice to the obligations of the Company
or the Guarantor to pay Additional Amounts in accordance with a requirement of
the Indenture) may, to the extent it is required to do so by law, deduct or
withhold income or other similar taxes imposed by the United States of America
from principal or interest payments hereunder.

         Section 3.2  Maintenance of Office or Agency. |



                                       19


                  (a) The Company shall (and the Guarantor shall cause the
Company to) maintain each office or agency required under Section 2.3. The
Company will (and the Guarantor shall cause the Company to) give prompt written
notice to the Trustee of any change in the location of any such office or
agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and each of the Company and the Guarantor
hereby appoints the Trustee as its agent to receive all such presentations,
surrenders, notices and demands.

                  (b) The Company may also from time to time designate one or
more other offices or agencies (in or outside of The City of New York or
Luxembourg) where the Notes may be presented or surrendered for any or all such
purposes and may from time to time rescind any such designation; provided,
however, that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in The City of New
York and Luxembourg for such purposes. The Company will (and the Guarantor shall
cause the Company to) give prompt written notice to the Trustee of any such
designation or rescission and any change in the location of any such other
office or agency.

         Section 3.3 Corporate Existence. | Subject to Articles IV and V, each
of the Company and the Guarantor will do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate existence.

         Section 3.4 Payment of Taxes and Other Claims. | Each of the Company
and the Guarantor will, and the Guarantor will cause each Principal Subsidiary
to, pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any Principal Subsidiary or for which it or any of them are
otherwise liable, or upon the income, profits or property of it or any Principal
Subsidiary and (ii) all lawful claims for labor, materials and supplies, which,
if unpaid, might by law become a liability or security interest upon the
property of it or any Principal Subsidiary; provided, however, that it shall not
be required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which appropriate
reserves, if necessary (in the good faith judgment of management the Guarantor),
are being maintained in accordance with GAAP or where the failure to effect such
payment will not be disadvantageous to the Holders.

         Section 3.5 Further Instruments and Acts. | The Company and the
Guarantor will execute and deliver such further instruments and do such further
acts as may be reasonably necessary or proper to carry out more effectively the
purpose of this Indenture.

         Section 3.6 Waiver of Stay, Extension or Usury Laws. | Each of the
Company and the Guarantor covenants (to the extent that it may lawfully do so)
that it will not at any time insist upon, plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay or extension law or any
usury law or other law that would prohibit or forgive it from paying all or any
portion of the principal of or interest on the Notes as contemplated herein,
wherever enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this Indenture. Each of the Company and the
Guarantor hereby expressly waives (to the extent that it may lawfully do so) all
benefit or advantage of any such law, and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Trustee, but
will suffer and permit the execution of every such power as though no such law
had been enacted.

         Section 3.7 Payment of Additional Amounts. | The Company shall make all
payments of principal and interest in respect of the Notes without withholding
or deduction for, or on account of, any present or future taxes, duties,
assessments or governmental charges of whatever nature imposed, levied,
collected, withheld or assessed by the United Kingdom or any political
subdivision or any authority thereof or therein having power to tax ("Taxes")
with respect to payments of interest and


                                       20


principal on the Notes, unless such withholding or deduction is required by law
or by the official judicial or administrative interpretation thereof; provided,
however, that if the law of the United Kingdom should require that any payments
in respect of the Notes of a series be subject to withholding or deduction with
respect to any Taxes imposed or levied by, or on behalf of, such jurisdiction or
any authority therein or thereof having power to tax, the Company shall, to the
fullest extent then permitted by law, pay such additional amounts as may be
necessary in order that the net amounts received by a Holder of Notes of such
series who is not resident in the United Kingdom for tax purposes after such
withholding or deduction shall equal the respective amounts of principal and
interest, if any, that would otherwise have been receivable in respect of the
Notes of such series in the absence of such withholding or deduction (the
"Additional Amounts"); except that no such Additional Amounts shall be payable
with respect to any Note of such series presented for payment:

                  (a) by or on behalf of a Holder of a Note (including a
beneficial owner) who is liable for such Taxes in respect of such Note by reason
of such Holder having some connection with the United Kingdom other than the
mere holding of such Note;

                  (b) where such withholding or deduction could have been
avoided by the Holder making a declaration of non-residence or other similar
claim for exemption to any authority of or in the United Kingdom;

                  (c) where (in the case of a payment of principal or interest
on final redemption) the relevant Note is surrendered for payment more than 30
days after the Relevant Date except to the extent that the relevant Holder would
have been entitled to such Additional Amounts if such Holder had surrendered the
relevant Note on the last day of such period of 30 days;

                  (d) where such withholding or deduction is imposed on a
payment to an individual and is required to be made pursuant to European Council
Directive 2003/48/EC or any other Directive implementing the conclusions of the
ECOFIN Council meeting of November 26-27, 2000 on the taxation of savings income
or any law implementing or complying with, or introduced in order to conform to,
such Directive; or

                  (e) where the relevant Note is surrendered for payment by or
on behalf of a Holder who would have been able to avoid such withholding or
deduction by presenting the relevant Note to another Paying Agent in a member
state of the European Union.

         If the Directive is promulgated, the Company undertakes to maintain a
Paying Agent in a European Union member state that will not be obliged to
withhold or deduct Taxes pursuant to the Directive if such a member state
exists.

         If the Company, or its successor, becomes subject at any time to any
taxing jurisdiction other than the United Kingdom, references in this Section to
the United Kingdom with respect to Additional Amounts shall be construed as
references to the United Kingdom and/or such other successor jurisdiction.

         Section 3.8  Limitation on Liens. |

         So long as any Notes remain outstanding, the Guarantor will not, and
will not permit any Principal Subsidiary to, create, assume or permit to arise
or to exist any mortgage, pledge, charge, lien, security interest or other
encumbrance (other than a lien or other encumbrance arising by operation of law)
(a "Lien") upon the whole or any part of its present or future property, assets
or revenues to secure (i) payment of any Relevant Indebtedness or (ii) payment
under any guarantee or indemnity granted by the Guarantor or any Principal
Subsidiary in respect of any Relevant Indebtedness, without in any such case at
the same time affording to the Notes the same security as the Lien created or
subsisting to secure any such Relevant Indebtedness, guarantee or indemnity or
such other security as the Guarantor, by an Officers' Certificate, shall confirm
to the Trustee is not


                                       21



materially less beneficial to the Holders of the Notes or as shall be approved
by Holders of a majority in aggregate principal amount of each series of
Outstanding Notes; provided, however, that a Lien existing to secure Relevant
Indebtedness of, or in respect of the payment of which there is granted a
guarantee or an indemnity by, a Principal Subsidiary and which Lien existed
prior to the time of such Principal Subsidiary becoming a Subsidiary (other than
a Lien created or assumed in contemplation of such company becoming a
Subsidiary), shall be permitted and neither the Guarantor nor such Principal
Subsidiary shall be required to extend the security of such Lien to the Holders
of the Notes.

         Section 3.9  Reports to Holders. |

         At any time when the Guarantor is not subject to Section 13 or Section
15(d) of the Exchange Act (or is not current in its reporting obligations
thereunder nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder), the
Guarantor will make available, upon request and at the expense of the Company
and the Guarantor, to any Holder and any prospective purchaser of Notes the
information required pursuant to Rule 144A(d)(4) under the Securities Act.

                                   ARTICLE IV

                               TRANSFEREE COMPANY

         Section 4.1 Assumption of Obligations. A limited liability company or
corporation that is organized under the laws of the State of Delaware in the
United States of America and is legally and beneficially wholly-owned by the
Guarantor, directly or indirectly (the "Transferee Company"), may assume the
obligations of the Company under a series of Notes and the Indenture without the
consent of the Holders thereof, provided that:

                  (a) the Transferee Company shall expressly assume by a
supplemental indenture all of the obligations of the Company under the Notes of
such series and this Indenture;

                  (b) such supplemental indenture shall be in a form reasonably
satisfactory to the Trustee, shall be duly authorized and executed by the
Transferee Company, shall constitute a valid and legally binding agreement of
such Transferee Company, and shall be delivered to the Trustee;

                  (c) subject to exceptions (a) through (e) in Section 3.7
herein, such Transferee Company shall agree that all payments made by it in
respect of principal of, or premium, if any, or interest on, the relevant Notes
will be made without withholding or deduction for, or on account of, any present
or future taxes, duties, assessments or governmental charges of whatever nature
imposed, levied, collected, withheld or assessed by or on behalf of the United
States or any authority thereof or therein having power to tax, unless such
withholding or deduction is required by law or by the official judicial or
administrative interpretation thereof, and if withholding or deduction is so
required, such Transferee Company will pay to each Holder of such Notes such
Additional Amounts as may be necessary so that the net amounts paid to such
Holder who is not resident for tax purposes in the United States after such
deduction or withholding, shall be not less than the amounts specified in such
series of Notes to which such Holder is entitled;

                  (d) immediately after giving effect to such transfer, no Event
of Default with respect to such series of Notes, and no event which, after
notice or lapse of time of both, would become an Event of Default with respect
to such series of Notes, shall have occurred and be continuing;

                  (e) the Guarantor's obligations under the Guarantees shall
remain in full force and effect after the transfer;


                                       22



                  (f) the relevant Notes shall not be delisted from the
Luxembourg Stock Exchange as a result of such transfer, unless alternative
listing arrangements satisfactory to the affected Holders have been made;

                  (g) the ratings assigned to the relevant Notes shall not be
adversely affected as a result of any such transfer, and Moody's Investors
Service, Inc and Standard & Poor's shall have provided written confirmation to
that effect to the Guarantor;

                  (h) the Company shall give written notice of such transfer to
Holders of the relevant Notes not less than 30 nor more than 60 days prior to
the date such transfer shall occur, as set forth in Section 12.2;

                  (i) there shall have been delivered to the Trustee an Opinion
of Counsel stating that such transfer shall constitute a Tax-Free Exchange to
the Holders affected thereby; and

                  (j) the Company and the Guarantor shall each deliver to the
Trustee an Officer's Certificate and an Opinion of Counsel stating that such
transfer complies with this Section 4.1 and that all conditions precedent to
such transfer have been satisfied.

         Section 4.2  Transferee Company Substituted for Company.

         Upon any assumption in accordance with Section 4.1, the Transferee
Company shall succeed to, and be substituted for, and may exercise every right
and power of, the Company under this Indenture with the same effect as if such
Transferee Company had been named as the Company herein; and thereafter the
predecessor shall be released from all obligations and covenants under the
relevant series of Notes and this Indenture with respect to the relevant series
of Notes.

                                    ARTICLE V

                                SUCCESSOR COMPANY

         Section 5.1 Consolidation, Merger and Sale of Assets of the Company.
The Company may consolidate or merge with or into any other entity and may
convey, transfer or lease its property as an entirety or substantially as an
entirety to any entity, provided that:

                  (a) the entity (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received
such property (the "Successor Company") shall expressly assume by a supplemental
indenture all of the obligations of the Company under the Notes and this
Indenture;

                  (b) such supplemental indenture shall be in a form reasonably
satisfactory to the Trustee, shall be duly authorized and executed by the
Successor Company, shall constitute a valid and legally binding agreement of
such Successor Company, and shall be delivered to the Trustee;

                  (c) subject to exceptions (a) through (e) in Section 3.7
herein, such Successor Company shall agree that all payments made by it in
respect of principal of, or premium, if any, or interest on, any series of the
Notes will be made without withholding or deduction for, or on account of, any
present or future taxes, duties, assessments or governmental charges of whatever
nature imposed, levied, collected, withheld or assessed by or on behalf of the
jurisdiction in which such Successor Company is incorporated, or any political
subdivision thereof or authority or agency thereof or therein having power to
tax, unless such withholding or deduction is required by law or by the official
judicial or administrative interpretation thereof, and if withholding or
deduction is so required, such Successor Company will pay to each Holder of
Notes such Additional Amounts as may be necessary so that the net amounts paid
to such Holder who is not resident for tax purposes in the


                                       23


jurisdiction in which such Successor Company is incorporated, after such
deduction or withholding, shall be not less than the amounts specified in such
Notes to which such Holder is entitled;

                  (d) immediately after giving effect to such transaction, no
Event of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have occurred and be continuing with
respect to any series of Notes;

                  (e) the Guarantor's obligations under the Guarantees shall
remain in full force and effect after the transaction; and

                  (f) the Company and the Guarantor shall each deliver to the
Trustee an Officers' Certificate and an Opinion of Counsel stating that such
consolidation, merger, conveyance, transfer or lease and supplemental agreement
comply with this Article V and that all conditions precedent to such
consolidation, merger, conveyance, transfer or lease have been satisfied.

         Section 5.2 Consolidation, Merger and Sale of Assets of the Guarantor.
The Guarantor may consolidate or merge with or into any other entity and may
convey, transfer or lease its property as an entirety or substantially as an
entirety to any entity, provided that:

                  (a) the entity (if other than the Guarantor) formed by or
resulting from any such consolidation or merger or which shall have received
such property (the "Successor Guarantor") shall expressly assume by a
supplemental indenture all of the obligations of the Guarantor under the
Guarantees and this Indenture;

                  (b) such supplemental indenture shall be in form reasonably
satisfactory to the Trustee, shall be duly authorized and executed by the
Successor Guarantor, shall constitute a valid and legally binding agreement of
such Successor Guarantor, and shall be delivered to the Trustee;

                  (c) subject to exceptions (a) through (e) in Section 3.7 and
Section 11.1 herein, such Successor Guarantor shall agree that all payments made
by it under the Guarantees in respect of principal of, or premium, if any, or
interest on, any Note will be made without withholding or deduction for, or on
account of, any present or future taxes, duties, assessments or governmental
charges of whatever nature imposed, levied, collected, withheld or assessed by
or on behalf of the jurisdiction in which such Successor Guarantor is
incorporated, or any political subdivision thereof or authority or agency
thereof or therein having power to levy the same, unless such withholding or
deduction is required by law or by the official judicial or administrative
interpretation thereof, and if withholding or deduction is so required, such
Successor Guarantor will pay to each Holder of Notes such Additional Amounts as
may be necessary so that the net amounts paid to such Holder who is not resident
for tax purposes in the jurisdiction in which such Successor Guarantor is
incorporated, after such deduction or withholding, shall be not less than the
amounts specified in such Notes to which such Holder is entitled;

                  (d) immediately after giving effect to such transaction, no
Event of Default with respect to any series of Notes, and no event which, after
notice or lapse of time or both, would become an Event of Default with respect
to any series of Notes, shall have occurred and be continuing; and

                  (e) the Guarantor shall deliver to the Trustee an Officers'
Certificate and an Opinion of Counsel stating that such consolidation, merger,
conveyance, transfer or lease complies with this Article V and that all
conditions precedent to such consolidation, merger, conveyance, transfer or
lease and have been satisfied.

         Section 5.3  Successor Company or Guarantor Substituted.


                                       24



         Upon any consolidation, merger, conveyance, transfer or lease to any
entity involving the Company, in the case of Section 5.1, or the Guarantor in
the case of Section 5.2, the Successor Company or Successor Guarantor, as
applicable, formed by such consolidation, merger, conveyance, transfer or lease
is made shall succeed to, and be substituted for, and may exercise every right
and power of, the Company or the Guarantor, as applicable, and the Notes or the
Guarantees, as applicable, under this Indenture and the Notes or the Guarantees,
as applicable, with the same effect as if such Successor Company or Successor
Guarantor, as applicable, had been named originally as such herein; and
thereafter the predecessor shall be released from all obligations and covenants
under this Indenture and the Notes or the Guarantees, as applicable.

                                   ARTICLE VI

                          OPTIONAL REDEMPTION OF NOTES

         Section 6.1 Optional Tax Redemption. The Notes of either series may be
redeemed on not less than 30 nor more than 60 days' prior written notice to the
Trustee, and, in accordance with Section 6.4 and in the manner provided in
Section 12.2, the Holders of such Notes, at the option of the Company or the
Guarantor (an "Optional Tax Redemption"), in whole, but not in part, at any
time, if:

                  (a) on the occasion of the next succeeding Interest Payment
Date for such series, each of the Company and the Guarantor has or will become
obliged to pay Additional Amounts as a result of any change in, or amendment to,
the laws or regulations of the Company's domicile or any authority in or of the
Company's domicile having power to tax, or any change in the official judicial
or administrative interpretation of these laws or regulations, which change or
amendment becomes effective on or after the Issue Date; and

                  (b) each of the Company and the Guarantor is unable to avoid
this obligation by taking reasonable measures available to it;

provided that no notice of Optional Tax Redemption shall be given earlier than
90 days prior to the earliest date on which the Company or the Guarantor, as the
case may be, would be obliged to pay, deduct or withhold amounts were a payment
in respect of the Notes of such series then due.

         Notes redeemed pursuant to an Optional Tax Redemption will be redeemed
at an amount equal to the principal amount of the Notes being redeemed together
with Additional Amounts, if any, plus any accrued and unpaid interest to (but
excluding) the Redemption Date.

         Section 6.2 Optional Redemption. | The Company may redeem the Notes of
any series, as a whole at any time or in part from time to time, at the option
of the Company (an "Optional Redemption"), at a redemption price equal to the
greater of:

                  (a) 100% of the principal amount of the Notes of such series
being redeemed; or

                  (b) as determined by the Calculation Agent, the sum of the
present values of the remaining scheduled payments of principal and interest on
the Notes being redeemed, not including any portion of such payment of interest
accrued on the Redemption Date, from the Redemption Date to the relevant
Maturity Date, discounted to the Redemption Date on a semi-annual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Treasury
Rate plus 15 basis points, in the case of the 2009 Notes, and 20 basis points,
in the case of the 2014 Notes, plus any accrued and unpaid interest to (but
excluding) the Redemption Date and Additional Amounts, if any.

Notice of any redemption will be mailed at least 30 days but no more than 60
days before the Redemption Date to the Trustee, the Guarantor and, in accordance
with Section 6.4 and in the manner provided in Section 12.2, to each Holder of
Notes to be redeemed.


                                       25




         Section 6.3 Election to Redeem. The Guarantor or the Company, as
applicable, shall evidence its election to redeem any Notes pursuant to Section
6.1 or Section 6.2 by a Board Resolution.

         Section 6.4  Notice of Redemption. |

                  (a) The Company or the Guarantor shall give or cause the
Trustee to give written notice of redemption not less than 30 nor more than 60
days prior to the Redemption Date to each Holder of Notes to be redeemed at the
address appearing in the Notes Register. If the Company or the Guarantor itself
gives the notice, it shall also deliver a copy to the Trustee.

                  (b) If either (i) the Company is not redeeming all Outstanding
Notes of a series, or (ii) the Company or the Guarantor elects to have the
Trustee give notice of redemption, then the Company shall deliver to the
Trustee, at least 45 days prior to the Redemption Date (unless the Trustee is
satisfied with a shorter period), an Officers' Certificate requesting that the
Trustee select the Notes to be redeemed and/or give notice of redemption and
setting forth the information required by paragraph (c) of this Section 6.4. If
the Company or the Guarantor elects to have the Trustee give notice of
redemption, the Trustee shall give the notice in the name of the Company and the
Guarantor and at the expense of the Company and the Guarantor.

                  (c) All notices of redemption shall state:

                       (i) which series of Notes is the subject of redemption
         and whether such Notes are being redeemed pursuant to an Optional Tax
         Redemption or an Optional Redemption;

                      (ii) the Redemption Date,

                     (iii) the redemption price and the amount of any accrued
         interest payable as provided in Section 6.7,

                      (iv) in the case of an Optional Redemption, whether or
         not the Company is redeeming all Outstanding Notes of a series,

                       (v) in the case of an Optional Redemption, if the Company
         is not redeeming all Outstanding Notes of a series, the aggregate
         principal amount of Notes of such series that the Company is redeeming
         and the aggregate principal amount of Notes of such series that will
         remain Outstanding after the partial redemption, as well as the
         identification of the particular Notes, or portions of the particular
         Notes, that the Company is redeeming,

                      (vi) in the case of an Optional Redemption, if the Company
         is redeeming only a portion of the principal amount of a Note or Notes
         of a series, the notice that relates to such Note or Notes shall state
         that on and after the Redemption Date, upon surrender of such Note or
         Notes, the Holders will receive, without charge, a new Note or Notes of
         such series of authorized denominations for the principal amount of the
         Note or Notes remaining unredeemed,

                     (vii) that on the Redemption Date the redemption price and
         any accrued interest payable to the Redemption Date as provided in
         Section 6.7 will become due and payable in respect of each Note to be
         redeemed, and, unless the Company and the Guarantor defaults in making
         the redemption payment, that interest on each Note to be redeemed will
         cease to accrue on and after the Redemption Date,

                    (viii) the place or places where a Holder must surrender the
         Holder's Notes for payment of the redemption price, and


                                       26



                     (ix) the CUSIP or ISIN number, if any, listed in the notice
         or printed on the Notes, and that no representation is made as to the
         accuracy or correctness of such CUSIP or ISIN number.

         Section 6.5  Selection of Notes to be Redeemed in Part Pursuant to an
Optional Redemption. |

                  (a) If the Company is not redeeming all Outstanding Notes of a
series pursuant to an Optional Redemption, the Trustee shall, so long as such
Notes are listed on the Luxembourg Stock Exchange, select the Notes to be
redeemed in compliance, based on an Opinion of Counsel furnished to the Trustee
by the Company prior to the Redemption Date, with the requirements of the
Luxembourg Stock Exchange, and in all cases, on a pro rata basis, by lot or in
another fair and reasonable manner chosen by the Trustee. The Trustee shall make
the selection from the Outstanding Notes of such series not previously called
for redemption. The Trustee shall promptly notify each of the Company and the
Guarantor in writing of the Notes selected for redemption and, in the case of
any Notes selected for partial redemption, the principal amount of the Notes to
be redeemed. In the event of a partial redemption by lot, the Trustee shall
select the particular Notes to be redeemed not less than 30 nor more than 60
days prior to the relevant Redemption Date from the Outstanding Notes of such
series not previously called for redemption. The Company may redeem Notes in
those denominations specified for such Notes only in whole. The Trustee may
select for redemption portions (equal to the denomination(s) specified for such
Notes or any integral multiple thereof) of the principal of Notes that have
denominations larger than a denomination specified for such Notes, provided that
after such partial redemption the remaining principal amount of any such Note
shall be a denomination specified for such Notes or any integral multiple
thereof.

                  (b) For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to redemption of Notes shall relate,
in the case of any Note redeemed or to be redeemed only in part, to the portion
of the principal amount of that Note which has been or is to be redeemed.

         Section 6.6 Deposit of Redemption Price. | Prior to 10:00 a.m. local
time in the city in which the office of the Trustee or the Paying Agent with
respect to the Notes being redeemed is located on the relevant Redemption Date,
the Company and the Guarantor (without duplication) shall deposit with the
Trustee or with a Paying Agent (or, if the Company or the Guarantor is acting as
Paying Agent, segregate and hold in trust as provided in Section 2.4) an amount
of money in immediately available funds sufficient to pay the redemption price
of, and accrued interest on, all the Notes that are being redeemed on that date.

         Section 6.7 Notes Payable on Redemption Date. | If the Company or the
Guarantor, or the Trustee on behalf of the Company or the Guarantor, gives
notice of redemption in accordance with this Article VI, the Notes, or the
portions of Notes (in the case of an Optional Redemption), called for
redemption, shall, on the Redemption Date, become due and payable at the
redemption price specified in the notice (together with accrued interest, if
any, to (but excluding) the Redemption Date), and from and after the Redemption
Date (unless the Company and the Guarantor shall default in the payment of the
redemption price and accrued interest) the Notes or the portions of the Notes
shall cease to bear interest. Upon surrender of any Note for redemption in
accordance with the notice, the Company shall pay the Notes at the redemption
price, together with accrued, but unpaid, interest, if any, to (but excluding)
the Redemption Date and any Additional Amounts, if any, subject to the rights of
Holders in the case of a Global Registered Note on the relevant Record Date to
receive interest due on the related Interest Payment Date. If the Company and
the Guarantor shall fail to pay any Note called for redemption upon its
surrender for redemption, the principal shall, until paid, bear interest from
the Redemption Date at the rate borne by Note.

         Section 6.8 Unredeemed Portions of Partially Redeemed Note. | In the
case of an Optional Redemption, upon surrender of a Note that is to be redeemed
in part, the Company and the Guarantor shall execute, and upon Company Order the
Trustee shall authenticate and make available for delivery


                                       27




to the Holder of the Note at the expense of the Company, a new Note or Notes of
the same series in any authorized denomination as requested by the Holder, in an
aggregate principal amount equal to, and in exchange for, the unredeemed portion
of the principal of the Note surrendered, provided that each new Note will be in
a principal amount of $1,000 and integral multiples of $1,000 in excess thereof.

                                   ARTICLE VII

                              DEFAULTS AND REMEDIES

         Section 7.1  Events of Default. |

                  (a) An "Event of Default" occurs with respect to a series of
Notes if one or more of the following events shall occur with respect to such
series:

                  (i) default in the payment of any interest on any of the
         Notes of such series when due and payable, and such default continues
         for a period of 30 days;

                 (ii) default in the payment of the principal of any of the
         Notes of such series when due and payable, and such default continues
         for a period of two Business Days;

                (iii) default in the performance of, or breaches, any covenant
         or warranty of the Company or the Guarantor contained in this Indenture
         or the Notes, and such default or breach continues for a period of 30
         days after written notice of such default or breach shall have been
         given to the Company or the Guarantor by the Trustee or the Holders of
         at least 25% in aggregate principal amount of such series of Notes then
         Outstanding;

                 (iv) if any event of default as defined in any mortgage,
         indenture or instrument under which there may be issued, or by which
         there may be secured or evidenced, any indebtedness of the Guarantor or
         indebtedness of any Principal Subsidiary for money borrowed, whether
         such indebtedness now exists or shall hereafter be created, shall occur
         and shall result in such indebtedness in principal amount in excess of
         $30,000,000 (or the equivalent thereof in other currencies) becoming or
         being declared due and payable prior to the date on which it would
         otherwise become due and payable, and such acceleration shall not be
         rescinded or annulled, or such indebtedness shall not have been
         discharged, within a period of 30 days after written notice thereof
         shall have been given to the Guarantor and the Company by the Trustee
         or the Holders of at least 25% in aggregate principal amount of such
         series of Notes then Outstanding;

                  (v) if proceedings are initiated against the Company, the
         Guarantor or any Principal Subsidiary under any applicable liquidation,
         insolvency, re-organization or any other similar laws, or an
         application is made for the appointment of an administrative or other
         receiver, manager or administrator, or any such or other similar
         official is appointed, in relation to the Company, the Guarantor or any
         Principal Subsidiary, as the case may be, in relation to the whole or a
         part of the undertakings or assets of the Company, the Guarantor or any
         Principal Subsidiary, or an encumbrancer takes possession of the whole
         or a part of the applicable company's undertakings or assets, or a
         distress, execution, attachment, sequestration or other process is
         levied, enforced upon, sued out or put in force against the whole or a
         part of its undertakings or assets; and in any case (other than the
         appointment of an administrator) are not discharged within 28 days;
         provided that this paragraph (v) shall not apply to any proceedings
         against the Company, the Guarantor or a Principal Subsidiary brought by
         a third party other than an administrative or judicial authority where
         the Company, the Guarantor, or the Principal Subsidiary can demonstrate
         that any such proceedings are being contested by the Company, the
         Guarantor or the Principal Subsidiary in good faith, diligently and by
         appropriate proceedings in a competent court;

                                       28



                     (vi) commencement by the Company, the Guarantor or any
         Principal Subsidiary of a voluntary case or proceeding under any
         applicable liquidation, insolvency, re-organization or any other
         similar laws, or of any other case or proceeding to be adjudicated a
         bankrupt or insolvent, or the consent by the Company, the Guarantor or
         any Principal Subsidiary to the entry of a decree or order for relief
         in respect of the Company, the Guarantor or any Principal Subsidiary in
         an involuntary case or proceeding under any applicable liquidation,
         insolvency, re-organization or any other similar laws, or to the
         commencement of any bankruptcy or insolvency case or proceeding against
         the Company, the Guarantor or any Principal Subsidiary, or the filing
         by the Company, the Guarantor or any Principal Subsidiary of a petition
         or answer or consent seeking re-organization or relief under any
         applicable law, or the consent by the Company, the Guarantor or any
         Principal Subsidiary to the filing of such petition or to the
         appointment of or taking possession by a custodian, receiver,
         conservator, liquidator, assignee, trustee, sequestrator or similar
         official of the Company, the Guarantor or any Principal Subsidiary or
         of any substantial part of the property of the Company, the Guarantor
         or any Principal Subsidiary or the making by the Company, the Guarantor
         or any Principal Subsidiary of an assignment for the benefit of
         creditors, or the taking of corporate action by the Company, the
         Guarantor or any Principal Subsidiary in furtherance of any such
         action; or

                    (vii) the Guarantees shall cease to be in full force and
         effect or the Guarantor shall, in writing, deny or disaffirm its
         obligations under the Guarantees (or any of them) or this Indenture.

Any of the foregoing will constitute an Event of Default whatever the reason for
any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.

                  (b) The Company and the Guarantor shall deliver to the Trustee
within five days after the occurrence of any Default or Event of Default written
notice in the form of an Officers' Certificate of any Default or Event of
Default, their status and what action the Company and the Guarantor propose to
take in respect thereof.

         Section 7.2 Acceleration. If an Event of Default occurs and is
continuing with respect to a series of Notes (other than one relating to the
matters referred to in Section 7.1(v) or (vi), in which case, the principal of
all Outstanding Notes of each series shall become due and payable immediately),
then the Trustee or Holders of at least 25% in aggregate principal amount of the
Outstanding Notes of that series may declare the principal amount of all of the
Outstanding Notes of such series to be due and payable immediately, together
with accrued and unpaid interest, Additional Amounts, if any, accrued to the
date of repayment by a notice in writing to the Company and the Guarantor (and
to the Trustee if given by the Holders), and upon any such declaration, such
principal amount and accrued and unpaid interest shall become immediately due
and payable.

         At any time after such a declaration of acceleration with respect to
the Notes of a series subject to such declaration of acceleration has been made
and before a judgment or decree for payment of the money due has been obtained
by the Trustee or the Holders as hereinafter in this Article provided, the
Holders of a majority in aggregate principal amount of the Outstanding Notes of
the applicable series, by written notice to the Company, the Guarantor and the
Trustee, may rescind and annul such declaration of acceleration and its
consequences if:

                  (a) the Company or the Guarantor has irrevocably paid or
deposited with the Trustee a sum sufficient to pay:

                      (i) all overdue interest on all Notes of such series
         subject to such declaration of acceleration,


                                       29



                     (ii) the principal of all Notes of such series subject to
         such declaration of acceleration which become due otherwise than by
         such declaration of acceleration and any interest thereon at the rate
         or rates prescribed therefor in such Notes,

                    (iii) to the extent that payment of such interest is
         lawful, interest upon overdue interest at the rate or rates therefor in
         the Notes of such series subject to such declaration of acceleration,
         and

                     (iv) all sums paid or advanced by the Trustee hereunder and
         the reasonable compensation, expenses, disbursement and advances of the
         Trustee, its agents and counsel, and any other amounts due to the
         Trustee under Section 8.7; and

                  (b) all Events of Default with respect to Notes of such series
subject to such declaration of acceleration, other than the non-payment of the
principal of Notes subject to such declaration of acceleration which has become
due solely by such declaration of acceleration, have been cured or waived as
provided in Section 7.4.

         Section 7.3  Other Remedies. |

                  (a) If an Event of Default occurs and is continuing with
respect to Notes of a series, the Trustee may pursue any available remedy to
collect the payment of principal of and interest on the Notes of that series or
to enforce the performance of any provision of the Notes of that series or this
Indenture.

                  (b) The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Holder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.

         Section 7.4 Waiver of Past Defaults. | The Holders of not less than a
Qualified Majority in aggregate principal amount of the Outstanding Notes of a
series may on behalf of the Holders of all the Notes of such series waive any
Event of Default hereunder with respect to such series of Notes and its
consequences, except (i) a default in the payment of the principal of, or
premium, if any, or interest on, such Notes, or (ii) a Default in respect of a
covenant or agreement that cannot be modified or amended without the consent of
the Holder of each such Note affected thereby. Upon any such waiver, such
Default shall cease to exist and any Event of Default arising therefrom shall be
deemed to have been cured, for every purpose of this Indenture; but no such
waiver shall extend to any subsequent or other Event of Default or impair any
right consequent thereon.

         Section 7.5 Control by Majority. | The Holders of a majority in
principal amount of the Outstanding Notes of a series may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the Trustee. Subject to
Sections 8.1 and 8.2, however, the Trustee may refuse to follow any direction
that (i) conflicts with law or this Indenture, (ii) exposes the Trustee to
personal liability for which the Trustee would not be satisfactorily indemnified
pursuant to Section 8.7 hereof or (iii) is unduly prejudicial to such Holders
not joined therein; provided, further, that the Trustee may take any other
action deemed proper by the Trustee that is not inconsistent with such
direction.

         Section 7.6  Limitation on Suits. |

         No Holder of any Note will have any right to institute any proceeding
with respect to this Indenture for any remedy hereunder, unless:



                                       30



                  (a) such Holder has previously given to the Trustee written
notice of a continuing Event of Default;

                  (b) Holders of at least 25% in principal amount of the then
Outstanding Notes of the applicable series shall have made a written request to
the Trustee to pursue the remedy in its own name as trustee hereunder;

                  (c) such Holders of the Notes have provided to the Trustee
reasonable indemnity satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with such request;

                  (d) the Trustee does not comply within 60 days after its
receipt of such notice, request and offer of indemnity; and

                  (e) during such 60 day period the Holders of a majority in
principal amount of the Outstanding Notes of the applicable series have not
given the Trustee a written direction which is inconsistent with the request.

         Otherwise, no Holder of any Note will have any right to institute any
proceeding with respect to this Indenture or for any remedy hereunder, except:

                  (f) a Holder of a Note may institute suit for enforcement of
payment of the principal of and premium, if any, or interest on such Note on or
after the respective due dates expressed in such Note, or

                  (g) for the institution of any proceeding with respect to this
Indenture or any remedy thereunder, including, without limitation, acceleration,
by the Holders of a majority in principal amount of the Outstanding Notes of the
applicable series; provided, that upon institution of any proceeding or exercise
of any remedy, such Holder or Holders provide the Trustee with prompt written
notice thereof.

         Section 7.7 Rights of Holders to Receive Payment. | Notwithstanding any
other provision of this Indenture (including, without limitation, Section 7.6),
the right of any Holder to receive payment of principal of or interest on the
Notes held by such Holder, on or after the respective due dates or Redemption
Dates expressed in this Indenture or the Notes, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.

         Section 7.8 Collection Suit by Trustee. | If an Event of Default occurs
and is continuing, the Trustee may recover judgment in its own name and as
trustee of an express trust against the Company and the Guarantor for the whole
amount then due and owing (together with applicable interest on any overdue
principal and, to the extent lawful, interest on overdue interest) and the
amounts provided for in Section 8.7.

         Section 7.9  Trustee May File Proofs of Claim, etc. |

                  (a) The Trustee may (irrespective of whether the principal of
the Notes is then due):

                      (i) file such proofs of claim and other papers or
         documents as may be necessary or advisable in order to have the claims
         of the Trustee and the Holders under this Indenture and the Notes
         allowed in any bankruptcy, insolvency, liquidation or other judicial
         proceedings relative to the Company, the Guarantor or any Subsidiary of
         the Guarantor or their respective creditors or properties; and


                                       31



                     (ii) collect and receive any monies or other property
         payable or deliverable in respect of any such claims and distribute
         them in accordance with this Indenture.

Any receiver, trustee, liquidator, sequestrator (or other similar official) in
any such proceeding is hereby authorized by each Holder to make such payments to
the Trustee and, in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, taxes, disbursements and advances
of the Trustee, its agent and counsel, and any other amounts due to the Trustee
pursuant to Section 8.7.

                  (b) Nothing in this Indenture shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or composition affecting the
Notes or the rights of any Holder thereof, or to authorize the Trustee to vote
in respect of the claim of any Holder in any such proceeding.

         Section 7.10 Priorities. | If the Trustee collects any money or
property pursuant to this Article VII, it shall pay out the money or property in
the following order:

         FIRST:  to the Trustee for amounts due under Section 8.7;

         SECOND:  if the Holders proceed against the Company or the Guarantor
directly without the Trustee in accordance with this Indenture, to the Holders
for their collection costs;

         THIRD:  to the Holders for amounts due and unpaid on the Notes of the
applicable series for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on such Notes for
principal and interest, respectively; and

         FOURTH:  to the Company, the Guarantor or such other party as a court
of competent jurisdiction shall direct.

The Trustee may, upon notice to the Company and the Guarantor, fix a record date
and payment date for any payment to Holders pursuant to this Section 7.10.

         Section 7.11 Undertaking for Costs. | In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees and expenses, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section 7.11 does not apply
to a suit by the Trustee, a suit by the Company, a suit by the Guarantor, a suit
by a Holder pursuant to Section 7.7 or a suit by Holders of more than 10% in
principal amount of the Outstanding Notes of a series.

                                  ARTICLE VIII

                                     TRUSTEE

         Section 8.1  Duties of Trustee. |

                  (a) If a Default or an Event of Default has occurred and is
continuing, the Trustee shall exercise the rights and powers vested in it by
this Indenture and use the same degree of care and skill in their exercise as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.

                  (b) Except during the continuance of a Default or an Event of
Default:



                                       32


                      (i) the Trustee undertakes to perform such duties and only
         such duties as are specifically set forth in this Indenture and no
         implied covenants or obligations shall be read into this Indenture
         against the Trustee; and

                     (ii) in the absence of bad faith on its part, the Trustee
         may conclusively rely, as to the truth of the statements and the
         correctness of the opinions expressed therein, upon certificates or
         opinions furnished to the Trustee and conforming to the requirements of
         this Indenture. However, in the case of any such certificates or
         opinions which by any provisions hereof are specifically required to be
         furnished to the Trustee, the Trustee shall examine such certificates
         and opinions to determine whether or not they reasonably conform to the
         requirements of this Indenture (but need not confirm or investigate the
         accuracy of mathematical calculations or other facts stated therein).

                  (c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:

                      (i) this paragraph (c) does not limit the effect of
         paragraph (b) of this Section 8.1;

                     (ii) the Trustee shall not be liable for any error of
         judgment made in good faith by a Trust Officer unless it is proved that
         the Trustee was negligent in ascertaining the pertinent facts; and

                    (iii) the Trustee shall not be liable with respect to any
         action it takes or omits to take in good faith in accordance with a
         direction received by it pursuant to Section 7.2, 7.4 or 7.5.

                  (d) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company and
the Guarantor.

                  (e) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.

                  (f) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.

                  (g) Whether or not expressly provided herein, every provision
of this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Article VIII and to the provisions of the TIA.

                  (h) The Trustee shall not be liable for indirect or
consequential loss or damages in connection with this Indenture.

                  (i) Unless otherwise specifically provided in this Indenture,
any demand, request, direction or notice from the Company or the Guarantor shall
be sufficient if signed by an Officer of the Company or the Guarantor,
respectively.

                  (j) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders unless such Holders shall have offered to the
Trustee reasonable security or indemnity satisfactory to it against the costs,
expenses (including reasonable attorneys' fees and expenses) and liabilities
that might be incurred by it in compliance with such request or direction.


                                       33


         Section 8.2  Rights of Trustee. |  Subject to Section 8.1:

                  (a) The Trustee may conclusively rely and shall be fully
protected in acting or refraining from acting on any document (whether in
original or facsimile form) reasonably believed by it to be genuine and to have
been signed or presented by the proper party or parties. The Trustee need not
investigate any fact or matter stated in the document.

                  (b) Whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, it may require an Officers'
Certificate or an Opinion of Counsel. The Trustee shall not be liable for any
action it takes or omits to take in good faith in reliance on an Officers'
Certificate or Opinion of Counsel.

                  (c) The Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through its
attorneys and agents and shall not be responsible for the misconduct or
negligence on the part of any agent or attorney appointed with due care.

                  (d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers; provided, however, that the Trustee's conduct does not
constitute willful misconduct or negligence (as finally determined by a court of
competent jurisdiction).

                  (e) The Trustee may consult with counsel of its selection, and
the advice or opinion of counsel with respect to legal matters relating to this
Indenture, the Notes and the Guarantees shall be full and complete authorization
and protection from liability in respect to any action taken, omitted or
suffered by it hereunder in good faith and in accordance with the advice or
opinion of such counsel.

                  (f) If the Trustee shall determine, it shall be entitled to
examine the books, records and premises of the Company and the Guarantor,
personally or by agent or attorney.

                  (g) The Trustee shall not be deemed to have knowledge of any
Default or Event of Default unless a Trust Officer of the Trustee has Actual
Knowledge thereof or unless written notice of any event which is in fact such a
Default or Event of Default is received by the Trustee at the Corporate Trust
Office of the Trustee, and such notice references the Notes and this Indenture.

                  (h) The rights, privileges, protections, immunities and
benefits given to the Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each
of its capacities hereunder, and to each agent, custodian and other Person
employed to act hereunder.

                  (i) The Trustee may request that each of the Company and the
Guarantor deliver an Officers' Certificate setting forth the names of
individuals and/or titles of Officers authorized at such time to take specified
actions pursuant to this Indenture, which Officers' Certificate may be signed by
any Person authorized to sign an Officers' Certificate, including any Person
specified as so authorized in any such certificate previously delivered and not
superseded.

                  (j) Any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Order and any resolution of the
Board of Directors of the Company shall be sufficiently evidenced by a Board
Resolution.

         Section 8.3 Individual Rights of Trustee. | The Trustee in its
individual or any other capacity may become the owner or pledgee of Notes and
may otherwise deal with the Company, the Guarantor or any of its Affiliates with
the same rights it would have if it were not Trustee. Any Authenticating


                                       34


Agent, Paying Agent, Registrar or co-Registrar may do the same with like rights.
However, the Trustee must comply with Sections 8.10 and 8.11 and the
Authenticating Agent must comply with Section 2.2(d).

         Section 8.4 Trustee's Disclaimer. | The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture, the Guarantees or the Notes, it shall not be accountable for the
Company's use of the proceeds from the Notes, and it shall not be responsible
for any statement of the Company in this Indenture or in any document issued in
connection with the sale of the Notes or in the Notes other than the Trustee's
certificate of authentication.

         Section 8.5 Notice of Defaults. | If a Default or Event of Default
occurs and is continuing with respect to a series of Notes and if a Trust
Officer has Actual Knowledge thereof, the Trustee shall mail to each Holder of
such series of Notes, notice of the Default or Event of Default within 30 days
after the Trustee obtains Actual Knowledge thereof. Except in the case of a
Default or Event of Default in payment of principal of or interest on any Note
(including payments pursuant to the Optional Redemption, Optional Tax Redemption
or required repurchase provisions of such Note, if any), the Trustee may
withhold the notice if and so long as a committee of its Trust Officers in good
faith determines that withholding the notice is in the interests of the Holders
of such Notes.

         Section 8.6 Reports by Trustee to Holders. | The Trustee shall comply
with TIA Section 313. The Company agrees to notify promptly the Trustee whenever
any Notes become listed, quoted and/or traded on or by any stock exchange,
competent listing authority and/or quotation system and of any delisting
thereof.

         Section 8.7  Compensation and Indemnity. |

                  (a) The Company and the Guarantor (without duplication) shall
pay to the Trustee from time to time reasonable compensation for its acceptance
of this Indenture and services hereunder as the Company, the Guarantor and the
Trustee shall from time to time agree in writing. The Trustee's compensation
shall not be limited by any law on compensation of a trustee of an express
trust. The Company and the Guarantor (without duplication) shall reimburse the
Trustee upon request for all reasonable out-of-pocket expenses, disbursements
and advances incurred or made by it, including, without limitation, costs of
collection, costs of preparing and reviewing reports, certificates and other
documents, costs of preparation and mailing of notices to Holders. Such expenses
shall include the reasonable compensation and expenses, disbursements and
advances of the Trustee's agents, counsel, accountants and experts.

                  (b) The Company and the Guarantor (jointly and severally but
without duplication) shall indemnify the Trustee against any and all loss,
judgment, liability, claim, damage or expense (including reasonable attorneys'
fees and expenses) incurred by it without negligence, willful misconduct or bad
faith on its part arising out of or in connection with the acceptance and
administration of this trust and the performance of its duties hereunder,
including the costs and expenses of enforcing this Indenture (including this
Section 8.7) and of defending itself against any claims or liabilities (whether
asserted by any Holder, the Company or otherwise). The Trustee shall notify the
Company and the Guarantor promptly of any claim for which it may seek indemnity.
Failure by the Trustee to so notify the Company and the Guarantor shall not
relieve the Company or the Guarantor of its obligations hereunder. The Company
and the Guarantor shall defend the claim and the Trustee may, upon written
request to the Company and the Guarantor, have separate counsel and the Company
and the Guarantor shall upon such event pay the fees and expenses of such
counsel. Neither the Company nor the Guarantor need reimburse any expense or
indemnify against any loss, liability or expense incurred by the Trustee through
the Trustee's own negligence, willful misconduct or bad faith.

                  (c) To secure the Company's and the Guarantor's payment
obligations in this Section 8.7, the Trustee shall have a lien prior to the
Notes on all money or property held or collected



                                       35



by the Trustee other than money or property held in trust to pay principal of
and interest on particular Notes. The Trustee's right to receive payment of any
amounts due under this Section 8.7 shall not be subordinate to any other
liability or indebtedness of the Company or the Guarantor.

                  (d) The Company's and the Guarantor's payment obligations
pursuant to this Section 8.7 shall survive the discharge of this Indenture and
the resignation or removal of the Trustee. When the Trustee incurs expenses
after the occurrence of a Bankruptcy Default, the expenses are intended to
constitute expenses of administration under any Bankruptcy Law; provided,
however, that this shall not affect the Trustee's rights as set forth in this
Section 8.7 or Section 7.10.

         Section 8.8  Replacement of Trustee. |

                  (a) The Trustee may resign at any time by notifying the
Company and the Guarantor. The Holders of a majority in principal amount of the
Outstanding Notes of a series may remove the Trustee insofar as it relates to
the Notes of such series at any time by so notifying the Trustee in writing and
may appoint a successor Trustee reasonably acceptable to the Company and the
Guarantor. The Company or the Guarantor shall remove the Trustee if:

                      (i) the Trustee fails to comply with Section 8.10;

                     (ii) the Trustee is adjudged bankrupt or insolvent;

                    (iii) a receiver or other public officer takes charge of the
         Trustee or its property; or

                     (iv) the Trustee otherwise becomes incapable of acting.

                  (b) If the Trustee resigns or is removed by the Company, the
Guarantor or the Holders of a majority in principal amount of the Outstanding
Notes of a series (and such Holders do not reasonably promptly appoint a
successor Trustee), or if a vacancy exists in the office of the Trustee for any
reason (the Trustee in such event being referred to herein as the retiring
Trustee), the Company or the Guarantor shall promptly appoint a successor
Trustee for the applicable series.

                  (c) A successor Trustee shall deliver a written acceptance of
its appointment to the retiring Trustee and to the Company and the Guarantor.
Thereupon the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have all the rights, powers and
duties of the Trustee under this Indenture. The successor Trustee shall mail a
notice of its succession to Holders. The retiring Trustee shall promptly
transfer all property held by it as Trustee to the successor Trustee, subject to
the lien provided for in Section 8.7.

                  (d) If a successor Trustee does not deliver a written
acceptance of its appointment within 30 days after the retiring Trustee resigns
or is removed, the retiring Trustee or the Holders of 10% in principal amount of
the Outstanding Notes of the applicable series may petition, at the expense of
the Company and the Guarantor, any court of competent jurisdiction for the
appointment of a successor Trustee.

                  (e) If the Trustee fails to comply with Section 8.10, any
Holder of Notes of the applicable series may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.

                  (f) Notwithstanding the replacement of the Trustee pursuant to
this Section 8.8, each of the Company's and the Guarantor's obligations under
Section 8.7 shall continue for the benefit of the retiring Trustee.



                                       36




                  (g) In the event of the resignation, termination or removal of
the Trustee, the Company or the Guarantor (at the expense of the Company and the
Guarantor) shall within 30 days mail written notice thereof to the Holders of
Notes.

         Section 8.9  Successor Trustee by Merger. |

                  (a) If the Trustee consolidates with, merges or converts into,
or transfers all or substantially all its corporate trust business or assets to,
another Person, the resulting, surviving or transferee Person without any
further act shall be the successor Trustee.

                  (b) In case at the time such successor or successors to the
Trustee shall succeed to the trusteeship created by this Indenture, any of the
Notes shall have been authenticated but not delivered, any such successor to the
Trustee may adopt the certificate of authentication of any predecessor trustee,
and deliver such Notes so authenticated; and in case at that time any of the
Notes shall not have been authenticated, any successor to the Trustee may
authenticate such Notes either in the name of any predecessor hereunder or in
the name of the successor to the Trustee; and in all such cases such
certificates shall have the full force which it is anywhere in the Notes or in
this Indenture provided that the certificate of the Trustee shall have.

         Section 8.10 Eligibility; Disqualification. | The Trustee and the
Authenticating Agent shall at all times satisfy the requirements of TIA Section
310(a). The Trustee shall have a combined capital and surplus of at least
U.S.$50,000,000 as set forth in its most recent published annual report of
condition. The Trustee shall comply with TIA Section 310(b); provided, however,
that there shall be excluded from the operation of TIA Section 310(b)(1) any
indenture or indentures under which other securities or certificates of interest
or participation in other securities of the Company or the Guarantor are
outstanding if the requirements for such exclusion set forth in TIA Section
310(b)(1) are met.

         Section 8.11 Preferential Collection of Claims Against Company. | The
Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated.

         Section 8.12 Paying Agent and Calculation Agent. | All rights, duties
and immunities of the Trustee under this Indenture shall apply to any Paying
Agent and Calculation Agent under this Indenture.

                                   ARTICLE IX

            SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONIES

         Section 9.1 Satisfaction and Discharge. | The Indenture will be
discharged and will cease to be of further effect (except as to surviving rights
of registration of transfer or exchange of the Notes, as expressly provided for
in the Indenture and except as to the Company's and the Guarantor's obligations
under Section 8.7) as to all Outstanding Notes when:

                  (a) either:

                      (i) the Notes theretofore executed, authenticated and
         delivered (except lost, stolen or destroyed Notes which have been
         replaced or paid and Notes for whose payment money has theretofore been
         deposited in trust or segregated and held in trust by the Company or
         the Guarantor and thereafter repaid to the Company or the Guarantor or
         discharged from such trust) have been delivered to the Trustee for
         cancellation, or

                     (ii) all Notes not theretofore delivered to the Trustee for
         cancellation have become due and payable, or by their terms are due and
         payable within one year (or scheduled for Optional Redemption or
         Optional Tax Redemption within one year) and the Company or the



                                       37


         Guarantor has irrevocably deposited or caused to be deposited with the
         Trustee U.S. dollar funds sufficient to pay and discharge the entire
         indebtedness on the Notes not theretofore delivered to the Trustee for
         cancellation, for principal of and interest on the Notes to the date of
         deposit (or until their redemption, as confirmed by the opinion of an
         internationally recognized firm of independent public accountants),
         together with irrevocable written instructions from the Company or the
         Guarantor directing the Trustee to apply such funds to the payment;

                  (b) the Company or the Guarantor has paid all other sums
payable under: (i) this Indenture, (ii) the Notes and (iii) the Guarantees; and

                  (c) each of the Company and the Guarantor has delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel stating that all
conditions precedent under this Indenture relating to the satisfaction and
discharge of this Indenture have been complied with.

         Section 9.2  Application by Trustee of Funds Deposited for Payment of
Notes. |

         Subject to Section 9.4, all monies deposited with the Trustee pursuant
to Section 9.1 shall be held in trust and applied by it to the payment, either
directly or through any paying agent (including the Company or the Guarantor
acting as paying agent), to the Holders of the particular Notes for the payment
or redemption of which such monies have been deposited with the Trustee, of all
sums due and to become due thereon for principal and interest; but such money
need not be segregated from other funds except to the extent required by law.

         Section 9.3  Repayment of Monies Held by Paying Agent. |

         In connection with the satisfaction and discharge of this Indenture
with respect to the Notes, all monies then held by any paying agent under the
provisions of this Indenture with respect to such series of Notes shall, upon
written demand of the Company or the Guarantor, be repaid to the Company or the
Guarantor, as the case may be, or paid to the Trustee and thereupon such paying
agent shall be released from all further liability with respect to such monies.

         Section 9.4 Return of Monies Held by Trustee and Paying Agent Unclaimed
for Two Years. |

         Any monies deposited with or paid to the Trustee or any paying agent
for the payment of the principal of or interest (including Additional Amounts)
on any Note and not applied but remaining unclaimed for two years after the date
upon which such principal or interest (including Additional Amounts) shall have
become due and payable, shall, upon the written request of the Company and
unless otherwise required by mandatory provisions of applicable escheat or
abandoned or unclaimed property law, be repaid to the Company or the Guarantor
by the Trustee or such paying agent, and the Holder of such Note shall, unless
otherwise required by mandatory provisions of applicable escheat or abandoned or
unclaimed property laws, thereafter look only to the Company or the Guarantor
for any payment which such Holder may be entitled to collect, and all liability
of the Trustee or any paying agent with respect to such monies shall thereupon
cease.

                                    ARTICLE X

                                   AMENDMENTS

         Section 10.1  Without Consent of Holders. |

                  (a) The Company, the Guarantor and the Trustee may amend this
Indenture with respect to either or both series of Notes or the Notes of a
series without notice to or consent of any Holder:


                                       38


                      (i) to cure any ambiguity, omission, defect or
         inconsistency, provided that such action shall not adversely affect the
         interests of the Holders of the Notes of such series in any material
         respect;

                     (ii) to comply with Article IV or V in respect of the
         assumption by a Transferee Company or a Successor Company of the
         obligations of the Company under the Notes of such series and this
         Indenture with respect to such series of Notes;

                    (iii) to comply with Article V in respect of assumption by
         a Successor Guarantor of the obligations of the Guarantor under the
         Guarantees and this Indenture;

                     (iv) to provide for uncertificated Notes of such series in
         addition to or in place of certificated Notes of such series; provided,
         however, that the uncertificated Notes are issued in registered form
         for purposes of Section 163(f) of the Code;

                      (v) to add additional guarantees with respect to the
         Notes of such series or to secure the Notes of such series;

                     (vi) to add to the covenants of the Company or the
         Guarantor for the benefit of the Holders of Notes of such series or to
         surrender any right or power herein conferred upon the Company or the
         Guarantor;

                     (vii) to add any additional Events of Default for the
         benefit of the Holders of the Notes of such series;

                    (viii) to make any change that does not adversely affect the
         rights of any Holder of the Notes of such series in any material
         respect;

                     (ix) to provide for the issuance of Add On Notes as
         permitted by Section 2.11, which will have terms substantially
         identical to the other Outstanding Notes of the same series except as
         specified in Section 2.11, and which will be treated, together with any
         other Outstanding Notes of such series, as a single series of
         securities.

                  (b) After an amendment under this Section 10.1 becomes
effective, the Company or the Guarantor (at its own expense) shall mail to
Holders a notice briefly describing such amendment. The failure to give such
notice to all Holders, or any defect therein, shall not impair or affect the
validity of an amendment under this Section 10.1.

         Section 10.2  With Consent of Holders. |

                  (a) The Company, the Guarantor and the Trustee may amend this
Indenture with respect to the Notes of a series without notice to any Holder but
with the written consent of the Holders of at least a Qualified Majority in
principal amount of the Outstanding Notes of the applicable series (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), which consent(s) shall be delivered
to the Company, the Guarantor and the Trustee. However, without the consent of
each Holder of Notes of such series affected, an amendment may not:

                      (i) reduce the principal amount of Notes of such series
the Holders of which must consent to an amendment or waiver;

                     (ii) reduce the rate of, or change, or have the effect of
         changing the time for payment of, interest, including Additional
         Amounts, if any, on any Notes of such series or change in any adverse
         respect the obligation of the Company and the Guarantor to pay
         Additional Amounts with respect to such series;


                                       39



                    (iii) reduce the principal of, or change, or have the
         effect of changing the time for payment of principal or the fixed
         maturity of, any Notes of such series or the amount due upon an Event
         of Default, or change the date on which any Notes of such series may be
         subject to acceleration or redemption, or reduce the redemption price
         therefor;

                     (iv) make any Notes of such series payable in a currency or
         at a location other than that stated in the Notes or at a place other
         than stated in the Notes;

                      (v) make any change in the provisions of this Indenture
         entitling each Holder of Notes of such series to receive payment of
         principal of and interest on such Notes on or after the due date
         thereof or to bring suit to enforce such payment, or permitting Holders
         of a Qualified Majority in principal amount of Outstanding Notes of
         such series to waive compliance with various provisions of this
         Indenture or Defaults or Events of Default;

                     (vi) reduce the percentage of Holders of Notes of such
         series whose consent is needed to modify or amend the provisions of
         this Indenture with respect to the Notes of such series;

                    (vii) make any changes to this Section 10.2; or

                   (viii) change the terms of the Guarantees with respect to
         such series.

                  (b) It shall not be necessary for the consent of the Holders
under this Section 10.2 to approve the particular form of any proposed
amendment, but it shall be sufficient if such consent approves the substance
thereof.

                  (c) After an amendment under this Section 10.2 becomes
effective, the Company or the Guarantor shall mail to Holders of the applicable
series a notice briefly describing such amendment. The failure to give such
notice to all such Holders, or any defect therein, shall not impair or affect
the validity of an amendment under this Section 10.2.

         Section 10.3 Compliance with Trust Indenture Act. | Every amendment to
this Indenture or the Notes shall comply with the TIA as then in effect.

         Section 10.4  Acts of Holders; Record Dates. |

                  (a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or taken
by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing as herein otherwise expressly provided. Such action shall
become effective when such instrument or instruments are delivered to the
Trustee and, where it is hereby expressly required, to the Company or the
Guarantor. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and (subject to Section 8.1) conclusive in favor of
the Trustee, the Company and the Guarantor, if made in the manner provided in
this Section.

                  (b) The fact and date of the execution by any Person of any
such instrument or writing may be proved in any reasonable manner which the
Trustee deems sufficient.

                  (c) The Company or the Guarantor may set any day as a record
date for the purpose of determining the Holders of Outstanding Notes of any
series represented by Global Registered Notes or Certificated Notes entitled to
give, make or take any request, demand, authorization, direction, notice,
consent, waiver or other action provided or permitted by this


                                       40



Indenture to be given, made or taken by Holders of Notes of a series (for the
purposes of this Section 10.4 only, a "record date"); provided that the Company
and the Guarantor may not set a record date for, and the provisions of this
paragraph shall not apply with respect to, the giving or making of any notice,
declaration, request or direction referred to in the next paragraph. If any
record date is set pursuant to this paragraph, the Holders of Outstanding Notes
of a series represented by Global Registered Notes or Certificated Notes on such
record date, and no other Holders, shall be entitled to take the relevant
action, whether or not such Holders remain Holders after such record date;
provided that no such action shall be effective hereunder unless taken on or
prior to the applicable expiration date by Holders of the requisite principal
amount of Outstanding Notes of the applicable series on such record date.
Nothing in this paragraph shall be construed to prevent the Company or the
Guarantor from setting a new record date for any action for which a record date
has previously been set pursuant to this paragraph (whereupon the record date
previously set shall automatically and with no action by any Person be cancelled
and be of no effect), and nothing in this paragraph shall be construed to render
ineffective any action taken by Holders of the requisite principal amount of
Outstanding Notes of such series on the date such action is taken. Promptly
after any record date is set pursuant to this paragraph, the Company or the
Guarantor (at its own expense) shall cause notice of such record date, the
proposed action by Holders and the applicable expiration date to be given to the
Trustee in writing and to each Holder of Notes in the manner set forth in
Section 12.2.

         The Trustee may set any day as a record date for the purpose of
determining the Holders of Outstanding Notes of a series represented by Global
Registered Notes or Certificated Notes entitled to join in the giving or making
of (i) any request to institute proceedings referred to in Section 7.6 or (ii)
any direction referred to in Section 7.5, in each case with respect to the Notes
of such series. If any record date is set pursuant to this paragraph, the
Holders of Outstanding Notes of such series on such record date, and no other
Holders, shall be entitled to join in such notice, declaration, request or
direction, whether or not such Holders remain Holders after such record date;
provided that no such action shall be effective hereunder unless taken on or
prior to the applicable expiration date by Holders of the requisite principal
amount of Outstanding Notes of the applicable series on such record date.
Nothing in this paragraph shall be construed to prevent the Trustee from setting
a new record date for any action for which a record date has previously been set
pursuant to this paragraph (whereupon the record date previously set shall
automatically and with no action by any Person be cancelled and be of no
effect), and nothing in this paragraph shall be construed to render ineffective
any action taken by Holders of the requisite principal amount of Outstanding
Notes of such series on the date such action is taken. Promptly after any record
date is set pursuant to this paragraph, the Trustee, at the expense of the
Company and the Guarantor, shall cause notice of such record date, the proposed
action by Holders and the applicable expiration date to be given to the Company
and the Guarantor in writing and to each Holder of Notes in the manner set forth
in Section 12.2.

         With respect to any record date set pursuant to this Section, the party
hereto which sets such record date may designate any day as the "expiration
date" and from time to time may change the expiration date to any earlier or
later day; provided that no such change shall be effective unless notice of the
proposed new expiration date is given to the other parties hereto in writing and
to each Holder of Notes in the manner set forth in Section 12.2, on or prior to
the existing expiration date. Notwithstanding the foregoing, no expiration date
shall be later than the 180th day after the applicable record date and, if an
expiration date is not designated with respect to any record date set pursuant
to this Section, the party or parties hereto which set such record date shall be
deemed to have designated the 180th day after such record date as the expiration
date with respect thereto.

         Without limiting the foregoing, a Holder entitled hereunder to take any
action hereunder with regard to any particular Note may do so with regard to all
or any part of the principal amount of such Note or by one or more duly
appointed agents each of which may do so pursuant to such appointment with
regard to all or any part of such principal amount.

         Section 10.5 Notation on or Exchange of Notes. | If an amendment
changes the terms of a Note, the Trustee may require the Holder of the Note to
deliver it to the Trustee. The Trustee may


                                       41



place an appropriate notation on the Note regarding the changed terms and return
it to the Holder. Alternatively, if the Company, the Guarantor or the Trustee so
determines, the Company in exchange for the Note will execute and upon Company
Order the Trustee will authenticate a new Note of the same series that reflects
the changed terms. Failure to make the appropriate notation or to issue a new
Note shall not affect the validity of such amendment.

         Section 10.6 Trustee to Sign Amendments. | The Trustee shall sign any
amendment authorized pursuant to this Article X; provided that the Trustee may,
but shall not be obligated to, sign any amendment that adversely affects its own
rights, duties, liabilities or immunities. If it does, the Trustee may but need
not sign it. In signing such amendment the Trustee shall be entitled to receive
indemnity reasonably satisfactory to it and shall be provided with, and (subject
to Sections 8.1 and 8.2) shall be fully authorized and protected in relying upon
an Opinion of Counsel and an Officers' Certificate, each stating that such
amendment is authorized or permitted by this Indenture.

                                   ARTICLE XI

                                   GUARANTEES

         Section 11.1  The Guarantees. |

                  (a) The Guarantor hereby irrevocably and unconditionally
guarantees to each Holder of a Note of each series authenticated and delivered
by the Trustee the due and punctual payment of the principal of, any premium and
interest on, and any Additional Amounts with respect to, such Note, when and as
the same shall become due and payable, whether at the relevant Maturity Date, by
acceleration, redemption or otherwise, in accordance with the terms of such Note
and of this Indenture. In case of the failure of the Company punctually to pay
any such principal, premium, interest or Additional Amounts, the Guarantor
hereby agrees to cause any such payment to be made punctually when and as the
same shall become due and payable, whether at the relevant Maturity Date, upon
acceleration, redemption or otherwise, and as if such payment were made by the
Company. The aforesaid Guarantees are ones of payment and not of collection.

         Section 11.2 Guarantees Unconditional, etc. The Guarantor hereby agrees
that its obligations hereunder shall be as principal and not merely as surety,
and shall be absolute, irrevocable and unconditional, irrespective of, and shall
be unaffected by, any invalidity, irregularity or unenforceability of any Note
or this Indenture, any failure to enforce the provisions of any Note or this
Indenture, or any waiver, modification, consent or indulgence granted with
respect thereto by the Holder of such Note or the Trustee, the recovery of any
judgment against the Company or any action to enforce the same, or any other
circumstances which may otherwise constitute a legal or equitable discharge of a
surety or guarantor. The Guarantor hereby waives diligence, presentment, demand
of payment, filing of claims with a court in the event of merger, insolvency or
bankruptcy of the Company, any right to require a proceeding first against the
Company, protest or notice with respect to any such Note or the indebtedness
evidenced thereby and all demands whatsoever, and covenants that these
Guarantees will not be discharged except by payment in full of the principal of,
any premium and interest on, and any Additional Amounts required with respect
to, the Notes and the complete performance of all other obligations contained in
the Notes. The Guarantor further agrees, to the fullest extent that it lawfully
may do so, that as between the Guarantor, on the one hand, and the Holders and
the Trustee, on the other hand, the relevant Maturity Date of the obligations
guaranteed hereby may be accelerated as provided in Section 7.2 hereof for the
purposes of these Guarantees, notwithstanding any stay, injunction or
prohibition extant under any bankruptcy, insolvency, reorganization or other
similar law of any jurisdiction preventing such acceleration in respect of the
obligations guaranteed hereby.

         Section 11.3  Reinstatement.


                                       42



         These Guarantees shall continue to be effective or be reinstated, as
the case may be, if at any time payment on any Note, in whole or in part, is
rescinded or must otherwise be repaid or restored to the Company or the
Guarantor upon the bankruptcy, liquidation or reorganization of the Company, the
Guarantor or otherwise.

         Section 11.4  Subrogation

         The Guarantor shall be subrogated to all rights of the Holder of any
Note against the Company in respect of any amounts paid to such Holder by the
Guarantor pursuant to the provisions of these Guarantees; provided, however,
that the Guarantor shall not, without the consent of the Holders of all the
Notes of the applicable series then Outstanding, be entitled to enforce, or to
receive any payments arising out of or based upon, such right of subrogation
until the principal of, any premium and interest on, and any Additional Amounts
required with respect to, all Notes shall have been paid in full.

                                   ARTICLE XII

                                  MISCELLANEOUS

         Section 12.1 Trust Indenture Act Controls. | If any provision of this
Indenture limits, qualifies or conflicts with another provision which is
required or deemed to be included in this Indenture by the TIA, the required or
deemed provision shall control.

         Section 12.2  Notices. |

         Any notice or communication provided or permitted by this Indenture to
be given to the Company, the Guarantor, the Trustee or the Paying Agent may be
given to the Company, the Guarantees, the Trustee or any Paying Agent, as the
case may be, and shall be made in writing by hand-delivery, first-class mail,
facsimile or air courier guaranteeing next-day delivery:

         if to the Company:

         Pearson Dollar Finance plc
         80 Strand
         London WC2R 0RL
         United Kingdom

         Attention: Directors

         With a copy to:

         Pearson PLC
         80 Strand
         London WC2R 0RL
         United Kingdom

         Attention: General Counsel

         if to the Guarantor:

         Pearson PLC
         80 Strand
         London WC2R ORL
         United Kingdom


                                       43



         Attention: Group Treasurer

         With a copy to:

         Pearson PLC
         80 Strand
         London WC2R ORL
         United Kingdom

         Attention: General Counsel

         if to the Trustee and Paying Agent:

         The Bank of New York
         One Canada Square
         London E14 5AL
         United Kingdom
         [Attention: Alison Mitchell]

         All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered against written receipt;
one business day after being timely delivered to a next-day air courier; five
business days after being deposited in the mail postage prepaid; and when
receipt is acknowledged by the recipient's facsimile machine, if sent by
facsimile.

         The Company, the Guarantor, the Trustee or the Paying Agent by notice
to the others may designate additional or different addresses for subsequent
notices or communications. Such notices or communications may also be given by
any Holder of Notes to the Trustee or any Paying Agent through DTC in such
manner that such Trustee or Paying Agent, as the case may be, and DTC may
approve for such purpose.

         (b) All notices regarding the Notes shall be published (i) in a leading
English language daily newspaper of general circulation in New York City and
(ii) if and for so long as the Notes are listed on the Luxembourg Stock
Exchange, and for so long as the Luxembourg Stock Exchange rules so require, a
daily newspaper of general circulation in Luxembourg. Such publications will
initially be made in The Wall Street Journal in New York City and the
Luxemburger Wort in Luxembourg. The Company or the Guarantor (at its own
expense) shall also ensure that such notice is duly published in a manner that
complies with the rules and regulations of any other stock exchange, competent
listing authority and/or quotation system on or by which the Notes are for the
time being listed, quoted and/or traded. Any such notice will be deemed to have
been given on the date of the first publication or, where required to be
published in more than one newspaper, on the date of the first publication in
each such newspaper. Furthermore, the Company and the Guarantor shall send all
notices via first class mail or a courier delivery service to the Trustee and
the nominee of DTC.

         Section 12.3 Communication by Holders with Other Holders. | Holders may
communicate pursuant to TIA Section 312(b) with other Holders with respect to
their rights under this Indenture or the Notes. The Company, the Guarantor, the
Trustee, the Registrar and anyone else shall have the protection of TIA Section
312(c).

         Section 12.4 Certificate and Opinion as to Conditions Precedent. | Upon
any request or application by the Company or the Guarantor to the Trustee to
take or refrain from taking any action under this Indenture, the Company or the
Guarantor, as the case may be, shall furnish to the Trustee:

                  (a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the signer or
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and


                                       44



                  (b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such counsel, all
such conditions precedent, if any, have been complied with.

         Section 12.5 Statements Required in Certificate or Opinion. | Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:

                  (a) a statement that the individual making such  certificate
or opinion has read such covenant or condition and the definitions relating
thereto;

                  (b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;

                  (c) a statement that, in the opinion of such individual, he
has made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and

                  (d) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.

         In giving such Opinion of Counsel, counsel may rely as to factual
matters on an Officers' Certificate or on certificates of public officials
unless such counsel knows, or in the exercise of reasonable care, should know
that the Officers' Certificate or certificates of public officials or the
representations with respect to such matters are erroneous.

         Section 12.6  Form of Documents Delivered to Trustee. |

         In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters and any such Person may certify
or give an opinion as to such matters in one or several documents.

         Any certificate or opinion of an Officer of the Company or the
Guarantor may be based, insofar as it relates to legal matters, upon a
certificate or opinion of, or representations by, counsel, unless such Officer
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to the matters upon which his
certificate or opinion is based are erroneous. Any such certificate or Opinion
of Counsel may be based, insofar as it relates to factual matters, upon a
certificate or opinion of, or representations by, an Officer or Officers of the
Company or the Guarantor stating that the information with respect to such
factual matters is in the possession of the Company or the Guarantor, unless
such counsel knows or in the exercise of reasonable care should know, that the
opinion or representations with respect to such matters are erroneous.

         Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.

         Section 12.7 Rules by Trustee, Paying Agent and Registrar. | The
Trustee may make reasonable rules for action by, or a meeting of, Holders. The
Registrar and the Paying Agent may make reasonable rules for their functions.

         Section 12.8 Payment on Business Days. | If any Interest Payment Date,
a, Redemption Date or the relevant Maturity Date falls on a day that is not a
Business Day, the payment of interest and/or


                                       45


principal otherwise required to be paid on such day may be made on the next
succeeding Business Day, and no interest on such payment shall accrue for the
period from and after payment on such next succeeding Business Day.

         If a regular Record Date is not a Business Day, the Record Date shall
not be affected.

         Section 12.9  Governing Law, etc. |

                  (a) THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT THAT THE
AUTHORIZATION AND EXECUTION BY THE COMPANY AND THE GUARANTOR OF THE INDENTURE
AND THE NOTES OR THE GUARANTEES, AS APPLICABLE, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF ENGLAND, WITHOUT GIVING EFFECT TO ANY
CONTRARY CONFLICT OF LAWS OR CHOICE OF LAW PROVISIONS OF THE LAWS OF THE STATE
OF NEW YORK OR ANY OTHER JURISDICTION.

                  (b) To the extent that the Company or the Guarantor any of
their respective properties, assets or revenues, may have or may hereafter
become entitled to, or have attributed to it, any right of immunity, on the
grounds of sovereignty or otherwise, from any legal action, suit or proceeding,
from the giving of any relief in any such legal action, suit or proceeding, from
setoff or counterclaim, from the jurisdiction of any court, from service of
process, from attachment upon or prior to judgment, from attachment in aid of
execution of judgment, or from execution of judgment, or other legal process or
proceeding for the giving of any relief or for the enforcement of any judgment,
in any jurisdiction in which proceedings may at any time be commenced, with
respect to its obligations, liabilities or any other matter under or arising out
of or in connection with this Indenture, the Notes or the Guarantees, each of
the Company and the Guarantor hereby irrevocably and unconditionally waives, and
agrees not to plead or claim, any such immunity and consents to such relief and
enforcement.

                  (c) Each of the Company and the Guarantor hereby irrevocably
consents and agrees, for the benefit of the Holders and the Trustee, that any
legal action, suit or proceeding against it with respect to its obligations,
liabilities or any other matter arising out of or in connection with this
Indenture, the Notes or the Guarantees may be brought in any United States
federal court or New York state court, in each case located in the Borough of
Manhattan, The City of New York, and hereby irrevocably consents and submits to
the non-exclusive jurisdiction of each such court in personam, generally and
unconditionally with respect to any action, suit or proceeding for itself and in
respect of its properties, assets and revenues.

                  (d) Each of the Company and the Guarantor hereby irrevocably
designates, appoints, and empowers Pearson Inc., with an office at 1330 Avenue
of the Americas, New York, New York 10019, as its designee, appointee and agent
(the "Authorized Agent") to receive, accept and acknowledge for and on its
behalf, and its properties, assets and revenues, service of any and all legal
process, summons, notices and documents which may be served in any such action,
suit or proceeding brought in any United States federal court or New York state
court which may be made on such Authorized Agent in accordance with legal
procedures prescribed for such courts. If for any reason such Authorized Agent
hereunder shall cease to be available to act as such, each of the Company and
the Guarantor agrees to designate a new designee, appointee and agent in The
City of New York on the terms and for the purposes of this clause satisfactory
to the Trustee. Each of the Company and the Guarantor further hereby irrevocably
consents and agrees to the service of any and all legal process, summons,
notices and documents out of any of the aforesaid courts in any such action,
suit or proceeding by serving a copy thereof upon the relevant agent for service
of process referred to in this clause (whether or not the appointment of such
agent shall for any reason prove to be ineffective or such agent shall accept or
acknowledge such service) or by mailing copies thereof by registered or
certified air mail, first class, postage prepaid, to each of them at their
respective


                                       46



addresses specified in or designated pursuant to this Indenture. Each of the
Company and the Guarantor further agrees that the failure of any such Authorized
Agent to give any notice of such service to it shall not impair or affect in any
way the validity of such service or any judgment rendered in any action or
proceeding based thereon. Nothing herein shall in any way be deemed to limit the
ability of the Trustee or any Holder to serve any such legal process, summons,
notices and documents in any other manner permitted by applicable law or to
obtain jurisdiction over the Company or the Guarantor or bring actions, suits or
proceedings against the Company or the Guarantor in any jurisdiction, and in any
manner, as may be permitted by applicable law. Each of the Company and the
Guarantor hereby irrevocably and unconditionally waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of venue of any of the aforesaid actions, suits or proceedings arising out of or
in connection with this Indenture, the Notes or the Guarantees brought in any
United States federal court or New York state court, in each case located in the
Borough of Manhattan, The City of New York, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such action, suit or proceeding brought in any such court has been brought
in an inconvenient forum.

                  (e) Nothing in this Section 12.9 shall affect the right of the
Trustee or any Holder of the Notes to serve process in any other manner
permitted by law.

         Section 12.10 Successors. | All agreements of each of the Company and
the Guarantor in this Indenture, the Notes and the Guarantees shall bind each of
its successors and assigns. All agreements of the Trustee in this Indenture
shall bind its successors and assigns.

         Section 12.11 Duplicate and Counterpart Originals. | This Indenture may
be executed in any number of counterparts, each of which so executed shall be an
original, but all of them together represent the same agreement.

         Section 12.12 Severability. | In case any provision in this Indenture,
the Notes or the Guarantees shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.

         Section 12.13  Currency Indemnity. |

                  (a) The U.S. dollar is the sole currency of account and
payment for all sums payable by the Company or the Guarantor under or in
connection with the Notes, the Guarantees or this Indenture with respect to the
Notes, including damages. Any amount received or recovered in currency other
than U.S. dollars in respect of the Notes (whether as a result of, or of the
enforcement of, a judgment or order of a court of any jurisdiction, in the
winding-up or dissolution of the Company, the Guarantor, any Subsidiary or
otherwise) by any Holder of the Notes in respect of any sum expressed to be due
to it from the Company or the Guarantor shall only constitute a discharge of
them under the Notes, the Guarantor and this Indenture with respect to the Notes
only to the extent of the U.S. dollar amount which the recipient is able to
purchase with the amount so received or recovered in that other currency on the
date of that receipt or recovery (or, if it is not practicable to make that
purchase on that date, on the first date on which it is practicable to do so).
If that U.S. dollar amount is less than the U.S. dollar amount expressed to be
due to the recipient under the Notes, the Guarantees or this Indenture with
respect to the Notes, each of the Company and the Guarantor shall indemnify and
hold harmless the recipient against any loss or cost sustained by it in making
any such purchase. For the purposes of this Section 12.13, it will be sufficient
for the Holder of a Note to certify that it would have suffered a loss had an
actual purchase of U.S. dollars been made with the amount so received in that
other currency on the date of receipt or recovery (or, if a purchase of U.S.
dollars on such date had not been practicable, on the first date on which it
would have been practicable).

                  (b) The indemnities of each of the Company and the Guarantor
contained in this Section 12.13, to the extent permitted by law: (i) constitute
a separate and independent obligation



                                       47


from the other obligations of each of the Company and the Guarantor under the
Notes, the Guarantor and this Indenture with respect to the Notes; (ii) shall
give rise to a separate and independent cause of action against each of the
Company and the Guarantor; (iii) shall apply irrespective of any waiver granted
by any Holder of the Notes or the Trustee with respect to the Notes from time to
time; and (iv) shall continue in full force and effect notwithstanding any other
judgment, order, claim or proof of claim for a liquidated amount in respect of
any sum due under the Notes, the Guarantees or this Indenture with respect to
the Notes or any other judgment or order.

         Section 12.14 Benefits of Indenture. | Nothing in this Indenture, the
Notes or the Guarantees, express or implied, shall give to any Person, other
than the parties hereto and their successors hereunder and the Holders, any
benefit of any legal or equitable right, remedy or claim under this Indenture.

         Section 12.15 Table of Contents; Headings. | The table of contents and
headings of the Articles and Sections of this Indenture have been inserted for
convenience of reference only, are not intended to be considered a part hereof
and shall not modify or restrict any of the terms or provisions hereof.



                                       48




         IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.

                                 PEARSON DOLLAR FINANCE PLC

                                 By: /s/ Michael Day
                                 ------------------------
                                    Name:  Michael Day
                                    Title: Director






                                 PEARSON PLC

                                 By: /s/ Michael Day
                                 ------------------------
                                    Name:  Michael Day
                                    Title: Group Treasurer






                                 THE BANK OF NEW YORK

                                 as Trustee, Paying Agent and Calculation Agent

                                 By: /s/ Alison Mitchell
                                    ________________________________________
                                    Name:  Alison Mitchell
                                    Title: Assistant Treasurer



                                       49



                                                                       EXHIBIT A

                               FORM OF 2009 NOTES

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

                 [Include the following legend on all Notes that are Global
Registered Notes:

THIS NOTE IS A GLOBAL REGISTERED NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE THEREOF. THIS NOTE MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A NOTE
REGISTERED, AND NO TRANSFER OF THIS NOTE IN WHOLE OR IN PART MAY BE REGISTERED,
IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF,
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.]

                 [Include the following legend on all Notes that are Rule 144A
Global Notes:

THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE US SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") OR WITH ANY SECURITIES REGULATORY
AUTHORITY IN ANY JURISDICTION, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, US PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT) (2) AGREES THAT IT WILL NOT, WITHIN TWO
YEARS AFTER THE LATER OF (x) THE ORIGINAL ISSUANCE OF THIS NOTE AND (y) THE LAST
DATE ON WHICH PEARSON DOLLAR FINANCE PLC (THE "COMPANY"), PEARSON PLC (THE
"GUARANTOR") OR ANY AFFILIATE THEREOF WAS THE BENEFICIAL OWNER OF THIS NOTE (OR
ANY PREDECESSOR HEREOF) (THE "RESTRICTED PERIOD"), RESELL OR OTHERWISE TRANSFER
THIS NOTE EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH
CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY
TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION
OF THE RESTRICTED PERIOD. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY
OF THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT
FOR RESALES OF THIS NOTE.]

                [Include the following legend on all Notes that are Regulation S
Global Notes:

THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE US SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR WITH ANY SECURITIES REGULATORY
AUTHORITY IN ANY JURISDICTION, AND, ACCORDINGLY,



                                       50


MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, US PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A US PERSON AND IS
ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT,
PRIOR TO THE EXPIRATION OF THE DISTRIBUTION COMPLIANCE PERIOD (DEFINED AS 40
DAYS AFTER THE LATER OF THE CLOSING DATE WITH RESPECT TO THE NOTES AND THE
COMPLETION OF THE DISTRIBUTION OF THE NOTES), RESELL OR OTHERWISE TRANSFER THIS
NOTE EXCEPT (A)(1) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER
THE SECURITIES ACT OR (2) TO A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING
OF RULE 144A; AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE
STATES OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION. AS USED
HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "US PERSON" HAVE
THE MEANINGS GIVEN TO THEM IN REGULATION S UNDER THE SECURITIES ACT.]

                     [Include the following legend on all Notes that are
Certificated Notes:

IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR SUCH
OPINIONS OF COUNSEL, CERTIFICATES AND/OR OTHER INFORMATION AS IT MAY REASONABLY
REQUIRE IN FORM REASONABLY SATISFACTORY TO IT AS PROVIDED FOR IN THE INDENTURE
TO CONFIRM THAT THE TRANSFER COMPLIED WITH THE FOREGOING RESTRICTIONS AS
PROVIDED FOR IN THE INDENTURE.]



                                       51





                              FORM OF FACE OF NOTE

                     4.70% Guaranteed Senior Notes due 2009

No. [___]                                 Principal Amount U.S.$[______________]

                            [If the Note is a Global  Note include the following
                              two lines, as revised by the Schedule of Increases
                        and Decreases in Global Registered Note attached hereto]


                                                        [CUSIP NO. ____________]

                                                         [ISIN NO. ____________]

                                                     [COMMON CODE. ____________]


         Pearson Dollar Finance plc, a public company incorporated with limited
liability under the laws of England promises to pay to [___________], or its
nominee, or its registered assigns, the principal sum of [SPELL OUT IN WORDS]
U.S. dollars, [If the Note is a Global Registered Note, add the following, as
revised by the Schedule of Increases and Decreases in Global Registered Note
attached hereto], on [Maturity Date].

         Interest Payment Dates: o and o in each year

         Record Dates: o and o in each year

         Interest rate: o% per annum




         Additional provisions of this Note are set forth on the other side of
this Note.



                                       52




         IN WITNESS WHEREOF, Pearson Dollar Finance plc has caused this Note to
be signed by its duly authorized officer.

         Date: May o, 2004

                                            PEARSON DOLLAR FINANCE PLC

                                            By: ________________________________
                                                Name:
                                                Title:







                            TRUSTEE'S CERTIFICATE OF
                                 AUTHENTICATION

         The Bank of New York, as Trustee, certifies that this is one of the
Notes referred to in the Indenture.

             Date: May o, 2004

                                            By: ________________________________
                                                Authorized Signatory





                                    GUARANTEE

         This Note is irrevocably and unconditionally guaranteed by the
Guarantor in the manner and to the extent set forth in Article XI of the
Indenture.

             Date: May o, 2004

                                            PEARSON PLC

                                            By: ________________________________
                                                Name:
                                                Title:



                                       53



                          FORM OF REVERSE SIDE OF NOTE

                        O% GUARANTEED SENIOR NOTES DUE O

1.       Interest

         Pearson Dollar Finance plc (the "Company"), a public company
incorporated with limited liability under the laws of England (and each of its
successors and assigns under the Indenture), promises to pay interest on the
principal amount of this Note at the rate per annum shown above.

         The Company will pay interest semi-annually in arrears on each Interest
Payment Date of each year commencing o, 2004. Interest on the Notes will accrue
from the most recent date to which interest has been paid on the Notes or, if no
interest has been paid, from o, 2004. Interest on the Notes will be payable in
U.S. dollars at the Company's office or agency in the Borough of Manhattan, the
City of New York, New York. If interest is required to be calculated for any
period less than a year, other than with respect to regular semi-annual
payments, it will be calculated based on a 360-day year consisting of twelve
30-day months.

         All payments in respect of the Notes will be made free and clear of and
without deduction or withholding for or on account of any Taxes, unless such
withholding or deduction is required by law or by the interpretation or
administration thereof. In that event, the Company or Pearson PLC (the
"Guarantor"), as the case may be, will pay to each Holder of the Notes
Additional Amounts as provided in the Indenture subject to the limitations set
forth in the Indenture.

2.       Method of Payment

         On the date on which any principal of or interest on any Note is due
and payable, the Company shall irrevocably deposit with the Trustee or the
Paying Agent in New York, New York [If a Certificated Note, and in Luxembourg]
U.S. dollar funds sufficient to pay such principal and/or interest. The Company
will pay interest to the Persons who are registered Holders of Notes at the
close of business on the Record Date preceding the Interest Payment Date even if
Notes are cancelled, repurchased or redeemed after the Record Date and on or
before the relevant Interest Payment Date. Holders must surrender Notes to a
Paying Agent to collect principal payments. The Company will pay principal and
interest in U.S. dollars.

         Payments (including principal and interest) will be made by the
transfer of immediately available funds to the account specified by DTC with
respect to the Global Registered Note. [If this a Certificated Note, add the
following: The Company will make all payments in respect of a Certificated Note
(including principal and interest) by mailing a check to the registered address
of each Holder thereof; provided, however, that payments on the Notes may also
be made, in the case of a Holder of at least U.S.$1,000,000 aggregate principal
amount of Notes, by wire transfer to a U.S. dollar account maintained by the
payee with a bank in the United States if such Holder elects payment by wire
transfer by giving written notice to the Trustee or the Paying Agent to such
effect designating such account no later than 15 days immediately preceding the
relevant due date for payment (or such other date as the Trustee may accept in
its discretion).]



                                       54



3.       Paying Agent and Registrar

         Initially, The Bank of New York (the "Trustee"), will act as Trustee,
Paying Agent, Calculation Agent and Registrar. [If this Note is a Certificated
Note, The Bank of New York (Luxembourg) will act as Paying Agent and transfer
agent in Luxembourg.] The Company or the Guarantor may appoint and change any
Paying Agent, Registrar or co-registrar without notice to any Holder. The
Company or the Guarantor may act as Paying Agent, Registrar or co-registrar.

4.       Indenture

         The Company issued the Notes under an Indenture, dated as May o, 2004
(as it may be amended or supplemented from time to time in accordance with the
terms thereof, the "Indenture"), among the Company, the Guarantor and the
Trustee. In the event of an inconsistency between the terms of the Notes set
forth herein and other terms of the Indenture, the terms set forth in any part
of the Indenture other than in Exhibit A thereto shall govern. The terms of the
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the TIA. Capitalized terms used but not defined herein have the
meanings ascribed thereto in the Indenture. The Notes are subject to all such
terms, and Holders are referred to the Indenture and the TIA for a statement of
those terms. Each Holder, by accepting a Note, agrees to be bound by all of the
terms and provisions of the Indenture, as amended from time to time.

         The Notes are general senior unsecured obligations of the Company and
have the benefit of an irrevocable and unconditional guarantee of the Guarantor.
Subject to the conditions set forth in the Indenture and without the consent of
the Holders, the Company may issue Add On Notes. All Notes of this series will
be treated as a single class of securities under the Indenture.

         The Indenture imposes certain limitations on, among other things, (i)
the ability of the Company, the Guarantor and its Principal Subsidiaries to
create Liens to secure Relevant Indebtedness or (ii) the ability of the Company
and the Guarantor to consolidate or merge or transfer, lease or convey all or
substantially all of the Company's or the Guarantor's respective assets unless
certain conditions are satisfied.

5.       Redemption

         Optional Tax Redemption. The Notes may be redeemed on not less than 30
nor more than 60 days' prior written notice to the Trustee, and, in accordance
with the procedures described in the Indenture, to each Holder of the Notes, at
the option of the Company or the Guarantor, in whole, but not in part, at any
time, if:

         (a) on the occasion of the next payment of interest due under the
Notes, each of the Company and the Guarantor has or will become obliged to pay
Additional Amounts as a result of any change in, or amendment to, the laws or
regulations of the Company's domicile or any authority in or of the Company's or
the Guarantor's domicile, having power to tax, or any change in the official
judicial or administrative interpretation of those laws and regulations, which
change or amendment becomes effective on or after the Issue Date; and

         (b) each of the Company and the Guarantor is unable to avoid this
obligation by taking reasonable measures available to it, provided that no
notice of Optional Tax Redemption shall be given earlier than 90 days prior to
the earliest date on which the Company or the Guarantor, as the case may be,
would be obliged to pay, deduct or withhold amounts were a payment in respect of
the Notes then due.

         Notes redeemed pursuant to an Optional Tax Redemption will be redeemed
at an amount equal to the principal amount of the Notes being redeemed together
with Additional Amounts, if any, plus any accrued and unpaid interest to (but
excluding) the Redemption Date.


                                       55


         Optional Redemption. The Notes may also be redeemed, as a whole at any
time or in part from time to time, at the option of the Company, at a redemption
price equal to the greater of:

         (a)  100% of the principal amount of the Notes being redeemed; or

         (b)  as determined by the Calculation Agent, the sum of the present
values of the remaining scheduled payments of principal and interest on the
Notes being redeemed, not including any portion of such payment of interest
accrued on the Redemption Date, from the Redemption Date to the relevant
Maturity Date, discounted to the Redemption Date on a semi-annual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Treasury
Rate plus o basis points,

plus any accrued and unpaid interest to (but excluding) the Redemption Date and
Additional Amounts, if any.

         Notice of any redemption will be mailed at least 30 days but no more
than 60 days before the Redemption Date to the Trustee, the Guarantor and, in
accordance with the procedures described in the Indenture, to each Holder of
Notes to be redeemed.

         Unless the Company or the Guarantor defaults in payment of the
redemption price, on and after the Redemption Date, interest will cease to
accrue on the Notes called for redemption.

6.       Denominations; Transfer; Exchange

         The Notes are in fully registered form without coupons, and only in
denominations of principal amount of U.S.$1,000 and any integral multiples of
U.S.$1,000 in excess thereof. A Holder may transfer or exchange Notes in
accordance with the Indenture. The Registrar may require a Holder, among other
things, to furnish appropriate endorsements or transfer documents. The Registrar
need not register the transfer of or exchange (i) any Notes selected for
redemption (except, in the case of a Note to be redeemed in part, the portion of
the Note not to be redeemed) for a period beginning 15 days before the mailing
of a notice of Notes to be redeemed and ending on the date of such mailing or
(ii) any Notes for a period beginning 15 days before an Interest Payment Date
and ending on such Interest Payment Date.

7.       Persons Deemed Owners

         The Holder of this Note may be treated as the owner of it for all
purposes.

8.       Unclaimed Money

         If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Company
or the Guarantor at its written request unless an abandoned property law
designates another Person. After any such payment, Holders entitled to the money
must look only to the Company or the Guarantor and not to the Trustee for
payment.

9.       Discharge Prior to Redemption or Maturity

         Subject to certain conditions set forth in the Indenture, the Company
or the Guarantor at any time may terminate some or all of its obligations under
the Notes and the Indenture if the Company or the Guarantor deposits with the
Trustee U.S. dollar funds for the payment of principal of and interest on the
Notes to redemption or maturity, as the case may be.


                                       56



10.      Defaults and Remedies

         If an Event of Default occurs and is continuing, and subject to the
provisions set forth in the Indenture, the Trustee or any Holder of a Note may
declare the Note to be due and payable immediately.

         Holders may not enforce the Indenture or the Notes except as provided
in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes
unless it receives reasonable indemnity or security satisfactory to it. Subject
to certain limitations, Holders of a majority in principal amount of the
Outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders notice of any continuing Default or Event
of Default (except a Default or Event of Default in payment of principal or
interest) if it determines that withholding notice is in their interest.

11.      Trustee Dealings with the Company

         Subject to certain limitations set forth in the Indenture, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company, the Guarantor or its Affiliates and may otherwise
deal with the Company, the Guarantor or its Affiliates with the same rights it
would have if it were not Trustee.

12.      Authentication

         This Note shall not be valid or enforceable unless and until an
authorized signatory of the Trustee (or an Authenticating Agent acting on its
behalf) manually signs the certificate of authentication on the other side of
this Note.

13.      Abbreviations

         Customary abbreviations may be used in the name of a Holder or an
assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the
entirety), JT TEN (= joint tenants with rights of survivorship and not as
tenants in common), CUST (= custodian) and U/G/M/A (= Uniform Gift to Minors
Act).

14.      Governing Law

         THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK, EXCEPT THAT THE AUTHORIZATION AND EXECUTION BY
THE COMPANY OF THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF ENGLAND WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAWS OR CHOICE OF
LAWS PROVISIONS OF THE LAWS OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION.

15.      Currency of Account;  Conversion of Currency.

         The U.S. dollar is the sole currency of account and payment for all
sums payable by the Company under or in connection with the Notes or the
Indenture, including damages. The Company will indemnify the Holders as provided
in respect of the conversion of currency relating to the Notes and the
Indenture.

16.      Agent for Service;  Submission to Jurisdiction;  Waiver of Immunities.

         Each of the Company and the Guarantor has agreed that any suit, action
or proceeding against the Company or the Guarantor brought by any Holder or the
Trustee arising out of or based upon the


                                       57


Indenture or the Notes may be instituted in any state or federal court in the
Borough of Manhattan, the City of New York, New York. Each of the Company and
the Guarantor has irrevocably submitted to the non-exclusive jurisdiction of
such courts for such purpose and waived, to the fullest extent permitted by law,
trial by jury and any objection it may now or hereafter have to the laying of
venue of any such proceeding, and any claim it may now or hereafter have that
any proceeding in any such court is brought in an inconvenient forum. Each of
the Company and the Guarantor has appointed Pearson Inc., with an office at 1330
Avenue of the Americas, New York, NY 10019 as its authorized agent upon whom all
writs, process and summonses may be served in any suit, action or proceeding
arising out of or based upon the Indenture or the Notes which may be instituted
in any state or federal court in the Borough of Manhattan, the City of New York.
To the extent that the Company or the Guarantor has or hereafter may acquire any
immunity (sovereign or otherwise) from any legal action, suit or proceeding,
from jurisdiction of any court or from set-off or any legal process (whether
service or notice, attachment in aid or otherwise) with respect to itself or any
of its property, each of the Company and the Guarantor has irrevocably waived
and agreed not to plead or claim such immunity in respect of its obligations
under the Indenture or the Notes.

17.      Defined Terms.

         Capitalized terms used but not defined herein shall have the respective
meanings ascribed to them in the Indenture. The term "Note" or "Notes" as used
herein shall refer to Notes of this series.

         The Company will furnish to any Holder upon written request and without
charge to the Holder a copy of the Indenture which has in it the text of this
Note. Requests may be made to: Pearson Dollar Finance plc, 80 Strand, London
WC2R 0RL, United Kingdom.



                                       58





                                 ASSIGNMENT FORM

                  To assign this Note, fill in the form below:

                    I or we assign and transfer this Note to



                  --------------------------------------------

              (Print or type assignee's name, address and zip code)



                  --------------------------------------------

             (Insert assignee's Social Security or Tax I.D. Number)

and irrevocably appoint as agent to transfer this Note on the books of the
Company. The agent may substitute another to act for him.


Date:________________________           Your Signature:_________________________

Signature Guarantee:______________________________
                    (Signature must be guaranteed)


________________________________________________________________________________

Sign exactly as your name appears on the other side of this Note.

The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program), pursuant to
Rule 17Ad-15 under the Securities Exchange Act of 1934.



                                       59




                [To be attached to Global Registered Notes only:

                SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE

         The following increases or decreases in this Global Registered Note
have been made:




                                          AMOUNT OF INCREASE IN     PRINCIPAL AMOUNT OF      SIGNATURE OF
                 AMOUNT OF DECREASE IN    PRINCIPAL AMOUNT OF       THIS GLOBAL REGISTERED   AUTHORIZED SIGNATORY
DATE OF          PRINCIPAL AMOUNT OF      THIS GLOBAL REGISTERED    NOTE FOLLOWING SUCH      OF TRUSTEE OR PAYING
EXCHANGE         THIS GLOBAL NOTE         NOTE                      DECREASE OR INCREASE     AGENT
- ---------        ---------------------    -----------------------   ----------------------   --------------------
                                                                                 


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------



]



                                       60





                                                                       EXHIBIT B

                               FORM OF 2014 NOTES

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

   [Include the following legend on all Notes that are Global Registered Notes:

THIS NOTE IS A GLOBAL REGISTERED NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE THEREOF. THIS NOTE MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A NOTE
REGISTERED, AND NO TRANSFER OF THIS NOTE IN WHOLE OR IN PART MAY BE REGISTERED,
IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF,
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.]

   [Include the following legend on all Notes that are Rule 144A Global Notes:

THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE US SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") OR WITH ANY SECURITIES REGULATORY
AUTHORITY IN ANY JURISDICTION, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, US PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT) (2) AGREES THAT IT WILL NOT, WITHIN TWO
YEARS AFTER THE LATER OF (x) THE ORIGINAL ISSUANCE OF THIS NOTE AND (y) THE LAST
DATE ON WHICH PEARSON DOLLAR FINANCE PLC (THE "COMPANY"), PEARSON PLC (THE
"GUARANTOR") OR ANY AFFILIATE THEREOF WAS THE BENEFICIAL OWNER OF THIS NOTE (OR
ANY PREDECESSOR HEREOF) (THE "RESTRICTED PERIOD"), RESELL OR OTHERWISE TRANSFER
THIS NOTE EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH
CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY
TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION
OF THE RESTRICTED PERIOD. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY
OF THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT
FOR RESALES OF THIS NOTE.]

  [Include the following legend on all Notes that are Regulation S Global Notes:

THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE US SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR WITH ANY SECURITIES REGULATORY
AUTHORITY IN ANY JURISDICTION, AND, ACCORDINGLY,


                                       61



MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, US PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A US PERSON AND IS
ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT,
PRIOR TO THE EXPIRATION OF THE DISTRIBUTION COMPLIANCE PERIOD (DEFINED AS 40
DAYS AFTER THE LATER OF THE CLOSING DATE WITH RESPECT TO THE NOTES AND THE
COMPLETION OF THE DISTRIBUTION OF THE NOTES), RESELL OR OTHERWISE TRANSFER THIS
NOTE EXCEPT (A)(1) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER
THE SECURITIES ACT OR (2) TO A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING
OF RULE 144A; AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE
STATES OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION. AS USED
HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "US PERSON" HAVE
THE MEANINGS GIVEN TO THEM IN REGULATION S UNDER THE SECURITIES ACT.]

   [Include the following legend on all Notes that are Certificated Notes:

IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR SUCH
OPINIONS OF COUNSEL, CERTIFICATES AND/OR OTHER INFORMATION AS IT MAY REASONABLY
REQUIRE IN FORM REASONABLY SATISFACTORY TO IT AS PROVIDED FOR IN THE INDENTURE
TO CONFIRM THAT THE TRANSFER COMPLIED WITH THE FOREGOING RESTRICTIONS AS
PROVIDED FOR IN THE INDENTURE.]



                                       62





                              FORM OF FACE OF NOTE

                      5.70% Guaranteed Senior Note due 2014

No. [___]                                 Principal Amount U.S.$[______________]

                            [If the Note is a Global  Note include the following
                          two lines, as revised by the Schedule of Increases and
                            Decreases in Global Registered Note attached hereto]


                                                        [CUSIP NO. ____________]

                                                         [ISIN NO. ____________]

                                                      [COMMON CODE ____________]


         Pearson Dollar Finance plc, a public company incorporated with limited
liability under the laws of England promises to pay to [___________], or its
nominee, or its registered assigns, the principal sum of [SPELL OUT IN WORDS]
U.S. dollars, [If the Note is a Global Registered Note, add the following, as
revised by the Schedule of Increases and Decreases in Global Registered Note
attached hereto], on [Maturity Date].

         Interest Payment Dates: o and o in each year

         Record Dates: o and o in each year

         Interest rate: o% per annum





         Additional provisions of this Note are set forth on the other side of
this Note.


                                       63






         IN WITNESS WHEREOF, Pearson Dollar Finance plc has caused this Note to
be signed by its duly authorized officer.

         Date: May o, 2004

                                            PEARSON DOLLAR FINANCE PLC

                                            By: ________________________________
                                                Name:
                                                Title:






                            TRUSTEE'S CERTIFICATE OF
                                 AUTHENTICATION

         The Bank of New York, as Trustee, certifies that this is one of the
Notes referred to in the Indenture.

         Date: May o, 2004

                                            By: ________________________________
                                                Authorized Signatory





                                    GUARANTEE

         This Note is irrevocably and unconditionally guaranteed by the
Guarantor in the manner and to the extent set forth in Article XI of the
Indenture.

             Date: May o, 2004

                                            PEARSON PLC

                                            By: ________________________________
                                                Name:
                                                Title:



                                       64






                          FORM OF REVERSE SIDE OF NOTE

                        O% GUARANTEED SENIOR NOTES DUE O

1.       Interest

         Pearson Dollar Finance plc (the "Company"), a public company
incorporated with limited liability under the laws of England (and each of its
successors and assigns under the Indenture), promises to pay interest on the
principal amount of this Note at the rate per annum shown above.

         The Company will pay interest semi-annually in arrears on each Interest
Payment Date of each year commencing O, 2004. Interest on the Notes will accrue
from the most recent date to which interest has been paid on the Notes or, if no
interest has been paid, from O, 2004. Interest on the Notes will be payable in
U.S. dollars at the Company's office or agency in the Borough of Manhattan, the
City of New York, New York. If interest is required to be calculated for any
period less than a year, other than with respect to regular semi-annual
payments, it will be calculated based on a 360-day year consisting of twelve
30-day months.

         All payments in respect of the Notes will be made free and clear of and
without deduction or withholding for or on account of any Taxes, unless such
withholding or deduction is required by law or by the interpretation or
administration thereof. In that event, the Company or Pearson PLC (the
"Guarantor"), as the case may be, will pay to each Holder of the Notes
Additional Amounts as provided in the Indenture subject to the limitations set
forth in the Indenture.

2.       Method of Payment

         On the date on which any principal of or interest on any Note is due
and payable, the Company shall irrevocably deposit with the Trustee or the
Paying Agent in New York, New York [If a Certificated Note, and in Luxembourg]
U.S. dollar funds sufficient to pay such principal and/or interest. The Company
will pay interest to the Persons who are registered Holders of Notes at the
close of business on the Record Date preceding the Interest Payment Date even if
Notes are cancelled, repurchased or redeemed after the Record Date and on or
before the relevant Interest Payment Date. Holders must surrender Notes to a
Paying Agent to collect principal payments. The Company will pay principal and
interest in U.S. dollars.

         Payments (including principal and interest) will be made by the
transfer of immediately available funds to the account specified by DTC with
respect to the Global Registered Note. [If this a Certificated Note, add the
following: The Company will make all payments in respect of a Certificated Note
(including principal and interest) by mailing a check to the registered address
of each Holder thereof; provided, however, that payments on the Notes may also
be made, in the case of a Holder of at least U.S.$1,000,000 aggregate principal
amount of Notes, by wire transfer to a U.S. dollar account maintained by the
payee with a bank in the United States if such Holder elects payment by wire
transfer by giving written notice to the Trustee or the Paying Agent to such
effect designating such account no later than 15 days immediately preceding the
relevant due date for payment (or such other date as the Trustee may accept in
its discretion).]



                                       65



3.       Paying Agent and Registrar

         Initially, The Bank of New York (the "Trustee"), will act as Trustee,
Paying Agent, Calculation Agent and Registrar. [If this Note is a Certificated
Note, The Bank of New York (Luxembourg) will act as Paying Agent and transfer
agent in Luxembourg.] The Company or the Guarantor may appoint and change any
Paying Agent, Registrar or co-registrar without notice to any Holder. The
Company or the Guarantor may act as Paying Agent, Registrar or co-registrar.

4.       Indenture

         The Company issued the Notes under an Indenture, dated as May O, 2004
(as it may be amended or supplemented from time to time in accordance with the
terms thereof, the "Indenture"), among the Company, the Guarantor and the
Trustee. In the event of an inconsistency between the terms of the Notes set
forth herein and other terms of the Indenture, the terms set forth in any part
of the Indenture other than in Exhibit B thereto shall govern. The terms of the
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the TIA. Capitalized terms used but not defined herein have the
meanings ascribed thereto in the Indenture. The Notes are subject to all such
terms, and Holders are referred to the Indenture and the TIA for a statement of
those terms. Each Holder, by accepting a Note, agrees to be bound by all of the
terms and provisions of the Indenture, as amended from time to time.

         The Notes are general senior unsecured obligations of the Company and
have the benefit of an irrevocable and unconditional guarantee of the Guarantor.
Subject to the conditions set forth in the Indenture and without the consent of
the Holders, the Company may issue Add On Notes. All Notes of this series will
be treated as a single class of securities under the Indenture.

         The Indenture imposes certain limitations on, among other things, (i)
the ability of the Company, the Guarantor and its Principal Subsidiaries to
create Liens to secure Relevant Indebtedness or (ii) the ability of the Company
and the Guarantor to consolidate or merge or transfer, lease or convey all or
substantially all of the Company's or the Guarantor's respective assets unless
certain conditions are satisfied.

5.       Redemption

         Optional Tax Redemption. The Notes may be redeemed on not less than 30
nor more than 60 days' prior written notice to the Trustee, and, in accordance
with the procedures described in the Indenture, to each Holder of the Notes, at
the option of the Company or the Guarantor, in whole, but not in part, at any
time, if:

         (a) on the occasion of the next payment of interest due under the
Notes, each of the Company and the Guarantor has or will become obliged to pay
Additional Amounts as a result of any change in, or amendment to, the laws or
regulations of the Company's domicile or any authority in or of the Company's or
the Guarantor's domicile, having power to tax, or any change in the official
judicial or administrative interpretation of those laws and regulations, which
change or amendment becomes effective on or after the Issue Date; and

         (b) each of the Company and the Guarantor is unable to avoid this
obligation by taking reasonable measures available to it, provided that no
notice of Optional Tax Redemption shall be given earlier than 90 days prior to
the earliest date on which the Company or the Guarantor, as the case may be,
would be obliged to pay, deduct or withhold amounts were a payment in respect of
the Notes then due.

         Notes redeemed pursuant to an Optional Tax Redemption will be redeemed
at an amount equal to the principal amount of the Notes being redeemed together
with Additional Amounts, if any, plus any accrued and unpaid interest to (but
excluding) the Redemption Date.


                                       66



         Optional Redemption. The Notes may also be redeemed, as a whole at any
time or in part from time to time, at the option of the Company, at a redemption
price equal to the greater of:

         (a)  100% of the principal amount of the Notes being redeemed; or

         (b)  as determined by the Calculation Agent, the sum of the present
values of the remaining scheduled payments of principal and interest on the
Notes being redeemed not including any portion of such payment of interest
accrued on the Redemption Date, from the Redemption Date to the relevant
Maturity Date, discounted to the Redemption Date on a semi-annual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Treasury
Rate plus o basis points,

plus any accrued and unpaid interest to (but excluding) the Redemption Date and
Additional Amounts, if any.

         Notice of any redemption will be mailed at least 30 days but no more
than 60 days before the Redemption Date to the Trustee, the Guarantor and, in
accordance with the procedures described in the Indenture, to each Holder of
Notes to be redeemed.

         Unless the Company or the Guarantor defaults in payment of the
redemption price, on and after the Redemption Date, interest will cease to
accrue on the Notes called for redemption.

6.       Denominations; Transfer; Exchange

         The Notes are in fully registered form without coupons, and only in
denominations of principal amount of U.S.$1,000 and any integral multiples of
U.S.$1,000 in excess thereof. A Holder may transfer or exchange Notes in
accordance with the Indenture. The Registrar may require a Holder, among other
things, to furnish appropriate endorsements or transfer documents. The Registrar
need not register the transfer of or exchange (i) any Notes selected for
redemption (except, in the case of a Note to be redeemed in part, the portion of
the Note not to be redeemed) for a period beginning 15 days before the mailing
of a notice of Notes to be redeemed and ending on the date of such mailing or
(ii) any Notes for a period beginning 15 days before an Interest Payment Date
and ending on such Interest Payment Date.

7.       Persons Deemed Owners

         The Holder of this Note may be treated as the owner of it for all
purposes.

8.       Unclaimed Money

         If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Company
or the Guarantor at its written request unless an abandoned property law
designates another Person. After any such payment, Holders entitled to the money
must look only to the Company or the Guarantor and not to the Trustee for
payment.

9.       Discharge Prior to Redemption or Maturity

         Subject to certain conditions set forth in the Indenture, the Company
or the Guarantor at any time may terminate some or all of its obligations under
the Notes and the Indenture if the Company or the Guarantor deposits with the
Trustee U.S. dollar funds for the payment of principal of and interest on the
Notes to redemption or maturity, as the case may be.


                                       67



10.      Defaults and Remedies

         If an Event of Default occurs and is continuing, and subject to the
provisions set forth in the Indenture, the Trustee or any Holder of a Note may
declare the Note to be due and payable immediately.

         Holders may not enforce the Indenture or the Notes except as provided
in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes
unless it receives reasonable indemnity or security. Subject to certain
limitations, Holders of a majority in principal amount of the Outstanding Notes
may direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders notice of any continuing Default or Event of Default
(except a Default or Event of Default in payment of principal or interest) if it
determines that withholding notice is in their interest.

11.      Trustee Dealings with the Company

         Subject to certain limitations set forth in the Indenture, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with and collect obligations
owed to it by the Company, the Guarantor or its Affiliates and may otherwise
deal with the Company, the Guarantor or its Affiliates with the same rights it
would have if it were not Trustee.

12.      Authentication

         This Note shall not be valid or enforceable unless and until an
authorized signatory of the Trustee (or an Authenticating Agent acting on its
behalf) manually signs the certificate of authentication on the other side of
this Note.

13.      Abbreviations

         Customary abbreviations may be used in the name of a Holder or an
assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the
entirety), JT TEN (= joint tenants with rights of survivorship and not as
tenants in common), CUST (= custodian) and U/G/M/A (= Uniform Gift to Minors
Act).

14.      Governing Law

         THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK, EXCEPT THAT THE AUTHORIZATION AND EXECUTION BY
THE COMPANY OF THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF ENGLAND WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAWS OR CHOICE OF
LAWS PROVISIONS OF THE LAWS OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION.

15.      Currency of Account;  Conversion of Currency.

         The U.S. dollar is the sole currency of account and payment for all
sums payable by the Company under or in connection with the Notes or the
Indenture, including damages. The Company will indemnify the Holders as provided
in respect of the conversion of currency relating to the Notes and the
Indenture.

16.      Agent for Service;  Submission to Jurisdiction;  Waiver of Immunities.

         Each of the Company and the Guarantor has agreed that any suit, action
or proceeding against the Company or the Guarantor brought by any Holder or the
Trustee arising out of or based upon the Indenture or the Notes may be
instituted in any state or federal court in the Borough of Manhattan, the


                                       68



City of New York, New York. Each of the Company and the Guarantor has
irrevocably submitted to the non-exclusive jurisdiction of such courts for such
purpose and waived, to the fullest extent permitted by law, trial by jury and
any objection it may now or hereafter have to the laying of venue of any such
proceeding, and any claim it may now or hereafter have that any proceeding in
any such court is brought in an inconvenient forum. Each of the Company and the
Guarantor has appointed Pearson Inc., with an office at 1330 Avenue of the
Americas, New York, NY 10019 as its authorized agent upon whom all writs,
process and summonses may be served in any suit, action or proceeding arising
out of or based upon the Indenture or the Notes which may be instituted in any
state or federal court in the Borough of Manhattan, the City of New York. To the
extent that the Company or the Guarantor has or hereafter may acquire any
immunity (sovereign or otherwise) from any legal action, suit or proceeding,
from jurisdiction of any court or from set-off or any legal process (whether
service or notice, attachment in aid or otherwise) with respect to itself or any
of its property, each of the Company and the Guarantor has irrevocably waived
and agreed not to plead or claim such immunity in respect of its obligations
under the Indenture or the Notes.

17.      Defined Terms.

         Capitalized terms used but not defined herein shall have the respective
meanings ascribed to them in the Indenture. The term "Note" or "Notes" as used
herein shall refer to Notes of this series.

         The Company will furnish to any Holder upon written request and without
charge to the Holder a copy of the Indenture which has in it the text of this
Note. Requests may be made to: Pearson Dollar Finance plc, 80 Strand, London
WC2R 0RL, United Kingdom.


                                       69





                                 ASSIGNMENT FORM

                  To assign this Note, fill in the form below:

                  I or we assign and transfer this Note to



                  --------------------------------------------

              (Print or type assignee's name, address and zip code)



                  --------------------------------------------

             (Insert assignee's Social Security or Tax I.D. Number)

and irrevocably appoint as agent to transfer this Note on the books of the
Company. The agent may substitute another to act for him.


Date:______________________           Your Signature:___________________________


Signature Guarantee:______________________________
                    (Signature must be guaranteed)


________________________________________________________________________________

Sign exactly as your name appears on the other side of this Note.

The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program), pursuant to
Rule 17Ad-15 under the Securities Exchange Act of 1934.



                                       70





                   [To be attached to Global Registered Notes only:

                   SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE

         The following increases or decreases in this Global Registered Note
have been made:



                                          AMOUNT OF INCREASE IN     PRINCIPAL AMOUNT OF      SIGNATURE OF
                 AMOUNT OF DECREASE IN    PRINCIPAL AMOUNT OF       THIS GLOBAL REGISTERED   AUTHORIZED SIGNATORY
DATE OF          PRINCIPAL AMOUNT OF      THIS GLOBAL REGISTERED    NOTE FOLLOWING SUCH      OF TRUSTEE OR PAYING
EXCHANGE         THIS GLOBAL NOTE         NOTE                      DECREASE OR INCREASE     AGENT
- ---------        ---------------------    -----------------------   ----------------------   --------------------
                                                                                 


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------


- ---------        ---------------------    -----------------------   ----------------------   --------------------









                                       71




                                                                       EXHIBIT C

                FORM OF TRANSFER CERTIFICATE FOR TRANSFER TO QIB

                                                     [Date]

The Bank of New York
One Canada Square
48th Floor
London E14 5AL
United Kingdom

[Attention: Alison Mitchell]


         Re:    o% Guaranteed Senior Notes due o (the "Notes") of Pearson Dollar
Finance plc (the "Company") guaranteed by Pearson PLC (the "Guarantor")



Ladies and Gentlemen:

         Reference is hereby made to the Indenture, dated as of May o, 2004 (as
amended and supplemented from time to time, the "Indenture"), between the
Company, the Guarantor and The Bank of New York, as Trustee. Capitalized terms
used but not defined herein shall have the meanings given them in the Indenture.

         This letter relates to U.S.$ [o] aggregate principal amount of Notes
[in the case of a transfer of an interest in a Regulation S Global Note to a QIB
during the Distribution Compliance Period] which represents an interest in a
Regulation S Global Note beneficially owned by the undersigned (the
"Transferor") to effect the transfer of such Notes in exchange for an equivalent
beneficial interest in the Rule 144A Global Note.

         In connection with such request, and with respect to such Notes, the
Transferor does hereby certify that such Notes are being transferred in
accordance with Rule 144A under the Securities Act of 1933, as amended ("Rule
144A"), to a transferee that the Transferor reasonably believes is purchasing
the Notes for its own account or an account with respect to which the transferee
exercises sole investment discretion, and the transferee, as well as any such
account, is a "qualified institutional buyer" within the meaning of Rule 144A,
in a transaction meeting the requirements of Rule 144A and in accordance with
applicable securities laws of any state of the United States or any other
jurisdiction.

         You and the Company and the Guarantor are entitled to rely upon this
letter and are irrevocably authorized to produce this letter or a copy hereof to
any interested party in any administrative or legal proceedings or official
inquiry with respect to the matters covered hereby.

         Very truly yours,

         [Name of Transferor]

         By:________________________________

         ___________________________________
         Authorized Signature



                                       72




                                                                       EXHIBIT D

        FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS
                            PURSUANT TO REGULATION S

                                                        [Date]

The Bank of New York
One Canada Square
48th Floor
London E14 5AL
United Kingdom

[Attention:  Alison Mitchell]



     Re: o% Guaranteed Senior Notes due o (the "Notes") of Pearson Dollar
Finance plc (the "Company") guaranteed by Pearson PLC (the "Guarantor")



Ladies and Gentlemen:

         Reference is hereby made to the Indenture, dated as of May o, 2004 (as
amended and supplemented from time to time, the "Indenture"), between the
Company, the Guarantor and The Bank of New York, as Trustee. Capitalized terms
used but not defined herein shall have the meanings given them in the Indenture.

         In connection with our sale of U.S.$ [o] aggregate principal amount of
the Notes [in the case of a transfer of an interest in a 144A Global Note to a
Non-US Person in accordance with Regulation S], which represent an interest in a
144A Global Note beneficially owned by the undersigned ("Transferor"), we
confirm that such sale has been effected pursuant to and in accordance with
Regulation S under the Securities Act of 1933, as amended (the "Securities
Act"), and, accordingly, we represent that:

         (a) the offer of the Notes was not made to a person in the United
States;

         (b) either (i) at the time the buy order was originated, the transferee
was outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United States or (ii)
the transaction was executed in, on or through the facilities of, a designated
off-shore securities market and neither we nor any person acting on our behalf
knows that the transaction has been pre-arranged with a buyer in the United
States;

         (c) no directed selling efforts have been made in the United States in
contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S,
as applicable;

         (d)  the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act; and

         (e)  we are the beneficial owner of the principal amount of Notes being
transferred.

         In addition, if the sale is made during the Distribution Compliance
Period and the provisions of Rule 904(b)(1) or Rule 904(b)(2) of Regulation S
are applicable thereto, we confirm that such sale


                                       73



has been made in accordance with the applicable provisions of Rule 904(b)(1) or
Rule 904(b)(2), as the case may be.

         You and the Company and the Guarantor are entitled to rely upon this
letter and are irrevocably authorized to produce this letter or a copy hereof to
any interested party in any administrative or legal proceedings or official
inquiry with respect to the matters covered hereby. Terms used in this letter
have the meanings set forth in Regulation S.

         Very truly yours,

         [Name of Transferor]

         By:________________________________

         ___________________________________
         Authorized Signature




                                       74




                                                                       EXHIBIT E


                         FORM OF RULE 144 CERTIFICATION

                                                       [Date]

The Bank of New York
One Canada Square
48th Floor
London E14 5AL
United Kingdom

[Attention: Alison Mitchell]


         Re:  o% Guaranteed Senior Notes due o (the "Notes") of Pearson Dollar
Finance plc (the "Company") guaranteed by Pearson PLC (the "Guarantor")



Ladies and Gentlemen:

         Reference is hereby made to the Indenture, dated as of May o, 2004 (as
amended and supplemented from time to time, the "Indenture"), between the
Company, the Guarantor and The Bank of New York, as Trustee. Capitalized terms
used but not defined herein shall have the meanings given them in the Indenture.

         In connection with our sale of U.S.$ [o] aggregate principal amount of
the Notes [in the case of a transfer of an interest in a 144A Global Note] which
represents an interest in a 144A Global Note beneficially owned by the
undersigned ("Transferor"), we confirm that such sale has been effected pursuant
to and in accordance with Rule 144 under the Securities Act.

         You and the Company and the Guarantor are entitled to rely upon this
letter and are irrevocably authorized to produce this letter or a copy hereof to
any interested party in any administrative or legal proceedings or official
inquiry with respect to the matters covered hereby.

         Very truly yours,

         [Name of Transferor]

         By:________________________________

         ___________________________________
         Authorized Signature


                                       75

EX-4.1

                                                                     Exhibit 4.1


                                                   PEARSON PLC
3                                                  80 Strand
                                                   London WC2R 0RL

                                                   Telephone +44 (0)20 7010 2000
                                                   Facsimile +44 (0)20 7010 6060
                                                   www.pearson.com

January 28, 2005

CONFIDENTIAL

Peter Jovanovich


Re:      Employment with Pearson Education and its Affiliates

Dear Peter:

This letter ("Letter Agreement") outlines our arrangements regarding your
employment with Pearson Education Holdings Inc. (together with its successors
and assigns, the "Company"), Pearson plc, and their affiliates, as follows:

1.       Disability Leave: Duties. As we are both in agreement that you are no
longer able to perform any of the material and substantial duties of your job,
you will step down as President and Chief Executive Officer of the Company
effective January 31, 2005 (the "Disability Date"). You will also resign from
all other officer and director positions you hold with the Company, Pearson plc,
and their affiliates as of the Disability Date. As of the Disability Date, you
will relinquish all of your day-to-day duties and responsibilities as President
and Chief Executive Officer of the Company. We very much appreciate your offer
to make yourself available for appropriate consulting projects during the 18
month period following the Disability Date on a pro bono basis. We will be
discussing possible projects with you, but we acknowledge and agree that none of
the benefits outlined in this Letter Agreement is conditioned upon your taking
on or completing any such projects.

2.       Payments and Benefits. After the Disability Date, you will be entitled
to receive only the following payments and benefits (in each case subject to
applicable tax withholding):

         a.   Short Term Disability. With the assistance of the Company's Human
Resources Department, you will apply for benefits under the Company's Short-Term
Disability (STD) Plan. The STD Plan will provide you with 100% of your current
base salary ($890,000) from the Disability Date through the earlier of the date
of your death and the six month anniversary of the Disability Date (the "STD
Period").

         b.   Long Term Disability. Prior to the end of the STD Period, with the
assistance of and in consultation with the Company's Human Resources Department,
you will apply for benefits under the Company's Long-Term Disability (LTD) Plan.
Assuming you qualify and continue to qualify thereunder, UNUM, our insurance
carrier, will pay you (on a non-taxable basis, no less frequently than monthly,
and in approximately equal installments) $300,000 annually (60% of the first
$500,000 of your base salary), commencing on the six month anniversary of the
Disability Date and ending on the earlier of the date of your death and the date
you attain age 65 (the "LTD Period"), provided that for purposes of



REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723




                                                                     pearson plc


paragraphs 2(c), 2(e), 2(f), 2(h) and 3, the LTD Period shall end upon your
knowingly rendering material services to a material competitor of the Company or
any of its affiliates ("Competitive Services").

         c.   Supplemental Long-Term Disability Benefits. During the LTD Period,
we will supplement your benefits under the LTD Plan and pay you (on a taxable
basis, no less frequently than monthly, and in approximately equal periodic
installments) $234,000 annually (60% of your base salary above $500,000, or 60%
of ($890,000 less $500,000)). In addition, to the extent that the $300,000 in
annualized non-taxable LTD payments discussed in paragraph 2(b) are not promptly
and fully paid to you throughout the LTD Period (e.g., because the LTD benefit
is reduced, eliminated, or delayed, or because you do not otherwise initially
qualify for the benefit), we will promptly make up any lost, reduced or delayed
payment to you, on a fully tax grossed-up basis (assuming taxation at the
highest applicable marginal rates), provided you have, in good faith, filed
applications, submitted to physical exams or interviews, and supplied other
information, in each case as may be required under the applicable LTD Plan or
UNUM policy; provided further that if all or any portion of any such make-up
payment is later paid by UNUM, you agree to promptly pay such amount, or assign
your right to such amount, to the Company. If during the LTD Period you receive
earnings for services rendered to any entity not affiliated with the Company or
Pearson plc, amounts otherwise payable to you under this paragraph 2(c) will be
reduced dollar-for-dollar by the amount of such earnings.

         d.   Benefits during the STD Period. During the STD Period, you will be
treated as an active employee for purposes of all of the equity, welfare,
pension, retirement and other benefit plans of the Company and its affiliates,
provided that following the Disability Date, you acknowledge that no new awards
will be made to you under any of the Pearson plc stock plans (other than any
awards made pursuant to the second sentence of paragraph 2(h)).

         e.   Benefits during the LTD Period.

               (i)  Medical, Dental and Vision Plans. Your coverage (and that of
your dependents) in the Pearson Inc. medical, hospitalization, dental and vision
plans and programs will continue during the LTD Period at the same level, and
with the same benefits, as are then provided to active employees of the Company
who participate in those plans and programs. You will be required to contribute
toward the costs of those plans and programs at the same level, and on the same
basis, as active employees.

              (ii) Life Insurance. Your coverage under the Pearson Inc. basic
life insurance plan will continue during the LTD Period at the same level in
force prior to the Disability Date. The Company will pay the full cost of this
coverage. You also are entitled to continue to participate, during the LTD
Period, in the supplemental life insurance plan at the same level in force prior
to the Disability Date, provided that you continue to pay premiums at no greater
a rate than the rate that then applies to active employees whose coverage
continues. You may apply to the insurance company for a wavier of premium for
the supplemental life coverage once you have been receiving LTD benefits for 6
months.


REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723
Page 2




                                                                     pearson plc


             (iii)  Vacation. At the expiration of the STD Period, you will
receive payment for any unused vacation days that are then accrued. You will
accrue vacation days during the STD Period, and will cease to accrue additional
vacation days upon the expiration of the STD Period.

              (iv)  Retirement Plans. At the expiration of the STD Period, you
(a) will cease to accrue additional benefits under, and (b) will be entitled to
apply for, and receive, benefits under the Pearson Inc. Pension Plan,
Supplemental Executive Retirement Plan, Pearson Inc. Retirement Plan (401k),
Pearson Excess Retirement Plan, and Pearson Inc. Share Bonus Plan in accordance
with the terms of those plans.

         f.   Individual Defined Contribution Arrangement. During both the STD
and LTD Periods, the Company will continue to credit your notional account under
your Individual Defined Contribution Arrangement (as described in our letter to
you dated June 13, 2003, with contributions at an annualized rate of $409,400
made in approximately equal periodic installments no less frequently than
monthly. All amounts credited to you under this arrangement (including, for
avoidance of doubt, notional interest) will be paid to you (or, in the event of
your death, to your nominated beneficiary) in a lump sum promptly following the
end of the LTD Period.

         g.   Annual Bonus. You will be paid your annual bonus in respect of
2004 in cash, such payment to be made at the time, and in the amount, that would
have applied if your active employment with the Company had continued
indefinitely, and determined without regard to any period of disability during
2004.

         h.   Pearson plc Stock Plans. The treatment of your outstanding awards
under the Pearson plc stock plans will governed by the terms of the applicable
plan documents and your individual award agreements, and, except with respect to
any plan intended to qualify under Section 401(a) or 423 of the Internal Revenue
Code, applied as if your active employment with the Company had continued
throughout the LTD Period. In the event that during the LTD Period, active
senior executives of the Company, Pearson plc, or any of their affiliates
receive special grants or awards in respect of grants or awards that correspond
to grants or awards that you received prior to the Disability Date, then you too
shall be entitled to receive corresponding special grants or awards, which
grants and awards shall be on terms and conditions (including relative amounts)
no less favorable than those received by continuing senior executives and shall
thereafter be treated as if your active employment with the Company had
continued throughout the LTD Period. The treatment of any awards or grants
described in the previous two sentences that are outstanding at the time of the
termination of the LTD Period will be governed by the terms of the applicable
plans and, to the extent that the Personnel Committee has discretion as to the
treatment of any such awards or grants, we will recommend to the Personnel
Committee that it exercise such discretion in the manner that is most favorable
to you or your beneficiaries, except where such termination is by reason of your
rendering Competitive Services.

3.       Indemnification/D&O Insurance.

         a.   In the event that any Claim is made, is threatened to be made, or
is reasonably anticipated to be made, against you that arise out of or relates
to your



REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723
Page 3




                                                                     pearson plc


employment by, or services for, the Company, Pearson plc, or any of their
affiliates, then you shall promptly be indemnified and held harmless to the
fullest extent permitted or authorized by the corporate governance documents of
the Company or Pearson plc, or if greater, by applicable law, against any and
all costs, expenses, liabilities and losses (including, without limitation,
attorneys' and other professional fees and charges reasonably incurred,
judgments, interest, expenses of investigation reasonably incurred, penalties,
fines, ERISA excise taxes or penalties, and amounts paid or to be paid pursuant
to settlements reasonably entered into) incurred or suffered by you in
connection therewith, and such indemnification shall continue through the STD
and LTD Periods, and thereafter, and shall inure to the benefit of your heirs,
executors and administrators. You shall be entitled to prompt advancement of any
and all costs and expenses (including, without limitation, attorneys' and other
professional fees and charges) incurred by you in connection with any such
Claim, or in connection with seeking to enforce your rights under this paragraph
3(a), any such advancement to be made within 15 days after you give written
notice, supported by reasonable documentation, requesting such advancement. Such
notice shall include and undertaking by you to repay the amount advanced if you
are ultimately determined not to be entitled to indemnification against such
costs and expenses. You shall be deemed to have met any standard of conduct
required for indemnification unless the contrary shall be established by the
Company or Pearson plc. Nothing in this Agreement, or the attached Release,
shall operate to limit or extinguish any right to indemnification, advancement
of expenses, or contribution that you would otherwise have (including, without
limitation, by agreement or under applicable law). For purposes of this
paragraph 3(a), "Claim" shall mean any claim, demand, investigation, dispute,
threat, discovery request, or request for testimony or information.

         b.   A directors' and officers' liability insurance policy (or
policies) shall be kept in place, until at least the sixth anniversary of the
Disability Date, providing coverage to you that is no less favorable to you in
any respect (including, without limitation, with respect to scope, exclusions,
amounts, and deductibles) than the coverage then being provided to any active
senior executive or director of the Company or any active director of Pearson
plc.

4.       Cessation of all other Compensation and Benefits. You will not receive
compensation, payments or benefits of any kind from the Company, Pearson plc or
its affiliates in respect of any period that ends after the Disability Date
other than those set forth in paragraphs 2 and 3 above, and you expressly
acknowledge and agree that, except with respect to the payments and benefits
specifically set forth in this Letter Agreement, you are not entitled to any
compensation, payment or benefit from the Company, Pearson plc or its affiliates
whatsoever, including, without limitation, any right to payments or benefits
under your letter of employment dated October 9, 2000 and subsequent amendments
or supplements thereto (the "Employment Agreement").

5.       Restrictive Covenants. The covenants and agreements made by you in
paragraphs 12, 13 and 14 of your Employment Agreement shall remain in full force
and effect in accordance with their terms, with the expiration of the STD Period
treated as your last day of employment for purposes of paragraph 12.
Notwithstanding the forgoing, you shall be entitled to retain, and not return to
the Company, your personal rolodex, personal


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                                                                     pearson plc


correspondence files, documents relating to your personal entitlements and
obligations, and the like.

6.       Release. In order to be entitled to the payments and benefits set forth
in paragraphs 2(c), 2(e)(i) and the second sentence of 2(h), and in
consideration therefor, you must (i) deliver a signed and dated copy of the
attached Release no later than February 21, 2005, and (ii) not subsequently
revoke your execution of such Release.

7.       Assignability; Binding Nature.

         a.   This Letter Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors, heirs (in your case) and
assigns.

         b.   No rights or obligations of the Company or Pearson plc under this
Letter Agreement may be assigned or transferred by the Company or Pearson plc
(each a "Company Transferor") except that such rights and obligations may be
assigned or transferred pursuant to a merger, consolidation or other combination
in which the Company Transferor is not the continuing entity, or a sale or
liquidation of all or substantially all of the business and assets of the
Company Transferor, provided that the assignee or transferee is the successor to
all or substantially all of the business and assets of the Company Transferor
and such assignee or transferee expressly assumes the liabilities, obligations
and duties of the Company Transferor as set forth in this Agreement.

         c.   None of your rights or obligations under this Agreement may be
assigned or transferred by you other than your rights to compensation and
benefits, which may be transferred only by will or by operation of law.
Notwithstanding the previous sentence, you shall be entitled, to the extent
permitted under applicable plans, programs and arrangements of the Company,
Pearson plc, and their affiliates, to select and change a beneficiary or
beneficiaries to receive any compensation or benefit hereunder following your
death by giving written notice thereof. In the event of your death or a judicial
determination of your incompetence, references in this Letter Agreement to you
shall be deemed, where appropriate, to refer to your beneficiary, estate or
other legal representatives.

8.       Miscellaneous. This Letter Agreement may be executed in several
counterparts, each or which shall be deemed to be an original but all of which
together will constitute one and the same instrument. Signatures delivered by
facsimile shall be effective for all purposes. This Letter Agreement constitutes
the entire agreement, and supersedes all prior agreements, of the parties hereto
relating to the subject matter hereof, except to the extent otherwise set forth
herein, and there are no written or oral terms or representations made by any
party other than those contained herein and therein. This Letter Agreement
cannot be modified, altered or amended except by a writing signed by all the
parties. No waiver by either party of any provision or condition of this Letter
Agreement at any time shall be deemed a waiver of such provision or condition at
any prior or subsequent time or of any provision or condition at the same or any
prior or subsequent time. This Letter Agreement and attached Release shall be
governed by and construed in accordance with the domestic laws of the State of
New York, except to the extent preempted by federal law, without giving effect
to any choice of law or conflict of law provision or rule (whether of the


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                                                                     pearson plc


State of New York or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of New York. You are under no
obligation to seek other employment or otherwise mitigate our obligations under
this Letter Agreement. Other than as expressly set forth in this Letter
Agreement, there shall be no offset against amounts or benefits due to you under
this Letter Agreement (or otherwise) because of any benefit or remuneration you
receive after the Disability Date. In the event of any inconsistency between any
provision of this Letter Agreement and any provision of any plan, program,
policy, agreement, corporate governance document, or other arrangement of the
Company, Pearson plc, or any of their affiliates, the provisions of this Letter
Agreement shall control. The headings of the paragraphs and subparagraphs
contained in this Letter Agreement are for convenience only and shall not be
deemed to control or affect the meaning or construction of any provision of this
Letter Agreement.

9.       Notices. Signed and dated copies of this Letter Agreement, the Release,
and any revocation of the Release should be sent by mail, courier, or facsimile
to:

                                          Richard Glicini
                                          Senior Vice President, Human Resources
                                          Pearson Education
                                          One Lake Street
                                          Upper Saddle River, NJ  07458
                                          (201) 236-3370 (tel)
                                          (201) 236-3382 (fax)

10.      Public Announcement. You and we will agree on the form of all
statements to be made to employees, analysts, the media and the public generally
relating to the subject matter of this Letter Agreement.

11.      Acknowledgement. By signing this Letter Agreement and attached Release,
you certify that you have read the terms of this Letter Agreement and Release,
and that your execution of this Letter Agreement and Release shall indicate that
this Letter Agreement and Release conforms to your understanding and is
acceptable to you as a final agreement. You further acknowledge and agree that
you have been advised of the opportunity to consult with counsel of your choice
and that you have been given a reasonable and sufficient period of time in which
to consider and return this Letter Agreement and attached Release.

Sincerely,

Pearson plc


By:  /s/ David Bell
- ------------------------------
Name:  David Bell
Title: Executive Director

Pearson Education Holdings Inc.



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                                                                     pearson plc

By:  /s/ Richard Gligini
- -----------------------------
Name:  Richard Gligini
Title: SVP, Human Resources, Pearson Education





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                                                                     pearson plc


ACCEPTED AND AGREED

/s/ Peter Jovanovich
- -----------------------------
Peter Jovanovich


Date: 28/01/05
- -----------------------------


REGISTERED OFFICE AT THE ABOVE ADDRESS, REGISTERED IN ENGLAND NUMBER 53723
Page 8





                                     RELEASE


I, Peter Jovanovich, the undersigned, irrevocably and unconditionally release,
remise, and forever discharge Pearson Education Holdings Inc. (the "Company")
and the Releasees (as defined below) from, any and all agreements, promises,
liabilities, claims and demands of any kind, in law or equity, whether known or
unknown, suspected or unsuspected, which I, my heirs, executors, administrators,
successors or assigns ever had, or now have against the Company or any Releasee
that arises out of or relates to my employment with, or services for, the
Company, Pearson plc, or any of their affiliates, or the termination thereof,
including (without limitation and to the extent set forth herein) any and all
contract claims, benefit claims, tort claims, fraud claims, claims for payments,
bonuses, severance, defamation, disparagement, or any other personal injury
claims, claims relating to retirement, pension or unemployment, arising out of
or relating to my status as a stockholder of Pearson plc, my employment,
compensation and benefits with the Company or the Releasees, and/or the
termination thereof, and any and all claims of unfair or unjust dismissal or
discrimination on any basis including but not limited to on the basis of age,
race, gender, disability, ethnic or national origin, sexual orientation, and
claims for costs, expenses and attorneys' fees with respect thereto existing, in
each case arising or occurring at any time up to and including the date I
execute this Release, provided, however, that nothing herein shall release,
waive, or otherwise affect any claim or right arising under, or preserved by,
the terms of the Letter Agreement between me and the Company, dated January 28,
2005 (the "Letter Agreement"), or preclude my participation as a class member in
any class action or derivative action against Pearson plc where I am not a named
defendant, provided that I agree that I shall in no way initiate or encourage
the initiation of the filing of any such action. This Release specifically
includes, without limitation and to the extent set forth above, any and all
claims under the Age Discrimination in Employment Act, 29 U.S.C. Section 621 et
seq., Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2000(e), the
Americans with Disabilities Act, 42 U.S.C. 1201, et seq., the Employee
Retirement Income Security Act of 1974, any and all other federal, state and/or
local statutes, ordinances, regulations or common laws, and any and all claims
for benefits under any compensation, bonus or benefit plan, program or policy of
the Company or the Releasees. For purposes of this Letter Agreement, the term
"Releasee" includes Pearson plc, its direct and indirect subsidiaries, insurers,
affiliates, its and their past, present and future predecessors, successors and
assigns, and its and their current, former and future officers, directors,
employees, stockholders, representatives, agents, and attorneys, in their
official and/or individual capacities, jointly and individually.

I understand that I have a period of up to 21 days to review and consider this
Release. I further understand that once I have signed this Release, I may revoke
it at any time during the 7 days following its execution by delivering a written
notice of revocation as provided in paragraph 9 of the Letter Agreement.

I ACKNOWLEDGE THAT I HAVE READ THIS RELEASE AND I UNDERSTAND AND ACCEPT ITS
TERMS





- -------------------------------------                     ----------------------
Peter Jovanovich                                          Date

EX-4.2

                                                                     EXHIBIT 4.2

                                                                  CONFORMED COPY

               IRREVOCABLE UNDERTAKINGS IN RESPECT OF AN OFFER BY

                               RETOS CARTERA, S.A.

                                FOR THE SHARES OF

                      RECOLETOS GRUPO DE COMUNICACION, S.A.

In Madrid, on 14 December, 2004

                                    BETWEEN

ON THE ONE SIDE

PEARSON PLC, a company duly incorporated under the laws of England and Wales,
with registered office at 80 Strand, London WC2R 0RL, England, and with
registration number 00053723 (hereinafter, "PEARSON"), duly represented by Mr.
Timothy Scott Henderson, of legal age, of Canadian nationality, with Canadian
Passport number BC253786 and with business address at 80 Strand, London WC2R
0RL, England, by virtue of a notarized and apostilled power of attorney dated 9
December 2004.

ON THE OTHER SIDE

RETOS CARTERA, S.A., a company duly incorporated under the laws of Spain, with
registered office at C/ Carbonero y Sol, n(degrees) 12, Madrid, Spain, and with
tax identification number A-84154046 (hereinafter, the "OFFEROR"), duly
represented by Mr. Jaime Castellanos Borrego, of legal age, of Spanish
nationality, with National Identity Card number 14.899.002 Q and with business
address at Paseo de la Castellana, n(degrees) 66, Madrid, Spain, in his capacity
as Managing Director (Consejero Delegado) of OFFEROR and by virtue of a
notarized power of attorney dated 14 December 2004 and granted by the Board of
Directors of OFFEROR.

PEARSON and OFFEROR shall be hereinafter jointly referred to as the "PARTIES",
and each of them individually as a "PARTY".

                                     WHEREAS



                                                                  CONFORMED COPY

I.    RECOLETOS GRUPO DE COMUNICACION, S.A. (hereinafter, "RECOLETOS" or the
      "COMPANY"), a company duly incorporated under the laws of Spain, with
      registered office at Paseo de la Castellana, n(degrees) 66, Madrid, Spain,
      is the parent of a group of companies whose main activity is media and
      publishing.

      RECOLETOS has a share capital of Euro 26,142,749.80, represented by
      130,713,749 ordinary shares of Euro 0.20 nominal value each, all of them
      listed on the Madrid, Barcelona, Bilbao and Valencia Stock Exchanges and
      included in the Spanish Automated Quotation System (Mercado Continuo).

II.   PEARSON OVERSEAS HOLDINGS LIMITED, a company duly incorporated under the
      laws of England and Wales, with registered office at 80 Strand, London
      WC2R 0RL, England, and with registration number 00145205 (hereinafter,
      "POHL") is a wholly-owned subsidiary of PEARSON and PEDIFRI, S.L., a
      company duly incorporated under the laws of Spain, with registered office
      at Paseo de la Castellana, n(degrees) 66, Madrid, Spain, and with tax
      identification number B-79561478 (hereinafter, "PEDIFRI"), is, in turn, a
      wholly-owned subsidiary of POHL. POHL and PEDIFRI, in turn, respectively
      own 94,005,598 and 9,169,198 shares of RECOLETOS (together, hereinafter
      the "SHARES") (71.92% and 7.01% of the share capital of the Company).

III.  OFFEROR is a newly incorporated company with an issued share capital of
      Euros 12,950,000, divided into 12,950,000 shares of Euro 1.00 nominal
      value each, all fully subscribed and paid up, and subordinated
      participating loans (prestamos participativos) from its shareholders in an
      aggregate nominal amount of Euro 160,050,000. Attached hereto as Annex 1
      to this Agreement is a chart showing the shareholding and participating
      loan structure of OFFEROR.

IV.   OFFEROR is interested in acquiring the Shares. Due to the fact that
      RECOLETOS is a listed company in Spain, and in accordance with the
      provisions of the Spanish securities markets regulations, such acquisition
      may only be achieved by OFFEROR through a public tender offer over 100% of
      the shares issued by RECOLETOS, thus giving the minority shareholders of
      RECOLETOS the opportunity to sell their shares in the Company.

V.    OFFEROR therefore intends to launch a public tender offer over RECOLETOS
      in accordance with, and subject to, the provisions of clause 1 below
      (hereinafter, the "OFFER").

VI.   For the purposes referred to under IV above, the Parties have held
      negotiations aimed at establishing the terms and conditions upon which
      PEARSON would be prepared irrevocably to undertake, subject to the terms
      of this Agreement, to procure that POHL and PEDIFRI accept the Offer or
      otherwise to procure that OFFEROR acquires, directly or indirectly, the
      Shares.

VII.  All payment obligations arising out of the Offer (therefore including
      payment of the price of the Shares) have been secured by means of four
      bank guarantees, each dated the date hereof, for an amount of Euro
      365,354,992.80, Euro 240,000,000,



                                                                  CONFORMED COPY

      Euro 246,000,000 and Euro 90,000,000, provided by Banco Espanol de
      Credito, S.A. ("BANESTO"), Calyon, Sucursal en Espana ("CALYON"), Caja de
      Ahorros y Monte de Piedad de Madrid ("CAJA MADRID") and Caja de Ahorros
      del Mediterraneo ("CAM") respectively, as required by Royal Decree
      1197/1991, of July 26, as amended, on rules governing tender offers
      (hereinafter, "ROYAL DECREE 1197/1991") (hereinafter, the "OFFER
      GUARANTEES"), a copy of each of which is attached as Annex 2 hereto.

VIII. In addition, any payment obligations of OFFEROR in respect of the units
      (participaciones) of PEDIFRI arising as a consequence of exercise by
      PEARSON of the PEDIFRI Put Option (as defined below) have been secured by
      means of four bank guarantees, each dated the date hereof, for an amount
      of Euro 22,129,686, Euro 14,546,891.30, Euro 14,900,313.50 and Euro
      5,441,334.20, provided by BANESTO, Calyon, Caja Madrid and CAM
      respectively (hereafter the "PEDIFRI GUARANTEES"), a copy of each of which
      is attached as Annex 3 hereto.

IX.   Now therefore, the Parties have decided to enter into this agreement in
      respect of the Offer (hereinafter, the "AGREEMENT"), which shall be
      governed by the following

                                    CLAUSES

1.    IRREVOCABLE UNDERTAKING OF OFFEROR

1.1.  OFFEROR hereby expressly and irrevocably undertakes to submit to the
      Spanish Comision Nacional del Mercado de Valores (hereinafter, the
      "CNMV"), not later than the next Business Day (hereinafter, a "BUSINESS
      DAY" being a day other than a Saturday or Sunday or public holiday in the
      city of Madrid) following the date of this Agreement, a request for the
      authorization of the Offer (hereinafter, the "AUTHORIZATION"), together
      with an "hecho relevante", the prospectus (in a form identical to the
      draft attached as Annex 4 hereto) (hereinafter, the "PROSPECTUS"), the
      Offer Guarantees and the remaining documentation required by Royal Decree
      1197/1991, other than the administrative authorizations and clearances
      from the authorities referred to in sub-clause 1.4 below (provided that
      OFFEROR shall deliver to the CNMV on the date such applications or
      submissions are made copies of the relevant application and submissions to
      such authorities and shall deliver to the CNMV as soon as they are
      available the relevant authorizations and clearances). OFFEROR shall
      diligently progress and pursue the obtaining of the Authorization and,
      subject to and conditional upon the Authorization having been obtained,
      shall launch the Offer and seek diligently to ensure that the Offer
      achieves a positive result, in each case within the briefest possible
      timeframe.

1.2.  The Offer shall be subject to the following terms and conditions:



                                                                  CONFORMED COPY

      (i)   It must be an offer for 100% of the shares of RECOLETOS.

      (ii)  It may be conditioned to the acquisition of 71.92% or less of the
            shares of RECOLETOS.

      (iii) The consideration of the Offer shall be Euro 7.20 per share (the
            "OFFER PRICE") and each offeree shall, in addition to the Offer
            Price, be offered the Deferred Contingent Offer Consideration as
            described more fully in clause 9.

      (iv)  The Offer Price and the Deferred Contingent Offer Consideration
            shall be fully paid in cash.

      (v)   The acceptance period of the Offer shall be two months.

1.3.  Notwithstanding the provisions of sub-clause 1.1. above, in the event
      that, prior to the submission of the request for the Authorization, any
      third party had submitted a request for the authorization of another
      tender offer in respect of some or all of the shares of RECOLETOS under
      which, in the case of an all cash offer, the offer price is the same or
      higher than the Offer Price or, in the case of any other offer, the
      consideration offered for each RECOLETOS share is (as at the date of such
      third party's request) as valuable as, or more valuable than, the
      consideration offered for each RECOLETOS share under the Offer in the
      reasonable opinion of Lazard Asesores Financieros, S.A. ("LAZARD"), then
      OFFEROR shall have to choose (and shall immediately inform PEARSON of its
      choice), during five (5) Business Days from the announcement of the
      submission of the prior tender offer by the third party, between the
      following:

      (i)   not to submit the Offer, in which case both Parties will be released
            from their respective obligations under this Agreement without any
            liability arising therefrom; or

      (ii)  to submit the Offer as a competing offer of the prior third party's
            tender offer, therefore increasing the price of the Offer. OFFEROR
            undertakes that any such competing offer it makes will continue to
            satisfy the terms and conditions of this Agreement, save that the
            Offer Price shall be higher (if necessary). If such a competing
            offer is launched by OFFEROR:

            (A)   PEARSON's undertakings to procure acceptance of the Offer in
                  sub- clause 2.2(i) and sub-clause 2.2(ii) of this Agreement
                  shall be deemed to be undertakings to procure acceptance of
                  such improved competing offer on the terms set out herein; and

            (B)   in the event that PEARSON exercises the PEDIFRI Put Option in
                  such circumstances, the total price payable for the PEDIFRI
                  units under sub-clause 3.3 shall be increased by the total
                  additional amount which would have been payable by OFFEROR for
                  the Shares in RECOLETOS held by PEDIFRI were PEDIFRI to have
                  accepted OFFEROR's improved competing offer for such Shares.



                                                                  CONFORMED COPY

1.4.(i) OFFEROR shall notify or, if appropriate, procure that its shareholders
        shall notify the Offer to the competent anti-trust authorities in Spain
        and Portugal and,to the extent legally required, any other regulatory
        authorities within five (5) Business Days as from the date of submission
        to the CNMV of the request for the Authorization, unless prior to that
        date OFFEROR has received oral (to be confirmed by OFFEROR or its legal
        counsel to PEARSON in writing) or written confirmation from the
        authority concerned that no notification is required in connection with
        the Offer, and OFFEROR shall diligently seek to ensure that it obtains
        any necessary clearances from such authorities within the briefest
        possible timeframe.

   (ii) OFFEROR undertakes likewise to apply for the relevant authorizations of,
        and/or make the appropriate notifications to, the Ministry of Industry,
        Commerce and Tourism and the relevant Autonomous Regions, as required by
        applicable legislation in connection with the television and radio
        concessions held by RECOLETOS and its subsidiaries and affiliates within
        the five (5) Business Days following the date of submission to the CNMV
        of the request for the Authorization and shall diligently seek to ensure
        that it obtains any necessary clearances and approvals from such
        authorities in the briefest possible timeframe.

1.5. Unless OFFEROR has notified PEARSON within the terms of sub-clause 1.3 that
     it has decided not to submit the Offer and subject to termination under any
     other provision of this Agreement, OFFEROR undertakes to make and complete
     the Offer (including, where necessary, making and completing the Offer on a
     modified basis to include or conform with any condition, conditions or
     amendments imposed by the CNMV, any competent anti-trust authorities or any
     other competent regulatory authorities unless such condition or conditions
     falls within sub-clause 1.6(i) and PEARSON is not prepared to agree to it
     or them or within sub-clause 1.7(i) and OFFEROR is not prepared to agree to
     it or them).

1.6. If:

   (i) the CNMV, any competent anti-trust authorities or any other competent
       regulatory authorities require any amendments or impose one or more
       conditions for the transaction which would have a material adverse effect
       on PEARSON (and any such condition or amendment which:

      (A) could reduce the consideration (including in respect of Deferred
          Contingent Offer Consideration) receivable by POHL or PEDIFRI in
          respect of the Shares; or

      (B) could reduce the consideration (including in respect of Deferred
          Contingent Offer Consideration) receivable by POHL in respect of the
          units in PEDIFRI,

      shall be deemed to be a material adverse effect for these purposes); or



                                                                  CONFORMED COPY

   (ii) OFFEROR has not exercised the OFFEROR Call Option prior to the expiry of
        the OFFEROR Call Option Period (as such terms are defined in sub- clause
        2.1); or

   (iii) the legal notice referred to in Article 18 of Royal Decree 1197/1991 in
         respect of the Offer has not been published by 14 April 2005,

   and this Agreement has not been previously terminated in accordance with its
   terms, then PEARSON shall have the right (but not the obligation) to
   terminate this Agreement with immediate effect on written notice to OFFEROR.

1.7. If:

   (i) the CNMV, any competent anti-trust authorities or any other competent
       regulatory authorities deny approval of the Offer or require any
       amendment or impose one or more conditions for the transaction which
       would have a material adverse effect on the business of RECOLETOS taken
       as a whole (and any such condition or amendment which is imposed by the
       authorities in relation to the television and radio concessions referred
       to in sub-clause 1.4 (ii) shall be deemed not to have a material adverse
       effect for these purposes) or which could increase the Offer Price to
       more than E7.20 per RECOLETOS share; or

  (ii) the legal notice referred to in Article 18 of Royal Decree 1197/1991 in
       respect of the Offer has not been published by 14 July 2005,

   and this Agreement has not been previously terminated in accordance with its
   terms, then OFFEROR shall have the right (but not the obligation) to
   terminate this Agreement with immediate effect on written notice to PEARSON.

1.8. Following any termination under sub-clauses 1.6 and 1.7, neither party
     shall have any claim against the other save for any rights which PEARSON
     may have against OFFEROR in respect of OFFEROR's failure to comply with its
     obligations under sub-clause 1.1, sub-clause 1.4 or sub-clause 1.5.

1.9. OFFEROR shall promptly notify PEARSON, and provide copies, of any
     communications from the CNMV, any competent anti-trust authority or any
     other competent regulatory authority in relation to obtaining the
     Authorization and any other relevant clearances. Where reasonably requested
     by PEARSON, OFFEROR shall provide PEARSON (or advisers nominated by
     PEARSON) with draft copies of all submissions and communications to the
     CNMV and any such other authority in relation to obtaining the
     Authorization and any other relevant clearances at such time as will allow
     PEARSON a reasonable opportunity to provide comments on such submissions
     and communications before they are submitted or sent to the CNMV or such
     other relevant authority. OFFEROR shall take into account any such comments
     as are reasonable and provide PEARSON (or advisers nominated by PEARSON)
     with copies of all such submissions and communications in the form
     submitted or sent. Where reasonably requested by PEARSON and where
     permitted by the CNMV or the other relevant authority



                                                                  CONFORMED COPY

      concerned, OFFEROR shall allow persons nominated by PEARSON to attend all
      meetings with the CNMV or such other relevant authorities in relation to
      obtaining the Authorization and any other relevant clearances and, where
      appropriate, to make oral submissions at such meetings. If necessary and
      where reasonable grounds exist for expecting that such action by OFFEROR
      could be successful, OFFEROR shall fully defend any court or
      administrative action which the CNMV or any competent anti-trust authority
      or any other regulatory authority may bring to prohibit, enjoin or modify
      the Offer and/or the other transactions contemplated by this Agreement.

1.10. For the avoidance of doubt, none of the following shall affect any of
      OFFEROR's obligations or undertakings under this Agreement, including,
      without limitation its obligations and undertakings to make and complete
      the Offer and its obligations and undertakings to act diligently:

     (i) a third party submitting at any time a request for the authorization of
         another tender offer over any RECOLETOS shares at a price lower than
         the Offer Price;

    (ii) a third party submitting following the submission of the request for
         the Authorization a request for the authorization of another tender
         offer over any RECOLETOS shares at a price equal to or higher than the
         Offer Price; and

   (iii) a third party taking any action in relation to any of the types of
         tender offers referred to in sub-clauses 1.10(i) and 1.10(ii) above.

2. IRREVOCABLE UNDERTAKING OF PEARSON

2.1. Subject to sub-clauses 1.3, 1.6, 1.7, 1.8 and 2.5, PEARSON hereby grants an
     option to OFFEROR (the "OFFEROR CALL OPTION") (which may be exercised by
     OFFEROR at any time during the period commencing on the later of (i) 1
     January 2005 and (ii) the date of commencement of the acceptance period of
     the Offer, and ending five (5) Business Days later (the "OFFEROR CALL
     OPTION PERIOD")) to require PEARSON to comply with sub-clause 2.2. The
     OFFEROR Call Option may only be exercised by OFFEROR giving notice in the
     form set out in Annex 5 hereto (the "OFFEROR EXERCISE NOTICE").

2.2. Subject to OFFEROR giving the Offeror Exercise Notice pursuant to
     sub-clause 2.1 above and to sub-clauses 1.3, 1.6, 1.7, 1.8 and 2.5, PEARSON
     hereby expressly and irrevocably undertakes (provided that the Offer is
     capable of acceptance in accordance with the applicable tender offers
     regulations):

     (i) to procure acceptance of the Offer in respect of all of the Shares; or

    (ii) to procure acceptance of the Offer in respect of all of the Shares
         held directly by POHL and to serve the PEDIFRI Exercise Notice (as
         defined in sub-clause 3.2 below),



                                                                  CONFORMED COPY

     in each case within five (5) Business Days of receipt by PEARSON of the
     Offeror Exercise Notice; and if the Offer is not capable of acceptance
     within such period but the Offer subsequently becomes capable of acceptance
     in accordance with the applicable tender offers regulations then PEARSON
     shall, subject always to the other provisions of this Agreement, comply
     with any obligations under this subclause 2.2 as soon as reasonably
     practicable in the circumstances.

2.3. (Subject always to the termination provisions in sub-clauses 1.3, 1.6, 1.7
     and 1.8) As a consequence of the foregoing provisions of this clause 2:

      (i) PEARSON expressly and irrevocably undertakes to procure that:

        (A) neither POHL nor PEDIFRI shall transfer the Shares, under any legal
            title, to any third party;

        (B) POHL shall not transfer the units of PEDIFRI, under any legal title,
            to any third party; and

        (C) neither POHL nor PEDIFRI shall accept any tender offer over
            RECOLETOS competing with the Offer, whether previous or subsequent
            to the Offer and regardless of the price of said tender offer; and

      (ii) PEARSON shall procure that neither POHL nor PEDIFRI shall accept the
           Offer at any time prior to the OFFEROR Call Option Period or, unless
           and until the Offeror Exercise Notice is given pursuant to sub-clause
           2.1 above, during the OFFEROR Call Option Period, but without
           prejudice to PEARSON's rights to procure acceptance of the Offer and
           to exercise the PEDIFRI Put Option (as defined in sub-clause 3.1
           below) at any time after the expiry of the OFFEROR Call Option
           Period.

2.4. For the avoidance of doubt:

       (i) each of POHL and PEDIFRI shall remain legal and beneficial owner of
           its respective Shares unless and until it accepts the Offer and the
           Offer is completed in accordance with its terms. Unless and until
           each of POHL and PEDIFRI accepts the Offer and such completion occurs
           nothing in this Agreement shall operate to fetter the rights
           (including voting rights of its respective Shares) of POHL or PEDIFRI
           in relation to the Shares; and

      (ii) POHL shall remain legal and beneficial owner of the units of PEDIFRI
           unless and until the sale of such units to OFFEROR is completed in
           accordance with clause 3. Unless and until such completion occurs
           nothing in this Agreement shall operate to fetter the rights
           (including voting rights of the PEDIFRI units) of POHL in relation to
           the units of PEDIFRI.

2.5. PEARSON's undertakings in sub-clause 2.2 and 2.3(i) are and shall at all
     times be conditional on:



                                                                  CONFORMED COPY

     (i) each of OFFEROR's representations and warranties in sub-clause 7.1(v)
         and (vi) being true and accurate at all relevant times; and

     (ii) each of the Offer Guarantees and the PEDIFRI Guarantees remaining in
          full force and effect.

2.6. Nothing in this Agreement shall prejudice PEARSON's rights to procure
     acceptance of the Offer and to exercise the PEDIFRI Put Option (as defined
     in sub-clause 3.1 below) at any time after the expiry of the OFFEROR Call
     Option Period.

3. PEDIFRI PUT OPTION

3.1. OFFEROR hereby grants PEARSON an option (hereinafter, the "PEDIFRI PUT
     OPTION") to require OFFEROR to purchase from POHL all of the units
     comprising the equity capital of PEDIFRI subject to the terms and
     conditions in this clause 3.

3.2. PEARSON may exercise the PEDIFRI Put Option by procuring that PEARSON and
     POHL serve on OFFEROR written notice in the form set out in Annex 6 hereto
     (hereinafter, the "PEDIFRI EXERCISE NOTICE") following the serving of the
     Offeror Exercise Notice or (provided that the Offer has been made) the
     expiry of the OFFEROR Call Option Period but no later than 9:00 a.m.
     (Madrid time) on the last Business Day of the Offer acceptance period.

3.3.(i) The effect of serving the PEDIFRI Exercise Notice shall be that OFFEROR
        shall purchase and, PEARSON shall procure that POHL shall sell, the
        entire issued equity capital of PEDIFRI for an aggregate consideration
        of:

   (A) an amount which is equal to Euro 57,018,225.60 plus Net Assets (as
       defined below), provided that, for the avoidance of doubt, the Net Assets
       may be a negative amount and, in such circumstances an amount equal to
       such negative amount of Net Asset shall be deducted from the amount of
       Euro 57,018,225.60 (hereinafter, the "INITIAL PEDIFRI CONSIDERATION");
       and:

   (B) the Deferred Contingent Offer Consideration (as defined in sub-clause
       9.2) which would, in relation to the Shares held by PEDIFRI at the time
       of its transfer to OFFEROR be attributable to those Shares on the
       assumption that PEDIFRI had accepted the Offer (hereinafter, the
       "DEFERRED CONTINGENT PEDIFRI CONSIDERATION").

     Completion shall be conditional only upon completion of the Offer by
     OFFEROR. Completion shall take place on the same date and at the same time
     as settlement occurs in respect of completion of the Offer. For such
     purposes, POHL and OFFEROR shall appear in front of a Notary Public of
     Madrid at or prior to Completion and shall execute a sale and purchase
     notarial deed, conditional only upon completion of the Offer by OFFEROR and
     subject only to the representations and warranties set out expressly in



                                                                  CONFORMED COPY

      this Agreement (hereinafter, the "NOTARIAL DEED"). At Completion, OFFEROR
      shall pay the Initial PEDIFRI Consideration in cash in Euros to POHL and
      POHL shall transfer the units in PEDIFRI to OFFEROR. The Parties shall
      procure that from Completion, the current directors of PEDIFRI are
      replaced with nominees of OFFEROR and PEARSON shall procure that on
      resignation of the current directors of PEDIFRI, such directors shall
      provide written confirmation to PEDIFRI that they have no outstanding
      claims against, and are owed no amounts by, PEDIFRI. PEARSON shall procure
      that POHL does, and OFFEROR shall do, all other things to ensure that
      Completion occurs in accordance with this clause 3. OFFEROR shall pay the
      Deferred Contingent PEDIFRI Consideration in cash in Euros to POHL at the
      same time as it pays the Deferred Contingent Offer Consideration in
      accordance with the terms of the Offer.

 (ii) PEARSON (or, to the extent that at any relevant time, OFFEROR is the
      owner of the PEDIFRI units, OFFEROR) shall procure that the accounts of
      PEDIFRI for the year to 31 December 2004 (the "PEDIFRI 2004 ACCOUNTS") are
      prepared promptly on a basis consistent with that on which the accounts of
      PEDIFRI for the year to 31 December 2003 were prepared and are audited by
      PricewaterhouseCoopers (or, if they are unwilling to act, another firm of
      accountants of international repute selected by PEARSON) as promptly as
      possible after such accounts have been prepared and that copies of such
      audited accounts are delivered to the Parties promptly after they are
      available.

(iii) PEARSON shall procure that:

     (A) the intra-group loan shown in the PEDIFRI balance sheet for the
         financial year ended 31 December 2003 is repaid by POHL; and

     (B) to the extent there are distributable reserves available for the
         purpose and so far as legally possible in Spain, the cash resulting
         from such intra-group loan repayment together with any other cash in
         PEDIFRI is dividended up to POHL or is otherwise distributed to POHL.
         (PEARSON and POHL shall also have the right, but not the obligation, to
         extract through reduction of capital of PEDIFRI and, in the case of any
         such reduction of capital, notwithstanding anything to the contrary in
         this Agreement, any reference to the total share capital of PEDIFRI to
         be transferred at Completion and any representation or warranty in
         respect of it shall be to the share capital as so reduced.)

      Once this has been done, PEARSON shall procure that a balance sheet for
      PEDIFRI which takes into account the operations referred to in (A) and (B)
      (the "PROVISIONAL COMPLETION BALANCE SHEET") is drawn up on a basis
      consistent with that on which the PEDIFRI 2004 Accounts were prepared (or,
      if the balance sheet from the PEDIFRI 2004 Accounts is used for these
      purposes, such balance sheet has been prepared in accordance with the
      requirements of (ii) above). PEARSON shall procure that the Provisional
      Completion Balance Sheet is audited by PricewaterhouseCoopers (or if they



                                                                  CONFORMED COPY

      are unwilling to act, another firm of accountants of international repute
      selected by PEARSON) as promptly as possible and that copies of such
      audited balance (the "AUDITED COMPLETION BALANCE SHEET") shall be
      delivered to the parties promptly after they are available.

      The Parties shall use the Audited Completion Balance Sheet to calculate
      the Net Assets of PEDIFRI for the purposes of calculating the Initial
      PEDIFRI Consideration. The "NET ASSETS" shall be the amount in Euros that
      is represented in the Audited Completion Balance Sheet by:

      (C) adding the aggregate balance sheet value of all the assets;

      (D) deducting the book value of the Shares held by PEDIFRI; and

      (E) deducting the balance sheet value of the creditors and any other
          liabilities (excluding, for the avoidance of doubt, all amounts
          relating to shareholders' equity).

      If the Provisional Completion Balance Sheet has not been audited prior to
      Completion, then for the purposes of calculating the amount of the Initial
      PEDIFRI Consideration to be paid at Completion, the Net Assets shall be
      deemed to be the Net Assets figure shown by the unaudited Provisional
      Completion Balance Sheet and, subsequently, once the audit of the
      Provisional Completion Balance Sheet has been completed, shall be the Net
      Assets figure shown by the Audited Completion Balance Sheet and an
      appropriate adjusting repayment by POHL to OFFEROR, or (as the case may
      be) payment by OFFEROR to POHL, shall be made to reflect any difference
      between the amount paid by OFFEROR at Completion based on the unaudited
      Provisional Completion Balance Sheet and the amount which would have been
      payable at Completion had the Audited Completion Balance Sheet then been
      available. Such adjusting repayment or, as the case may be, payment shall
      be made within five (5) Business Days of the Audited Completion Balance
      Sheet being delivered to the Parties.

      To the extent that any non-cash item is taken into account as an asset in
      the Provisional Completion Balance Sheet (or, as the case may be, Audited
      Completion Balance Sheet) so that it is included in the calculation of the
      Initial PEDIFRI Consideration, PEARSON shall guarantee to PEDIFRI the
      receipt by PEDIFRI of its full amount within one year of Completion. If
      PEARSON makes any payment to PEDIFRI under such guarantee then OFFEROR
      agrees that PEARSON may require an assignment of the asset to PEARSON at
      PEARSON's cost but, if that is not legally possible, PEARSON may itself
      take reasonable steps to obtain payment of such asset for PEDIFRI and
      OFFEROR shall provide such access to the records of PEDIFRI as PEARSON
      shall reasonably require for such purpose and shall procure payment by
      PEDIFRI to PEARSON of any amount recovered.

 (iv) If:



                                                                  CONFORMED COPY

      (a)the Audited Completion Balance Sheet shows that the amount of Initial
         PEDIFRI Consideration would be less than Euro 57,018,225.60; and

      (b)the Offer acceptance period has not at that time closed,

      PEARSON and POHL may, by written notice to OFFEROR served not later than
      9:00 a.m. (Madrid time) on the last Business Day of the Offer Acceptance
      period, rescind their exercise of the PEDIFRI Put Option provided that
      such notice of rescission is accompanied by an acceptance by PEDIFRI of
      the Offer in respect of the Shares held by PEDIFRI. The effect of such
      rescission shall be that PEARSON and POHL shall not be required,
      respectively, to procure the sale and sell the units of PEDIFRI and
      OFFEROR shall not be required to buy them.

  (v) For the purposes of OFFEROR's reasonable due diligence requirements,
      during the period between (A) the date of this Agreement and (B) the
      execution of the Notarial Deed or rescission of the PEDIFRI Put Option,
      PEARSON agrees to provide OFFEROR and its duly authorised agents upon
      reasonable request with full and free access (including the right to take
      copies) during usual business hours to the books, accounts and records of
      and relating to PEDIFRI except to the extent any such access is restricted
      by law, provided that OFFEROR shall and ensure that its duly authorised
      agents keep such disclosed information confidential. OFFEROR shall be
      entitled to notify the auditors referred to above of any matter it
      believes should be reflected in the Audited Completion Balance Sheet.

 (vi) PEARSON undertakes to procure that PEDIFRI is run in the ordinary course
      between (A) the date of this Agreement and (B) the execution of the
      Notarial Deed or rescission of the PEDIFRI Put Option, except that such
      actions as are necessary for the actions referred to in sub-clause
      3.3(iii)(A) and (B) above may be taken.

4. SETTLEMENT AND DELIVERY

4.1. Subject to sub-clause 4.2, payment of the consideration for the Shares
     shall be made by OFFEROR in the context of the Offer, in accordance with
     the settlement procedures set forth by the applicable tender offers
     regulations. The same shall apply, mutatis mutandis, to the delivery of the
     Shares by POHL and (where the PEDIFRI Put Option has not been exercised or
     has been exercised and rescinded in accordance with clause 3) PEDIFRI to
     OFFEROR.

4.2. Where the PEDIFRI Put Option has been exercised and not rescinded, payment
     of the consideration for the sale to OFFEROR of the PEDIFRI units, and
     settlement and delivery arrangements in relation to their transfer, shall
     be as provided in clause 3.

5. UNDERTAKINGS



                                                                  CONFORMED COPY

5.1. PEARSON undertakes, to the extent necessary in each case, to procure that
     POHL and PEDIFRI do such things as are necessary in order to fulfil the
     terms of this Agreement (whether or not any provision herein expressly
     refers to POHL and PEDIFRI), provided always that neither PEARSON nor POHL
     shall be responsible for any action or inaction of PEDIFRI following
     completion of the transfer of the PEDIFRI units in accordance with clause
     3.

5.2. OFFEROR undertakes, to the extent necessary in each case, to procure that
     PEDIFRI does such things as are necessary in order to fulfil the terms of
     this Agreement (whether or not any provision herein expressly refers to
     PEDIFRI) following completion of the transfer of the PEDIFRI units in
     accordance with clause 3.

6. REPRESENTATIONS AND WARRANTIES OF PEARSON

6.1. PEARSON represents and warrants to OFFEROR, as of the date hereof, as of
     the date of completion of the Offer and (provided that the Notarial Deed is
     executed) as of immediately prior to execution of the Notarial Deed, that:

     (i) Each of PEARSON, POHL and PEDIFRI is a limited liability company duly
         incorporated and validly existing under the laws of its respective
         jurisdiction of incorporation.

    (ii) Each of POHL and PEDIFRI is a wholly-owned direct or indirect
         subsidiary of PEARSON.

   (iii) Subject in each case to each of OFFEROR's representations and
         warranties in sub-clause 7.1(v) being true and accurate at each
         relevant time:

         (a) Each of PEARSON and POHL has full corporate power and authority and
             has taken all necessary corporate actions to enter into and perform
             its obligations under this Agreement.

         (b) No other consent, approval or authorization is required to be
             obtained by PEARSON and POHL in connection with the execution and
             consummation of this Agreement (and if PEDIFRI accepts the Offer,
             PEARSON will procure that (a) and (b) will be satisfied in respect
             of PEDIFRI).

    (iv) None of PEARSON, POHL and PEDIFRI is subject to any bankruptcy or
         insolvency proceedings, and there is no action underway or threatened
         to declare the bankruptcy or insolvency of any of them.

     (v) This Agreement, following execution thereof, will constitute a valid
         and legally binding obligation of PEARSON, enforceable against it in
         accordance with its terms, subject to applicable bankruptcy,
         insolvency, reorganization and other laws generally affecting the
         enforcement of creditors' rights.



                                                                  CONFORMED COPY

    (vi) Each of POHL and PEDIFRI has valid and full title of ownership of the
         Shares of RECOLETOS respectively referred to as being owned by each of
         them in Whereas II above, free and clear of any security interest,
         lien, charge, claim, right of pre-emption or first refusal or any other
         third party right or encumbrance of any kind.

6.2. In the event that the units in PEDIFRI are transferred to OFFEROR pursuant
     to the Notarial Deed, PEARSON represents and warrants to OFFEROR, as of the
     date of the Notarial Deed, that:

   (i) Subject in each case to OFFEROR's representations and warranties in sub-
       clause 7.1(v) being true and accurate at each relevant time:

      (a) POHL has full corporate power and authority and has taken all
          necessary corporate actions to enter into and perform its obligations
          under the Notarial Deed.

      (b) No other consent, approval or authorization is required to be obtained
          by POHL or PEDIFRI in connection with the execution and consummation
          of the Notarial Deed.

  (ii) The Notarial Deed, following execution thereof, will constitute a valid
       and legally binding obligation of POHL, enforceable against it in
       accordance with its terms, subject to applicable bankruptcy, insolvency,
       reorganization and other laws generally affecting the enforcement of
       creditors' rights.

 (iii) Immediately prior to the transfer to OFFEROR under the Notarial Deed,
       POHL has valid and full title of ownership of all of the issued units of
       PEDIFRI, free and clear of any security interest, lien, charge, claim,
       right of pre-emption or first refusal or any other third party right or
       encumbrance of any kind.

 (iv) The equity capital of PEDIFRI amounts to Euro 570,312.41, divided into
      94,982 units, numbered 1 through 94,982 both inclusive, of Euro 6.010121
      nominal value each, fully subscribed and paid up and no rights have been
      granted to any person entitling that person to subscribe for, or convert
      other rights into, shares in PEDIFRI.

  (v) The PEDIFRI 2004 Accounts and the Audited Completion Balance Sheet will
      be prepared in accordance with the basis of preparation set out therein
      and will give a fair and genuine representation of the financial position
      of PEDIFRI and of its assets and liabilities of the periods and as at the
      times stated therein and in accordance with the basis of preparation set
      out therein. PEDIFRI does not have any further liabilities (including
      hidden, contingent or off balance sheet liabilities) other than those
      which are or will be set out in or provided for in the Audited Completion
      Balance Sheet).

 (vi) PEDIFRI has no employees, has not performed any activities other than
      the holding of Shares of RECOLETOS and is not a party to any agreement



                                                                  CONFORMED COPY

        giving rise to obligations of the company vis-a-vis other companies
        within the PEARSON group or third parties.

  (vii) PEDIFRI is in compliance with its obligations under all applicable laws
        to which it is subject and has performed and is up to date with all of
        its obligations to pay taxes, file returns, documents and make payments.

 (viii) There are no writs, actions, claims, disputes, legal or administrative
        proceedings, arbitration proceedings, complaints, prosecutions or
        investigations in progress or pending (nor to the best of PEARSON's
        belief are there any contemplated), which affect PEDIFRI other than
        those which are or will be provided for in the Audited Completion
        Balance Sheet.

   (ix) Subsequent to 31 December 2004, there will be no material adverse change
        in the financial condition of PEDIFRI except to the extent that it
        changes as a consequence of the actions referred to in sub-clause
        3.3(iii)(A) and (B) above or as otherwise reflected in the Audited
        Completion Balance Sheet.

   Notwithstanding anything to the contrary in this Agreement, neither PEARSON
   nor POHL shall be responsible for liabilities arising from matters, facts,
   occurrences or situations relating to or affecting PEDIFRI prior to 3 October
   1996.

   No claim may be made under the representations and warranties in this
   sub-clause 6.2 to the extent that the matter is provided for in the Audited
   Completion Balance Sheet.

   Subject to the provisions of the following paragraphs in this sub-clause 6.2,
   PEARSON shall indemnify and hold harmless OFFEROR from and against any and
   all losses, liabilities, costs, claims, damages, expenses or demands (or
   actions in respect thereof) (excluding, for the avoidance of doubt, any
   indirect losses and loss of profits) ("Losses") which OFFEROR incurs or which
   is made against OFFEROR after Completion of OFFEROR's acquisition of PEDIFRI
   to the extent such Losses result from any breach or alleged breach of any of
   the representations or warranties set out in clause 6.2.

   If any action, claim or demand shall be brought or alleged against OFFEROR in
   respect of which the above indemnity is to be claimed against PEARSON,
   OFFEROR shall promptly (and in any event within 10 Business Days) notify
   PEARSON in writing and provide details of the relevant facts and
   circumstances, and PEARSON shall have the option either (A) to pay OFFEROR an
   amount equal to the amount claimed by the claimant, or (B) to assume the
   defence thereof with legal advisers satisfactory to OFFEROR (acting
   reasonably). If PEARSON fails to notify OFFEROR of its election between (A)
   and (B) within ten Business Days (or such other period as may be agreed
   between the Parties (acting reasonably)) after receipt of the notice of
   commencement of the action (or three Business Days prior to the date upon
   which the period for the defence of the claim in question expires, if
   earlier), OFFEROR shall be free to defend or settle the


                                                                  CONFORMED COPY

      claim in question and PEARSON's obligations under the above indemnity
      shall be unaffected.

      PEARSON's liability under the above indemnity shall not apply to the
      extent that OFFEROR is entitled to reimbursement for any Losses from any
      third party, including, without limitation, any insurer.

7.    REPRESENTATIONS AND WARRANTIES OF OFFEROR

7.1.  OFFEROR represents and warrants to PEARSON, as of the date hereof, as of
      the date of the exercise of the OFFEROR Call Option, as of each date when
      members of the PEARSON group accept the Offer, as of the date of any
      exercise by PEARSON of the PEDIFRI Put Option, as of the date of
      completion of the Offer and (provided that the Notarial Deed is executed)
      as of immediately prior to execution of the Notarial Deed, that:

      (i)   OFFEROR is a limited liability company duly incorporated and validly
            existing under the laws of Spain. The share capital of OFFEROR
            amounts to Euros 12,950,000, divided into 12,950,000 shares of Euro
            1.00 nominal value each, all belonging to a unique class and series
            and being entitled to the same number of voting rights and fully
            subscribed and paid up. OFFEROR has available cash, loan facilities
            or other financing arrangements that will:

            (A)   at completion of the Offer provide in immediately available
                  funds the necessary cash resources to satisfy its payment
                  obligations under the Offer; and

            (B)   provide in immediately available funds the necessary cash
                  resources to satisfy its payment obligations under this
                  Agreement and the Notarial Deed,

            and OFFEROR will be able to satisfy any conditions to such loan
            facilities or other financing arrangements at or prior to such
            payment obligations becoming due and payable.

      (ii)  OFFEROR has full corporate power and authority and has taken all
            necessary corporate actions to enter into and perform its
            obligations under this Agreement. No consent, approval or
            authorization is required to be obtained by OFFEROR in connection
            with the execution and consummation of this Agreement other than the
            approval of the Offer by the CNMV and the approval by the
            authorities referred to in clause 1.4 above.

      (iii) OFFEROR is not subject to any bankruptcy or insolvency proceedings,
            and there is no action underway or threatened to declare its
            bankruptcy or insolvency.

      (iv)  This Agreement, following execution thereof, will constitute a valid
            and legally binding obligation of OFFEROR, enforceable against it in



                                                                  CONFORMED COPY

      accordance with its terms, subject to applicable bankruptcy, insolvency,
      reorganization and other laws generally affecting the enforcement of
      creditors' rights.

(v)   In the context of the requirements of Chapter 11 of the United Kingdom
      Listing Rules, no person who is (or was within the 12 months preceding the
      date of this Agreement) a director (or a person in accordance with whose
      directions or instructions the directors of such body are accustomed to
      act (hereinafter, a "SHADOW DIRECTOR")) of PEARSON or of any other company
      which is (and, if he, she or it has ceased to be such, was while he, she
      or it was a director or a shadow director of such other company) PEARSON's
      subsidiary undertaking (hereinafter, a "RELATED PARTY") is directly or
      indirectly interested (or has a conditional or contingent entitlement to
      become interested) in OFFEROR or any parent undertaking or subsidiary
      undertaking of OFFEROR so that such person is (or would on the fulfilment
      of the condition or the occurrence of the contingency be) able:

            (a)   to exercise or control the exercise of 30% or more of the
                  votes able to be cast at general meetings of OFFEROR or any
                  parent undertaking or subsidiary undertaking of OFFEROR on
                  all, or substantially all, matters; or

            (b)   to appoint or remove directors of OFFEROR or any parent
                  undertaking or subsidiary undertaking of OFFEROR holding a
                  majority of voting rights at board meetings on all, or
                  substantially all, matters.

      The above representation and warranty remains true and accurate if the
      direct and indirect interests of each related party to which that
      representation and warranty applies are aggregated with the direct and
      indirect interests and conditional or contingent entitlements to become
      interested of:

            (c)   all other related parties (taken together);

            (d)   the members (taken together) of all related parties' families;

            (e)   the trustees (acting as such) of any trust of which any
                  related party and/or any related party's family is a
                  beneficiary or discretionary object;

            (f)   any company in whose equity shares one or more related parties
                  or any member or members (taken together) of the related
                  party's or related parties' family or the related party or
                  related parties and any such member or members (taken
                  together) are directly or indirectly interested (or have a
                  conditional or contingent entitlement to become interested) so
                  that they are (or would on the fulfilment of the condition or
                  the occurrence of the contingency be) able:



                                                                  CONFORMED COPY

            (A)   to exercise or control the exercise of 30% or more of the
                  votes able to be cast at general meetings of such company or
                  any parent undertaking or subsidiary undertaking of such
                  company on all, or substantially all, matters; or

            (B)   to appoint or remove directors of such company or any parent
                  undertaking or subsidiary undertaking of such company holding
                  a majority of voting rights at board meetings on all, or
                  substantially all, matters.

      Further no member or members (taken together) of a related party's family
      or a related party and any such member or members (taken together) is or
      are directly or indirectly interested (or has or have a conditional or
      contingent entitlement to become interested) in OFFEROR or any parent
      undertaking or subsidiary undertaking of OFFEROR so that such person is or
      persons are (or would on the fulfilment of the condition or the occurrence
      of the contingency be) able to do any of the things set out in sub-clauses
      7.1(v)(a) and 7.1(v)(b) above.

      Further, neither OFFEROR nor any person with a direct or indirect interest
      in the share capital of OFFEROR is or has been within the 12 months prior
      to the date of this Agreement entitled to exercise or to control the
      exercise of 10% or more of the votes able to be cast on all or
      substantially all matters at general meetings of PEARSON or any other
      company which is PEARSON's subsidiary undertaking (except the entitlements
      to exercise or to control the votes attributable directly to the Shares
      which are acquired pursuant to completion of the Offer and/or the Notarial
      Deed).

      Further, OFFEROR is not (nor has it been at any time within the 12 months
      preceding the date of this Agreement) a person in accordance with whose
      directions or instructions the directors of any subsidiary undertaking of
      PEARSON (or of any company which has ceased to be a subsidiary undertaking
      of PEARSON within the 12 months preceding the date of this Agreement) are
      accustomed to act.

      For the purposes of this Agreement an undertaking is a "PARENT
      UNDERTAKING" in relation to another undertaking, a "SUBSIDIARY
      UNDERTAKING", if:

      (g)   it holds a majority of the voting rights in the undertaking; or

      (h)   it has the right to appoint or remove a majority of its board of
            directors; or

      (i)   it has the right to exercise a dominant influence over the
            undertaking:

            (A)   by virtue of provisions contained in the undertaking's
                  by-laws; or



                                                                  CONFORMED COPY

                  (B)   by virtue of a control contract; or

            (j)   it controls alone, or pursuant to an agreement with other
                  shareholders or members, a majority of the voting rights in
                  the undertaking; or

            (k)   it has a participating interest in the undertaking and:

                  (A)   it actually exercises a dominant influence over it; or

                  (B)   it and the subsidiary undertaking are managed on a
                        unified basis.

            For the purposes of this Agreement an individual's "FAMILY" means
            that individual's spouse and children.

      (vi)  The aggregate of the total paid up equity share capital and
            subordinated participating loans (prestamos participativos) of
            OFFEROR is not less than E83,000,000, the funds representing such
            share capital (to the extent not used for expenditure within
            sub-clause 7.1(vii) below) being currently held in the form of funds
            readily available to OFFEROR.

      (vii) Payments which would have to be made by OFFEROR if the Offer does
            not proceed (excluding any payments for which OFFEROR may be liable
            in respect of breach of any of its obligations under this Agreement)
            will not exceed E 13,000,000 and no person with security interests
            over the assets of OFFEROR would have any rights which, taken with
            payments owed to any other person, would exceed such amount in such
            circumstances. Apart from security interests, there are no other
            third party rights or interests in the assets of OFFEROR.

     (viii) Apart from any arrangement falling within clause 9.15 below, there
            exists at the date of this Agreement, no agreement, arrangement or
            undertaking, formal or informal, that would, but for the timing of
            entering into such agreement, arrangement or undertaking, trigger
            any of OFFEROR's obligations to pay any Deferred Contingent Offer
            Consideration.

      (ix)  Except as disclosed in writing to PEARSON, neither OFFEROR nor any
            of its officers, advisers or agents is aware of any right to bring
            any claim against PEARSON or any of PEARSON's subsidiary
            undertakings or any of PEARSON's or PEARSON's subsidiary
            undertakings officers, employees, advisers or agents under this
            Agreement or in connection with any of the matters referred to in
            this Agreement.

7.2.  In the event that the units in PEDIFRI are transferred to OFFEROR pursuant
      to the Notarial Deed, OFFEROR represents and warrants to PEARSON (for
      itself and on behalf of POHL), as of the date of the Notarial Deed, that:

      (i)   OFFEROR has full corporate power and authority and has taken all
            necessary corporate actions to enter into and perform its
            obligations under the Notarial Deed.



                                                                  CONFORMED COPY

      (ii)  No other consent, approval or authorization is required to be
            obtained by OFFEROR in connection with the execution and
            consummation of the Notarial Deed.

      (iii) The Notarial Deed, following execution thereof, will constitute a
            valid and legally binding obligation of OFFEROR, enforceable against
            it in accordance with its terms, subject to applicable bankruptcy,
            insolvency, reorganization and other laws generally affecting the
            enforcement of creditors' rights.

8.    PUBLIC DISCLOSURE

8.1.  Save as provided in sub-clauses 8.2 and 8.3, no formal public announcement
      or press release in connection with the signature or subject matter of
      this Agreement shall be made or issued by or on behalf of either Party
      without the prior written approval of the other Party (such approval not
      to be unreasonably withheld or delayed).

8.2.  Upon the signature of this Agreement, the Parties shall disclose the basic
      contents of this Agreement and such other matters as are required in
      connection with the signature and subject matter of this Agreement to the
      CNMV and in accordance with the Listing Rules of the UK Listing
      Authorities, by filing the notice and announcements substantially in the
      form attached as Annex 7 hereto and a copy of this Agreement shall be
      delivered to the CNMV and may be attached to the Prospectus.

8.3.  If a Party has an obligation to make or issue any announcement or filing
      or to take any other action, in each case required by law or by any stock
      exchange or by any governmental authority, the relevant Party shall give
      the other Party every reasonable opportunity to comment on any
      announcement, release or filing before it is made or issued (provided that
      this shall not have the effect of preventing the Party making the
      announcement, release or filing or taking any such other action from
      complying with its legal and/or stock exchange and/or other regulatory
      obligations).

9.    DEFERRED CONTINGENT OFFER CONSIDERATION

9.1.  OFFEROR shall include the following provisions of this clause 9 in the
      Offer.

9.2.  Subject to the remaining provisions of this clause 9, if there shall occur
      during the Relevant Period any Disposal by a Relevant Party of a RECOLETOS
      Interest, OFFEROR shall pay to each Accepting Shareholder, in respect of
      each of the Accepted Shares for which the Offer was accepted by such
      Accepting Shareholder, the amount in cash in Euros of any Deferred
      Contingent Offer Consideration arising from such Disposal.

      For these purposes:



                                                                  CONFORMED COPY

      "RELEVANT PERIOD" means the period commencing on the date of this
      Agreement and ending at 23:59 (Madrid time) on the date which is 18
      calendar months after the date for settlement pursuant to the Offer;

      "DEFERRED CONTINGENT OFFER CONSIDERATION" means the Upside Amount arising
      from any Disposal divided by:

      (i)   (where the PEDIFRI Put Option has been exercised), the total number
            of Accepted Shares plus the number of shares in RECOLETOS held by
            PEDIFRI at the date of the Notarial Deed; or

      (ii)  (where the PEDIFRI Put Option has not been exercised), the total
            number of Accepted Shares;

      "DISPOSAL" means any sale, transfer or any other disposal, whether for
      cash or otherwise;

      "FIRST UPSIDE PERIOD" means the period commencing on the date of this
      Agreement and ending at 23:59 (Madrid time) on the date which is 12
      calendar months after the date for settlement pursuant to the Offer;

      "SECOND UPSIDE PERIOD" means the period commencing at the end of the First
      Upside Period and ending at 23:59 (Madrid time) on the date which is 6
      calendar months thereafter;

      "RELEVANT PARTY" means:

      (i)   OFFEROR or any subsidiary of OFFEROR;

      (ii)  any person (which term in this Agreement includes any body corporate
            or other legal entity as well as any individual) which holds any
            interest in OFFEROR, whether:

            (A)   directly; or

            (B)   indirectly through any other person;

            provided that no shareholder in BANESTO or any holding company of
            BANESTO (where such person would, but for this proviso, be a
            Relevant Party solely by virtue of its shareholding in BANESTO or
            any holding company of BANESTO) shall be a Relevant Party; and

      (iii) (while any person within (i) or (ii) retains any interest (direct or
            indirect) in the shares of RECOLETOS), RECOLETOS or any subsidiary
            of RECOLETOS.

      "RECOLETOS INTEREST" means:

      (i)   any interest in the RECOLETOS Shares;



                                                                  CONFORMED COPY

      (ii)  any interest in any Relevant Party Shares;

      (iii) any interest in the RECOLETOS Assets,

      and "INTEREST" for these purposes means an interest of any type, whether
      legal or beneficial, conditional or absolute, joint or sole and including
      (without limitation):

            (A)   any option to acquire;

            (B)   any subscription, conversion or exchange rights into;

            (C)   any interest held through or pursuant to a trust or similar
                  arrangement in respect of;

            (D)   any arrangement giving the ability to exercise voting rights
                  attaching to or to receive the economic benefits deriving
                  from;

            (E)   any agreement, conditional or otherwise, to acquire or to call
                  for the delivery of;

            in each case, any of the RECOLETOS Shares, Relevant Party Shares and
            RECOLETOS Assets; and

            (F)   any agreement, conditional or otherwise, to acquire any of the
                  interests falling within (A) to (E) above, both inclusive;

      "RECOLETOS SHARES" means the shares in the capital of RECOLETOS from time
      to time;

      "RELEVANT PARTY SHARES" means any shares (other than RECOLETOS Shares) or
      units in the capital of or participations in (or any other form of
      entitlement to share in assets on a dissolution, winding up or other
      termination of), in each case, any Relevant Party (other than a Relevant
      Party who is an individual);

      "RECOLETOS ASSETS" means the assets of any kind from time to time of
      RECOLETOS and its subsidiaries from time to time or of any of them
      including (without limitation) real estate, intellectual property,
      know-how, equipment, machinery, stock, debtors, the benefit of contracts,
      shares and other securities, goodwill, information and claims;

      "ACCEPTING SHAREHOLDERS" means the shareholders of RECOLETOS who accept
      the Offer;

      "UPSIDE AMOUNT" means:

      (i)   in the case of a Disposal for cash or cash equivalent of the full
            beneficial interest in any RECOLETOS Share(s) (where there has been
            no change to the denomination or number of RECOLETOS Shares in issue
            from those existing at the date of this Agreement), an amount which
            is equal to:



                                                                  CONFORMED COPY

            C% (P x (A-B))

            where, in each such case:

            C =   80 where the relevant Disposal takes place in the First Upside
                  Period; or 50 where the relevant Disposal takes place in the
                  Second Upside Period;

            P =   the number of RECOLETOS Shares disposed of;

            A =   the amount of the consideration received or receivable per
                  RECOLETOS Share in respect of that disposal; and

            B =   the Trigger Price.

      (ii)  in the case of a Disposal for cash or cash equivalent of the full
            beneficial interest in a RECOLETOS Asset, then for the purpose of
            the calculation of any Upside Amount, the RECOLETOS Share Equivalent
            of that RECOLETOS Asset shall first be determined as follows:

            (A)   the EBITDA generated by the business or businesses
                  attributable to that RECOLETOS Asset as a percentage of the
                  consolidated EBITDA generated by the whole of the RECOLETOS
                  business shall be calculated by the Independent Assessor by
                  reference to the most recently published audited consolidated
                  annual financial statements of RECOLETOS and its subsidiaries
                  and also (where no separate EBITDA attributable to such
                  business is specifically stated in any such audited accounts
                  of RECOLETOS for that period) such other factors (including
                  individual subsidiaries' accounts or statements for divisions
                  of the business) as the Independent Assessor, in its absolute
                  discretion, thinks fit to determine such EBITDA);

            (B)   that percentage is then applied to the total number of
                  RECOLETOS Shares in issue at the time of settlement of the
                  Offer;

            (C)   this then gives a number which is the RECOLETOS Share
                  Equivalent of the RECOLETOS Asset the subject of the Disposal
                  and this number shall be P for the purposes of the formula in
                  (i) above;

            (D)   the amount for the purposes of A in that formula shall be the
                  total consideration received or receivable in aggregate in
                  respect of the relevant Disposal of the RECOLETOS Asset
                  divided by the RECOLETOS Share Equivalent for the relevant
                  RECOLETOS Asset.

      (iii) in the case of any other Disposal of a RECOLETOS Interest, the
            amount calculated by the Independent Assessor (using as its
            reference point the basis of calculation of Upside Amount in the
            circumstances referred to in (i) above or in the case of a Disposal
            of any interest in a RECOLETOS Asset, in (ii) above, but adjusting
            for such factors as the Independent Assessor (in its absolute
            discretion) thinks fit in the actual circumstances) as being (in the



                                                                  CONFORMED COPY

            case of a Disposal within the First Upside Period) 80% or (in the
            case of a Disposal within the Second Upside Period) 50% of the
            difference between:

            (A)   the value of the consideration actually received or actually
                  receivable in respect of the relevant Disposal; and

            (B)   what would have been generated by the relevant Disposal of the
                  relevant RECOLETOS Interest had the underlying RECOLETOS
                  Shares been valued at the Trigger Price for the purposes of or
                  in the context of the relevant Disposal and (in the case of a
                  Disposal of a RECOLETOS Asset) had the value of all of
                  RECOLETOS's business been valued at the multiple of the
                  Trigger Price and the total number of RECOLETOS Shares in
                  issue at the date for settlement pursuant to the Offer;

      "TRIGGER PRICE" means Euro 7.50; and

      "INDEPENDENT ASSESSOR" means LAZARD or any replacement appointed in
      accordance with clause 9.9.

9.3.  Where any Disposal of a RECOLETOS Interest takes place otherwise than on
      arms length market terms, any subsequent Disposal (whether direct or by
      means of a Disposal of any interest in any entity which itself has an
      interest, direct or indirect, in the relevant RECOLETOS Interest) shall,
      if it falls within the Relevant Period, be treated as a Disposal of a
      RECOLETOS Interest for the purposes of sub-clause 9.2 above even though
      the Disposal would not, in such circumstances, be by a Relevant Party.

9.4.  In calculating the amount of the consideration received or receivable in
      respect of the Disposal of a RECOLETOS Interest, the relevant amount shall
      be adjusted where there has been any payment or declaration of any
      dividend or where there has been any other distribution or any return of
      shareholders funds (including through share buy-backs) in the period from
      and including the date for settlement pursuant to the Offer to and
      including the date of the relevant Disposal of a RECOLETOS Interest so as
      to reflect the value which RECOLETOS would have had if no such dividend
      had been paid (or declared) or other distribution or return of
      shareholders funds been made.

9.5.  Where any Disposal of a RECOLETOS Interest is of an interest (for example,
      an option) entitling the holder of that interest to acquire a further
      RECOLETOS Interest(s), then the acquisition of such further RECOLETOS
      Interest(s) shall be treated as the Disposal(s) of a RECOLETOS Interest
      falling within sub-clause 9.2 above even though such acquisition of
      further RECOLETOS Interest(s) itself falls outside the Relevant Period.
      Similarly, if any Disposal of such a RECOLETOS Interest falls within the
      First Upside Period, then even though the acquisition of the further
      RECOLETOS Interest(s) pursuant to that first Disposal falls inside the
      Second Upside Period or falls outside the Relevant Period, such
      acquisition of the further RECOLETOS Interest(s) shall be treated as
      falling within the First Upside Period.



                                                                  CONFORMED COPY

9.6.  OFFEROR shall make any payment due to an Accepting Shareholder under
      sub-clause 9.2 above within ten (10) Business Days of receipt by the
      Relevant Party of the consideration in relation to the relevant Disposal
      of the RECOLETOS Interest (or, where the calculation of the Upside Amount
      has to be done by the Independent Assessor, within ten (10) Business Days
      of the Independent Assessor completing that calculation). Where the
      consideration is received in instalments OFFEROR shall pay the
      proportionate part as above following receipt of each instalment. The fact
      that receipt of consideration may fall outside the Relevant Period shall
      not relieve OFFEROR from its payment obligations to Accepting Shareholders
      where the Disposal of the RECOLETOS Interest to which the consideration
      relates took place within the Relevant Period or is a Disposal to which
      sub-clause 9.5 above applies.

9.7.  The provisions of sub-clause 9.2 above shall not apply to Disposals of
      interests in RECOLETOS Assets where such Disposals:

      (i)   are of a revenue nature and are made in the ordinary course of
            business of RECOLETOS or the relevant RECOLETOS subsidiary; or

      (ii)  are Disposals where the aggregate RECOLETOS Share Equivalent of all
            such Disposals (calculated as referred to in sub-clause 9.2 above)
            does not, over the course of the Relevant Period, exceed 25% of the
            total RECOLETOS Shares in issue at the time of settlement of the
            Offer (but so that:

            (A)   any further Disposal(s) pursuant to an initial disposal within
                  the terms of sub-clause 9.5 above shall be treated as a
                  Disposal within the Relevant Period for these purposes; and

            (B)   the value of any Disposal involving instalment or deferred
                  payment(s) outside the Relevant Period shall be calculated by
                  reference to the discounted value of the payments on the date
                  of the Disposal (as determined by the Independent Assessor)).

9.8.  The provisions of sub-clause 9.2 above shall not apply to any Disposal of
      a RECOLETOS Interest to the extent that:

      (i)   such RECOLETOS Interest is an interest in the RECOLETOS Shares or
            any interest in any Relevant Party Shares; and

      (ii)  that Disposal, together with all other such Disposals up to and
            including that date would not amount to the disposal of interests
            (direct or indirect) of an aggregate of more than a 1% of the
            RECOLETOS Shares.

9.9.  The following provisions shall apply in relation to the Independent
      Assessor:

      (i)   OFFEROR shall pay the fees of the Independent Assessor.

      (ii)  If the Independent Assessor delays or becomes unwilling or incapable
            of acting then the Parties shall request as soon as possible that
            the President of



                                                                  CONFORMED COPY

            the Spanish Institute of Financial Analysts (Presidente del
            Instituto Espanol de Analistas Financieros) nominate another in its
            place and the Parties shall co-operate to appoint such nominee as
            soon as possible after such nomination. The nominee shall, upon
            acceptance of its appointment become the Independent Assessor for
            the purposes of this clause 9.

      (iii) The Independent Assessor shall act as an expert and not as an
            arbitrator and its decision shall (in the absence of manifest error)
            be final and binding.

      (iv)  The Parties shall co-operate fully with any request for documents
            and/or information reasonably requested by the Independent Assessor
            and the Parties undertake to use all reasonable endeavours to
            procure that other relevant persons subject to such requests do the
            same.

      (v)   The Independent Assessor shall be appointed on terms that it carry
            out any analysis and calculation it is required to do as promptly as
            reasonably possible and shall notify both OFFEROR and PEARSON of its
            conclusions as soon as possible after the conclusion of its analysis
            and calculation.

      (vi)  To the extent required by the CNMV, the Independent Assessor shall
            confirm to it any calculation of Upside Amount to be made under this
            clause 9.

9.10. OFFEROR undertakes to notify PEARSON and the Independent Assessor
      immediately upon OFFEROR or any of its officers becoming aware of any
      Disposal of a RECOLETOS Interest.

9.11. Subject as provided in clause 9.12, any subscription for new shares,
      units, participations or other equivalent rights in any Relevant Party at
      a price which reflects a value per existing RECOLETOS share (assuming no
      change to the number or denomination of RECOLETOS Shares in issue as at
      the date of settlement of the Offer and no return of capital) of more than
      the Trigger Price shall be treated as a Disposal of a RECOLETOS Interest
      for the purposes of clause 9.2

9.12. Any investment by new investors in OFFEROR (and any subsequent transfer by
      such new investor to another investor at an identical price within the
      period referred to below) which takes place in the period commencing on
      the date of this Agreement and ending at 23:59 (Madrid time) on the date
      which is four calendar months after the date for settlement pursuant to
      the Offer shall not give rise to an Upside Amount by virtue only of the
      fact that such investors pay a price for their shares in OFFEROR which
      includes a premium which would value the current number of RECOLETOS
      Shares above the Trigger Price, the purpose of such premium being to
      balance the subscription or purchase of shares in OFFEROR by RECOLETOS
      management (at prices which would value the current number of RECOLETOS
      Shares lower than the Trigger Price) under a management incentive scheme,
      provided that:



                                                                  CONFORMED COPY

      (i)   the aggregate of such premiums shall not exceed the total of such
            shortfall on new shares of OFFEROR representing no more than 5% of
            the total share capital of OFFEROR as at the date of this Agreement;

      (ii)  the provisions of this clause 9.12 shall apply only to the initial
            transfer to such a new investor (and any subsequent transfer by such
            new investor to another investor at an identical price within the
            period referred to above) and shall not apply to any subsequent
            transfers by any of them;

      (iii) OFFEROR shall procure that any public announcement by any such new
            investor (or any such transferee) shall require the prior written
            consent (not to be unreasonably withheld) of PEARSON and refer to
            the price as being the Offer Price plus a component for fees and a
            component related to the effective funding of a management incentive
            scheme rather than a specific figure.

9.13. The provisions of clause 9.2 above shall not apply to the following
      Disposals of RECOLETOS Interests:

      (i)   Disposals to persons within the same group as the transferor
            provided that if any such person ceases to be the subsidiary company
            or holding company of the transferor the ceasing to be such a
            company shall itself be a Disposal of the relevant RECOLETOS
            interest;

      (ii)  Disposals mortis causa where the transferor is an individual;

      (iii) Disposals for no consideration;

      (iv)  Disposals involving the buy back and redemption by RECOLETOS of its
            own shares; and

      (v)   a merger of OFFEROR and RECOLETOS by means of the Spanish process of
            fusion, provided that in this case in this clause 9 RECOLETOS Assets
            shall be read as OFFEROR Assets and any reference to RECOLETOS
            Shares shall be read as with appropriate changes to take account of
            the fusion into OFFEROR,

      provided that the provisions of sub-clause 9.2 above will apply to
      subsequent Disposals of RECOLETOS Interests by the relevant transferees
      and to any disposals of interests in such transferees (unless such
      subsequent Disposals are in the circumstances specified above).

9.14. Notwithstanding anything to the contrary in this clause 9, the maximum
      amount of Deferred Contingent Offer Consideration payable in respect of
      each Accepted Share shall not exceed Euro 10 in aggregate.

9.15. The provisions of clause 9.2 shall not apply to any Disposal of RECOLETOS
      Shares where the disposal in question is in exercise by a creditor of
      OFFEROR of



                                                                  CONFORMED COPY

      security rights over the RECOLETOS Shares pursuant to any financing to
      OFFEROR, including call option rights taken as security.

10.   LIABILITY

10.1. Save as otherwise provided herein, each Party shall be liable to the other
      Party for any damages, losses, costs and expenses caused to or incurred by
      the latter arising out of or resulting from any breach or infringement by
      the former Party of the obligations assumed under this Agreement.

10.2. Where one of the Parties considers that a breach or infringement of this
      Agreement (hereinafter, a "BREACH") has occurred which is attributable to
      the other Party, the former shall serve written notice on the latter
      (hereinafter, a "NOTICE OF DISPUTE"), and, if the Breach may be remedied,
      the Party in breach shall have to do so within a period of five (5)
      Business Days, without prejudice to its liability vis-a-vis the other
      Party for any damages and prejudices caused by the Breach. In the event
      that it is not possible to remedy the Breach or should the Party in breach
      fail to do so within such period, the Party in breach shall be liable
      vis-a-vis the other Party for damages and prejudice caused by the Breach.

11.   COSTS AND EXPENSES

      Each of the Parties shall bear its own costs, legal and advisory expenses,
      charges and other expenses (including taxation) arising out of the
      negotiation, preparation, execution and performance of this Agreement.

      OFFEROR shall pay all costs and expenses related to the preparation,
      filing, completion and settlement of the Offer, including in relation to
      obtaining the Authorization and any other regulatory clearances.

12.   NOTICES

12.1. All notices or communications between the Parties with respect to this
      Agreement must be made in writing by (i) hand delivery, (ii) registered
      mail with acknowledgement of receipt, (iii) courier service, (iv)
      facsimile, or (v) e-mail, in any case sent to the addresses or numbers set
      forth in sub-clause 12.2 below.

12.2. The contact details of each Party for all notices to be made in connection
      with this Agreement are the following:

      For PEARSON:

      Address:   80 Strand, London WC2R 0RL, England
      Attention: Marjorie Scardino (CEO) and Robert Dancy (General Counsel)
      Copy:      The Company Secretary
      Facsimile: +44 20 7010 6633 and +44 20 7010 6060



                                                                  CONFORMED COPY

      E-mail: marjorie.scardino@pearson.com and robert.dancy@pearson.com

      For OFFEROR:

      Address:     C/ Carbonero y Sol, n(degrees) 12, Madrid, Spain
      Attention:   Jose Garay
      Facsimile:   +34 91 411 69 89
      E-mail:      fmanagers@fmanagers.com

12.3. Any notice sent to the above-referred addresses shall be deemed to have
      been received by the addressee, except if prior to the sending of such
      notice the addressee had notified the sender of a change of address.

13.   GOVERNING LAW, DISPUTE RESOLUTION, ENGLISH LANGUAGE AND MISCELLANEOUS

13.1. This Agreement shall be governed by the laws of Spain.

13.2. Any dispute under this Agreement which has not been resolved between the
      Parties within thirty (30) Business Days of service of a Notice of Dispute
      may be referred by either Party to and, following any such referral, shall
      be finally resolved by arbitration under the Rules of Arbitration of the
      International Chamber of Commerce by three arbitrators appointed in
      accordance with those Rules. The seat of arbitration shall be Paris,
      France. The language to be used in the arbitral proceedings shall be
      English. The Parties shall have the right to seek interim relief from a
      court of competent jurisdiction, at any time before and after the
      arbitrator has been appointed, up until the arbitrator has made his final
      award.

13.3. The parties may append to this Agreement or attach this Agreement to
      documents in Spanish and documents the originals of which are in Spanish,
      subject always to the following provisions: the language of this Agreement
      and the transactions envisaged by it is English and all notices, demands,
      requests, statements, certificates or other documents or communications
      between the Parties shall be in English unless otherwise agreed. For the
      avoidance of doubt, the English language version of this agreement shall
      prevail to the exclusion of any translation of it into any other language.

13.4. This Agreement constitutes the entire agreement between the parties with
      respect to the subject matter hereof and supersedes all agreements,
      understandings, negotiations and discussions, whether written or verbal,
      between the parties prior to the date hereof.

13.5. The Annexes to this Agreement form an integral part thereof.



                                                                  CONFORMED COPY

IN WITNESS WHEREOF, the Parties execute this Agreement in two counterparts, one
for each of them, in the place and on the date first above written.

PEARSON PLC
By

/s/ TIMOTHY SCOTT HENDERSON
- ---------------------------
Mr. Timothy Scott Henderson

RETOS CARTERA, S.A.
By

/s/ JAIME CASTELLANOS BORREGO
- -----------------------------
Mr. Jaime Castellanos Borrego

EX-8.1

                                                                               .
                                                                               .
                                                                               .

                                                                     EXHIBIT 8.1


                        LIST OF SIGNIFICANT SUBSIDIARIES



                                                                            PERCENTAGE
                                                                             INTEREST/
NAME                                        COUNTRY OF INCORPORATION       VOTING POWER
- -------------------------------------       ------------------------       ------------
                                                                         
Pearson Education Inc.                      United States                      100%
Pearson Education Ltd                       England and Wales                  100%
NCS Pearson Inc.                            United States                      100%
Pearson Longman Inc.                        United States                      100%
Pearson Education Holdings Inc.             United States                      100%
PN Holdings Inc.                            United States                      100%
The Financial Times Limited                 England and Wales                  100%
Financial Times Business Ltd                England and Wales                  100%
Interactive Data Corporation                United States                       61%
Recoletos Grupo de Comunicacion SA          Spain                               79%
Les Echos SA                                France                             100%
Penguin Group (USA) Inc.                    United States                      100%
The Penguin Publishing Co Ltd               England and Wales                  100%
Dorling Kindersley Holdings Ltd             England and Wales                  100%
Pearson Inc.                                United States                      100%
Pearson Holdings Inc.                       United States                      100%
Pearson Overseas Holdings Ltd               England and Wales                  100%
Pearson International Finance Ltd           England and Wales                  100%
West Thurrock Estates Ltd                   England and Wales                  100%
Pearson Capital Company LLC                 United States                      100%
Pearson Finance Partnership (Bermuda)       Bermuda                            100%
Testchange Ltd                              England and Wales                  100%
Pearson Netherlands BV                      Netherlands                        100%
Pearson AG                                  Switzerland                        100%
Blue Wharf Ltd                              England and Wales                  100%
Themescene Ltd                              England and Wales                  100%
Pearson Investments BV                      Netherlands                        100%
Pearson DBC Holdings Inc.                   United States                      100%
Rycade Capital Corporation                  United States                      100%
Data Broadcasting Corporation               British Virgin Islands              61%
- ---------------------------------------------------------------------------------------

EX-10

                                                                      EXHIBIT 10



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No.s. 333-66444, 333-45070 and 333-44590) of
Pearson plc of our report dated June 27, 2005 relating to the financial
statements which appear in this Annual Report on Form 20-F for the year
ended December 31, 2004.



PricewaterhouseCoopers LLP
London, England
June 27, 2005

EX-12.1

                                                                    EXHIBIT 12.1


                                 CERTIFICATIONS


I, Marjorie Scardino, certify that:

1.   I have reviewed this annual report on Form 20-F of Pearson plc;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     Pearson plc as of, and for, the periods presented in this annual report;

4.   Pearson plc's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Pearson plc and have:

     a)   designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to Pearson
          plc, including its consolidated subsidiaries, is made known to us by
          others within those entities, particularly during the period in which
          this annual report is being prepared;

     b)   evaluated the effectiveness of Pearson plc's disclosure controls and
          procedures and presented in this annual report our conclusions about
          the effectiveness of the disclosure controls and procedures, as of the
          period covered by this report based on such evaluation; and

     c)   disclosed in this annual report any change in Pearson plc's internal
          control over financial reporting that occurred during the period
          covered by the annual report that has materially affected, or is
          reasonably likely to materially affect, Pearson plc's internal control
          over financial reporting.

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

     a)   all significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect Pearson plc's ability to record,
          process, summarize and report financial information; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in Pearson plc's internal
          control over financial reporting.



Date: June 27, 2005


/s/  Marjorie Scardino
- -----------------------------
Marjorie Scardino
Chief Executive Officer

EX-12.2

                                                                    EXHIBIT 12.2


                                 CERTIFICATIONS


I, Rona Fairhead, certify that:

1.   I have reviewed this annual report on Form 20-F of Pearson plc;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     Pearson plc as of, and for, the periods presented in this annual report;

4.   Pearson plc's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Pearson plc and have:

     a)   designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to Pearson
          plc, including its consolidated subsidiaries, is made known to us by
          others within those entities, particularly during the period in which
          this annual report is being prepared;

     b)   evaluated the effectiveness of Pearson plc's disclosure controls and
          procedures and presented in this annual report our conclusions about
          the effectiveness of the disclosure controls and procedures, as of the
          period covered by this report based on such evaluation; and

     c)   disclosed in this annual report any change in Pearson plc's internal
          control over financial reporting that occurred during the period
          covered by the annual report that has materially affected, or is
          reasonably likely to materially affect, Pearson plc's internal control
          over financial reporting.

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

     a)   all significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect Pearson plc's ability to record,
          process, summarize and report financial information; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in Pearson plc's internal
          control over financial reporting.


Date: June 27, 2005


/s/  Rona Fairhead
- -----------------------------
Rona Fairhead
Chief Financial Officer

EX-13.1

                                                                    EXHIBIT 13.1


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


     In connection with the Annual Report on Form 20-F of Pearson plc (the
"Company") for the fiscal year ending December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Marjorie Scardino, Chief Executive Officer of the Company, certify to my
knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350), that:

     1.   The Report fully complies with the requirements of section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     2.   The information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
          of the Company.

Dated: June 27, 2005

                                     /s/  Marjorie Scardino
                                     -------------------------------------------
                                     Marjorie Scardino
                                     Chief Executive Officer

EX-13.2

                                                                    EXHIBIT 13.2


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


     In connection with the Annual Report on Form 20-F of Pearson plc (the
"Company") for the fiscal year ending December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Rona
Fairhead, Chief Financial Officer of the Company, certify to my knowledge,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350), that:

     1.   The Report fully complies with the requirements of section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     2.   The information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
          of the Company.

Dated: June 27, 2005

                                     /s/  Rona Fairhead
                                     -------------------------------------------
                                     Rona Fairhead
                                     Chief Financial Officer