: chairman's letter :

It is astonishing how quickly we take for granted the greater focus and improved performance of our company over the last three years.

The financial highlights of 1999 demonstrate how much has been achieved. With adjusted earnings up 15%, we continue to build our reputation as a company that delivers consistent results. Pearson is now a web of increasingly connected media businesses, each performing well and with abundant opportunities for growth.

These growth opportunities stem from our ability to make inventive use of the intellectual property that Pearson commands. We will continue to invest, with bravery and imagination, in new platforms – through the internet and other technologies – and in more assets that help us inform, educate and entertain. Shareholders may be sure, however, that we will continue to apply, with rigour, the tough performance targets that have played such a key role in our progress over the last few years.

Our ability to attract and retain the best talent, at all levels of our company, is crucial to our growth and future performance. The new economy is transforming the opportunities on offer to management talent around the world. We have examined and rejected, for now, alternatives that would have separated some of our internet activities. Such a separation – through a separate flotation or the creation of some form of tracker stock – would have allowed us to give potentially highly leveraged options to those involved. We rejected this route because we see the internet as integral to all that we are trying to achieve. As importantly, we did not wish to discriminate against employees who are as crucial to the creation of shareholder value as those much more directly involved in the net.

However, we do need to be able to offer competitive compensation to people who are at the forefront of developing our internet enterprises. We also want to continue to extend share options more widely across Pearson. For these reasons, we have introduced a special share option plan this year and may well bring forward a new share option plan for your approval. Later this year, we plan to seek a listing of our ordinary shares on the New York Stock Exchange (NYSE). Over half our employees are based in the United States and a listing will enhance our ability to offer them equity participation in Pearson. We welcome your views on any of these issues.

We have now sold the last of our unrelated businesses – our stakes in the three Lazard investment houses. This sale allows us to invest all our resources in the businesses that form the future of Pearson, but it also means that we part company with an institution that has been tied to our history for over 80 years. Our relationship with Lazard has been long, happy and very profitable. As a result of the sale, two Lazard partners, Michel David-Weill and David Verey, have decided to step down as directors of Pearson. Michel joined our board in 1970; over the last three decades, Pearson’s shareholders have, on many occasions, benefited from his wise counsel. In his five years as a director, David has also made a major contribution. We wish Michel, David and all the Lazard partners a great future.

On behalf of my executive board colleagues and, indeed, all shareholders, I also thank the small number of very committed non-executive directors who have been an important source of support during the transformation of Pearson in recent years. Shareholders will welcome the news that the first increase in their fees for five years is being taken exclusively in shares. Over the next year we will be reviewing more innovative ways of linking the non-executives to the success of the business. On behalf of all shareholders, I would like to welcome two new non-executive directors who have joined the board since the publication of last year’s annual report. Lord Burns was appointed to the board on 6 May last year and Rana Talwar joined us on 20 March this year. Both will put themselves forward for reappointment at this year’s annual general meeting.

Finally, but foremost, the board thanks the 24,000 and more Pearson colleagues who made 1999 such a great year and give us such strong grounds for optimism about the future. It gives us great confidence to know that, through our company-wide bonus and share ownership plans, they can all share in our future success.