Chief executive's review

If you're reading this, you're a Pearson shareholder, and you may be wondering how things really are in your company.

Our share price is at a low ebb; one of our finest brands, the Financial Times, is becalmed in the advertising doldrums; and the political and economic atmosphere we're working in doesn't look as if it's going to fill with sunshine any time soon.

But Pearson is, in the midst of this gloom, in fine shape. There is every reason for you to be very proud of your connection to the company and confident about your investment. Let me give you just ten:

1

Our profits took a turn for the better in 2002 and we can make yearly progress hereafter. From 1997 to 2000 we produced record sales, profits and cash, and a rising dividend. In 2001, the advertising slump began to be an advertising collapse, and our business newspapers' profits collapsed as well. We still made a profit and still maintained a rising dividend; but it wasn't anywhere near what we'd been used to.

So 2002 was a year when we had to fight back. And we did. We kept our promise of an earnings recovery in spite of a global economy and business climate that just got worse and worse.

2

Each of our businesses is a leader in its field. All of them have sustainable, best-in-class positions in their markets. They are not only leaders in size; they also have strong brands and franchises - something special in the products they make or the way they do things that sets them apart from their competitors.

3

We are in 'knowledge' markets, good markets to be in when the world is moving from relying mostly on muscle power to relying mostly on brain power. Those markets require news and information to run businesses or countries; education - cradle to grave, pre-school to professional; entertainment and elucidation - at least what can be found in books, one of the most cost-effective ways there is to have a good time. Our businesses use two methods to appeal to people's intellects: great publishing and the ability to mix that publishing with services to help customers use the words and data and ideas.

4

Pearson is now an operating company rather than a holding company. That means our businesses have enough in common that we can all work on the business at hand, not on overseeing disparate enterprises. Including management. We go out with salesmen and dig for new product ideas and talk to customers. We look for ways to do new things, or to do old things differently. We look for ways for the parts of the company to share talents and assets and costs inside the company.

Of course, you can only share things if you have a set of businesses that work together and help each other. And that's what we finally have. Our businesses all make sense together, and so they can work toward the same goals together. Collaboration is an everyday occurrence at Pearson.

5

We are entirely reliant on the inventiveness and character of our people. If tomorrow we didn't have offices, or warehouses, or we lost all our manuscripts and all our software code, we'd still be in business. We'd still have our major stock in trade - our people's ability to reinvent the business and their willingness to confront tough chores.

We've set our sights on being a great place to work, a place everyone can leave because they're in such demand, but no one does because this place is better. We do everything we can to make sure that we recruit the best people and then give them the training and career development they need to do their job... and the next job they're going to have. When they join us, they can expect to be paid fairly for doing their job and to receive rewards for extraordinary work. They can also expect to have a safe place to work, free from any kind of bullying or unfair pressures. And they can, on most days, expect to enjoy their work.

6

We have a board of directors who understand that their job is to help the enterprise prosper, and who do just that. These days boards face more rules to ensure they act responsibly and check up on management regularly. Our board has an informal and intimate frankness that ensures they do both without pulling any punches. They know management needs their help, and they give it generously. They know the shareholders count on them to make sure their investment is being well taken care of, and they do that uncompromisingly.

7

We try to make it as easy as possible for people to understand our business and our performance. In a world where companies have lost their way through a confusion of accounting rules and special purpose vehicles, and where business stories are told in jargon and pension details are covered with caveats, we try to tell our stories - including our strengths and weaknesses - in plain English and plain data. We think that will protect our shareholders and give us advantages.

8

We believe corporations are risk-taking organisations whose aim is to become more valuable over time because they produce valuable products and services at a profit. Our company doesn't discover miracle drugs or miracle technology. But we do discover and publish new ideas; make information available and understandable; strive to provide truly 'universal' education - that teaches each child. We in Pearson work because of that possibility, and believe that if we're able to change the world, our shareholders will profit as well.

9

We count on the fact that culture and conduct - what beliefs we share and how we conduct business - have a great deal to do with success. Like all companies, we say we are ethical and try to do our duty to society and our employees. But we've been saying our aims were to be 'brave, imaginative, and decent' so long now we've all begun to know what that means. And when we don't act that way, we know it and try to make sure that it doesn't happen again.

10

We have a clear goal and a strategy for achieving it. Our goal is outlined in the theme of this report. It is to add to people's knowledge to help them live and learn.

To entertain and enlighten them; to teach them new skills and inform them about their professions. We believe it's a good goal, and we've now got the company that can accomplish it. But the measure of whether we're accomplishing it is our financial performance.

So now our strategy for achieving it is not just getting the right pieces, as it has been for the last five or six years. It is having annual improvement in sales, profits and cash; and increasing our return on invested capital. It is exerting what Thomas Edison once said genius required: 1% inspiration and 99% perspiration.