<PAGE>
                                                                   Exhibit 10.31


                      THE PEARSON LONG-TERM INCENTIVE PLAN

PREAMBLE

The Long-Term Incentive Plan has two elements:

-     the Stock Option element. This involves the grant of options to acquire
      Shares, normally having regard to corporate performance over the three
      years prior to grant, but without normally needing to satisfy a corporate
      performance target after grant; and

-     the Restricted Stock element. This involves the grant of rights to acquire
      Shares. The vesting of such grants may, but need not, be subject to a
      corporate performance target.

DEFINITIONS

1.1   In this Plan, unless the context otherwise requires, the following words
and expressions shall have the following meanings, namely:

ADOPTION DATE means the date of the adoption of the Plan by the Company in
general meeting;

ADSS means American Depositary Shares representing Shares;

AWARD means a right to acquire Shares under the rules of this Plan, comprising
either Stock Option and/or Restricted Stock elements;

THE COMMITTEE means the personnel committee of the board of directors of the
Company, or other duly authorised committee thereof;

THE COMPANY means Pearson plc;

CONTROL has the meaning given to that word by section 840 of the Income and
Corporation Taxes Act 1988;

DATE OF GRANT means the date on which an Award is granted;

DEALING DAY means any day on which the London Stock Exchange is open for
business;

EXECUTIVE means any employee or executive director of any member of the Group;

GRANT PERIOD means any day (other than a day on which dealings in Shares are
prohibited under the Model Code for Dealing in Securities) on which the
Committee considers it appropriate to grant Awards;

THE GROUP means the Company and the Subsidiaries and MEMBER OF THE GROUP shall
be construed accordingly;

ITEPA means the Income Tax (Earnings and Pensions) Act 2003;

<PAGE>

OPTION EXERCISE PRICE means the price per Share (expressed in sterling or US
dollars) payable on the exercise of a Stock Option as determined by the
Committee (subject to adjustment under rule 10) being not less than the Share
Price on the Date of Grant (PROVIDED THAT, in the case of any Stock Option under
which Shares are to be issued, the Option Exercise Price shall also not be less
than the nominal value of a Share);

OPTION PERIOD means, in relation to an Option or Option Tranche, the period
commencing on the Option Vesting Date and expiring on the tenth anniversary of
the Date of Grant;

OPTION TRANCHE means each tranche of Shares comprised in a Stock Option,
becoming exercisable in the manner described in rule 5.3 and 5.4;

OPTION VESTING DATE means the date on which a Stock Option, or each tranche
thereof where granted as Option Tranches, normally become exercisable;

PARTICIPANT means any individual who holds a subsisting Award (including, where
the context permits, the legal personal representatives of a deceased
Participant);

THE PLAN means this Plan as amended from time to time;

RESTRICTED STOCK means a right granted under the Plan to call for Shares without
payment;

RESTRICTED STOCK VESTING DATE means:

(a)   where the Restricted Stock is subject to a performance condition (unless
      the Committee specifies otherwise at its Date of Grant), the third
      anniversary of the Date of Grant of the Restricted Stock (or, if later,
      the date of publication of the final set of accounts of the Company which
      are relevant to the determination of the applicable performance
      condition); and

(b)   where the Restricted Stock is not subject to a performance condition, the
      date on which the Restricted Stock is expressed to vest (as specified by
      the Committee).

SPECIFIED AGE means age 55 for the purposes of paragraph 35A of Schedule 4 to
ITEPA;

STOCK OPTION means a right granted under the Plan to subscribe for or purchase
Shares at the Option Exercise Price;

SHARE OPTION PLAN means any employee share option plan established by the
Company;

SHARE PRICE means:

(a)   in relation to a Share on any Dealing Day, the middle market quotation for
      a Share as derived from the Daily Official List of The London Stock
      Exchange; and

                                                                          Page 2
<PAGE>

(b)   in relation to an ADS on any Dealing Day, the closing price for an ADS on
      the New York Stock Exchange.

SHARES means fully paid and irredeemable ordinary shares of 25p each in the
capital of the Company or shares representing those shares following any
reorganisation of the share capital of the Company (and, where the context
requires, shall include the equivalent thereof in ADSs);

SUBSIDIARY means any subsidiary of the Company within the meaning of section 736
of the Companies Act 1985 over which the Company has Control; and

TRUSTEE means the trustee from time to time of the Pearson plc Employee Share
Ownership Trust or such other trust as the Company shall specify from time to
time.

1.2   Where the context permits the singular shall include the plural and vice
versa. Headings shall be ignored in construing the Plan.

1.3   References to any act shall include any statutory modification, amendment
or re-enactment thereof.

GRANT OF AWARDS

2.1   The Committee may, during a Grant Period, grant Awards to Executives
selected by the Committee in its absolute discretion. For the avoidance of
doubt, no Executive shall have the right or expectation to participate in the
Plan in any year.

2.2   Each Award shall comprise such proportions of Stock Options and Restricted
Stock as the Committee thinks fit in its absolute discretion.

2.3   The grant of an Award and/or the delivery of Shares upon exercise thereof
shall be conditional on the Executive agreeing to comply with any arrangements
specified by the Company for the payment of taxation and social security
contributions (including without limitation the right to sell on his or her
behalf sufficient Shares to satisfy any taxation or social security
contributions liability on his or her part for which any member of the Group may
be liable) in respect of an Award.

2.4   As soon as practicable after the Date of Grant the Committee shall procure
the issue to such Executive of certificates in respect of an Award. Such
certificates shall be issued under the seal of the Company or otherwise to take
effect as a deed, or may refer to another document evidencing the legal
enforceability of the Award.

2.5   Any Executive to whom an Award is granted may, by notice in writing to the
Company given within 30 days after the Date of Grant, renounce in whole or in
part his or her rights under the Award. In such a case, the Award shall, to the
extent renounced, be treated as never having been granted and (if already
issued) the relevant certificate(s) shall be returned to the Company for
cancellation or amendment. No consideration shall be payable by the Company for
any such renunciation.

                                                                          Page 3
<PAGE>

2.6   No Award shall be granted under the Plan later than the fifth anniversary
of the Adoption Date.

2.7   Every Award granted hereunder shall be personal to the Participant and,
except to the extent necessary to enable a personal representative to exercise
the Award following the death of a Participant, neither the Award nor the
benefit thereof may be transferred, assigned, charged or otherwise alienated.
Any transfer of an Award otherwise than as permitted under this rule 2.7 shall
cause the Award to lapse.

PLAN LIMITS

3.1   Restricted Stock may only be satisfied using existing issued Shares, and
the Company shall provide (and shall procure, where appropriate, that any member
of the Group which employs Participants shall provide) sufficient monies to
enable the Trustee to acquire sufficient Shares to satisfy all Restricted Stock.
Such monies shall be provided to the Trustee no later than the date on which the
Restricted Stock vests.

3.2   Stock Options may be satisfied using existing issued Shares (in which case
the provisions of rule 3.1 shall apply mutatis mutandis) or with new Shares
issued to the Participant at the time of exercise or to the Trustee (in which
case rule 3.3 shall apply).

3.3   No Stock Option to subscribe for Shares (whether by the Participant or the
Trustee) shall be granted to the extent that the result of that grant would be
that the aggregate number of Shares that could be issued on the exercise of that
Stock Option and any other Stock Options granted at the same time:

(a)   when added to the number of Shares that:

      (i)   could be issued on the exercise of any other subsisting share
            options granted during the preceding ten years under any Share
            Option Plan (including Stock Options under the Plan);

      (ii)  have been issued on the exercise of any share options granted during
            the preceding ten years under any Share Option Plan (including Stock
            Options under the Plan); and

      (iii) have been issued during the preceding ten years under any profit
            sharing or other employee share incentive scheme (not being a Share
            Option Plan),

      would exceed 10 per cent of the ordinary share capital of the Company for
      the time being in issue PROVIDED THAT no date earlier than 1 January 1997
      shall be taken into account in applying the ten year period referred to in
      (i), (ii) and (iii) above; or

(b)   when added to the number of Shares that could be issued on the exercise of
      Stock Options granted during the same calendar year, would exceed 1.5 per
      cent of the ordinary share capital of the Company for the time being in
      issue.

                                                                          Page 4
<PAGE>

3.4   Reference in this rule 3 to the ISSUE of Shares shall, for the avoidance
of doubt, mean the issue and allotment (but not transfer) of Shares.

INDIVIDUAL LIMITS

4.1   Prior to granting Awards, the Committee shall, taking such independent
expert advice as it thinks fit, determine the implied value of the Awards
(expressed on a per Share basis) at the Date of Grant. Stock Options shall be
valued by reference to the Black Scholes method of valuation, taking account of
the Option Exercise Prices, certain variables specified in the Black Scholes
model relating to Shares (including the dividend growth rate and Share price
volatility), and the period during which Stock Options may be exercised.
Restricted Stock shall be valued on such basis as the Committee thinks fit,
having regard to the probability of any applicable performance target being met.

4.2   The number of Shares comprised in Awards granted to any Executive shall be
based on the valuation mechanism described in rule 4.1. The Committee shall, in
respect of each Executive, set an expected value for his or her Awards on that
occasion, and the aggregate value of the elements of the Awards shall not exceed
that expected value. The maximum expected value of Awards for executive
directors will have regard to market practice, and will generally equate to the
value of long-term incentive opportunity required to bring expected total
compensation to the upper quartile of market practice for a selected group of
comparable companies in the US and UK.

SPECIFIC PROVISIONS RELATING TO STOCK OPTIONS

5.1   The Committee will not grant Stock Options unless it considers that a
grant is supported by the underlying performance of the Company's business. For
these purposes the Committee intends to measure corporate performance by
reference to the Company's real earnings per share (EPS) growth over the three
financial years prior to the grant, determined in accordance with Schedule One.
No Stock Options will be granted unless the Company's average real EPS growth
over this period exceeds 3% per annum. Grants will be calibrated on a sliding
scale to corporate performance once this level of EPS growth is achieved, and
will be made at the maximum level only if real EPS growth exceeds 3% per annum
by a substantial margin.

5.2   All Stock Options will be subject to a demanding performance condition
which the Committee will normally apply before grant (to determine the number of
Shares granted under the Stock Option), but may apply after grant (to determine
the number of Shares over which the Stock Option is exercisable).

5.3   Where the Committee determines to grant Stock Options in Option Tranches,
such Stock Options will, unless otherwise permitted in these rules, only become
exercisable on the following dates:

(a)   as to the First Option Tranche, on the first anniversary of the Date of
      Grant;

(b)   as to the Second Option Tranche, on the second anniversary of the Date of
      Grant;

                                                                          Page 5
<PAGE>

(c)   as to the Third Option Tranche, on the third anniversary of the Date of
      Grant; and

(d)   as to the Final Option Tranche, on the fourth anniversary of the Date of
      Grant PROVIDED THAT the Final Option Tranche shall lapse in the event that
      the First, Second or Third Option Tranches have been exercised under this
      rule prior to the fourth anniversary of the Date of Grant.

5.4   Notwithstanding rule 5.3, the Committee may, if it thinks fit, grant Stock
Options in Option Tranches that become exercisable on different anniversaries to
those stated in rule 5.3. In that event:

(a)   the earliest date on which an Option Tranche shall become exercisable
      shall be the first anniversary of the Date of Grant;

(b)   the Stock Option shall not become exercisable in full before the third
      anniversary of the Date of Grant; and

(c)   such part of the Stock Option as the Committee shall specify shall lapse
      if any Option Tranche is exercised before the third anniversary of the
      Date of Grant (or such later anniversary as the Committee shall specify).
      Such part of the Stock Option which lapses shall be treated as the FINAL
      OPTION TRANCHE for the purposes of these rules.

5.5   Where the Committee grants a Stock Option, but not in Option Tranches
under rule 5.3 or 5.4, the Stock Option will not become exercisable until the
third anniversary of the Date of Grant, unless otherwise permitted in these
rules.

5.6   A Participant may exercise a Stock Option in whole or in part by giving
notice in writing to the Company in the form prescribed by the Company
specifying the Stock Option being exercised on that occasion, the number of
Shares in respect of which the Option (or Option Tranche thereof) is being
exercised and enclosing or arranging to provide cash payment in full of the
aggregate Option Exercise Price in respect of those Shares. If the Stock Option
is exercised in respect of some only of the Shares comprised in a Stock Option,
the Company shall procure the issue of a certificate to the Participant in
respect of the balance or call in the original certificate for endorsement.

5.7   Notwithstanding any other provision in these rules, a Stock Option shall
lapse automatically on the earliest of:

(a)   the expiry of the Option Period;

(b)   the Participant ceasing to be an employee of a member of the Group (save
      as provided in rule 7);

(c)   any of the dates specified in rule 9; and

(d)   the Participant being declared bankrupt or entering into any general
      composition with or for the benefit of his or her creditors.

                                                                          Page 6
<PAGE>

SPECIFIC PROVISIONS RELATING TO RESTRICTED STOCK

6.1   Restricted Stock consists of a right to call for a number of Shares at any
time within the time periods referred to in these rules. All Restricted Stock in
respect of which Participant has not made a written request to call will lapse
at the end of such period or at any earlier date specified in the rules.

6.2   Where a Restricted Stock Award is subject to a performance condition:

(a)   the number of Shares that vest (the VESTING SHARES) shall be determined by
      the extent to which an objective performance measure is satisfied by the
      Restricted Stock Vesting Date. The performance measure initially attaching
      to such Restricted Stock shall consist of the Free Cash Flow Performance
      Target set out in Schedule Two to this Plan. If the Committee wishes to do
      so, it may at the time of granting Restricted Stock, at its absolute
      discretion, add a further performance measure (in relation to a particular
      business or participant) or impose a performance measure other than that
      set out in Schedule Two;

(b)   75% of the Vesting Shares (the MAIN TRANCHE) may be called for at any time
      within the period of 6 months following the Restricted Stock Vesting Date;

(c)   25% of the Vesting Shares (the DEFERRED TRANCHE) may be called for at any
      time within the period of 6 months following the second anniversary of the
      Restricted Stock Vesting Date PROVIDED THAT the Participant has not
      disposed of any Shares comprised in the Main Tranche (other than Shares
      sold to satisfy tax liabilities associated with the vesting or calling for
      the Shares comprised in the Main Tranche) and in the event that the
      Participant has so disposed of Shares the Deferred Tranche shall lapse in
      full.

6.3   The Committee may grant Restricted Stock which is not subject to a
performance condition, in order to achieve retention or recruitment objectives.
The Restricted Stock Vesting Date, and such other conditions as the Committee
thinks fit, shall be specified by the Committee at the Date of Grant.

6.4   A Participant may call for Restricted Stock (in full only, to the extent
then exercisable) by giving written notice to the Company, requesting the Shares
to which he or she is entitled.

6.5   Alternatively, the Committee may grant Restricted Stock Awards on terms
that Vested Shares are delivered automatically to a Participant as soon as
practicable on or after the relevant Restricted Stock Vesting Date. Where
Restricted Stock Awards are granted on such terms, references in these Rules in
relation to Restricted Stock to "call for", "called for" and "calling for" shall
be construed as meaning "receive delivery of", "delivered" and "delivery of"
respectively

CESSATION OF EMPLOYMENT - STOCK OPTIONS AND RESTRICTED STOCK

7.1   Save as otherwise provided in these rules, an Award shall lapse
automatically on the Participant ceasing to be an employee of a member of the
Group.

                                                                          Page 7
<PAGE>

7.2   Where a Participant ceases to be an employee of a member of the Group by
reason of:

(a)   injury, disability, ill-health or redundancy (as determined by the
      Committee);

(b)   retirement at or after the date on which he or she is bound to retire
      under his or her contract of employment;

(c)   his or her employing company or business ceasing to be part of the Group;
      or

(d)   any other reason if the Committee so decides in its absolute discretion

then the following provisions shall apply:

(i)   any Stock Option (whether or not it is already exercisable at the date the
      Participant ceases employment) may be exercised in full at any time within
      the period of six months following cessation of employment, and will then
      lapse PROVIDED THAT the Committee may specify a later date (not being
      later than the expiry of the Option Period) on which the Stock Option
      shall lapse;

(ii)  any Restricted Stock which has not already vested or lapsed shall remain
      in force, and a Participant may call for the Shares under the Restricted
      Stock (if and to the extent that the relevant performance conditions are
      met) at any time up to 6 months after the relevant Restricted Stock
      Vesting Date and the Restricted Stock will then lapse PROVIDED THAT:

      (aa)  the number of Shares which vest in accordance with Schedule Two
            shall be reduced by the fraction A/B where A is the number of
            complete months from the Participant's leaving date to the relevant
            Restricted Stock Vesting Date, and B is the number of complete
            months from the Date of Grant to the relevant Restricted Stock
            Vesting Date. However, the Committee may in its absolute discretion
            determine (no later than the relevant Restricted Stock Vesting Date)
            that the Participant's entitlement should not be scaled down or
            should be scaled down in part only (the extent of scaling down being
            determined by the Committee in its absolute discretion); and

      (bb)  the Shares comprised in the Deferred Tranche may be called for
            without regard to the condition in rule 6.2(c).

7.3   For the purposes of rules 7.1 and 7.2 a female Participant shall not be
treated as ceasing to be an employee of a member of the Group if absent from
work wholly or partly because of pregnancy until she ceases to be entitled to
exercise a right to return to work.

DEATH OF PARTICIPANT - STOCK OPTIONS AND RESTRICTED STOCK

8.    If a Participant dies while in service (or at any time after leaving
service when he or she holds an Award at the time of his or her death) the
Committee shall determine in its absolute discretion what proportion (if any) of
an Award may be

                                                                          Page 8
<PAGE>

exercised and the time at which or within which it may be exercised by his or
her legal personal representatives. For the avoidance of doubt, an Award
exercisable under this rule may lapse at an earlier date by virtue of rule 9.

GENERAL OFFER FOR THE COMPANY, ETC - STOCK OPTIONS AND RESTRICTED STOCK

GENERAL OFFER

9.1   If any person (either alone or together with any person acting in concert
with him or her) obtains Control of the Company as a result of a general offer
to acquire the whole of the share capital of the Company (other than those
Shares which are already owned by him or her and/or any person acting in concert
with him or her), then the following provisions shall apply:

(i)   any Stock Option (whether or not it is already exercisable at the date on
      which the offer becomes unconditional in all respects) may be exercised at
      any time within the period referred to in rule 9.2 (and will then lapse);
      and

(ii)  any Restricted Stock which has not already vested or lapsed at the date on
      which the offer becomes unconditional in all respects may be exercised
      within the period referred to in rule 9.2 if and to the extent that the
      relevant performance conditions (that is, initially those set out in
      Schedule Two by reference to the Company's most recent published annual
      accounts or half-yearly accounts if the Committee thinks fit) are met over
      the foreshortened period ending on the date of change of Control (and will
      then lapse). For these purposes, the Shares comprised in the Deferred
      Tranche may be called for without regard to the condition in rule 6.2(c).
      In the event of a change of Control prior to the first anniversary of the
      Date of Grant of Restricted Stock, the Committee may release such number
      of Shares as it thinks fit.

9.2   Following a change of Control pursuant to rule 9.1 any Award which has not
been exercised (including non-exercise by reason of performance conditions not
being met) shall (unless validly exchanged under rule 9.6) lapse on the earlier
of the following dates:

(a)   two months from the date on which the offer becomes unconditional in all
      respects; and

(b)   one month after the date on which any person becomes bound or entitled to
      acquire Shares under sections 428 to 430F of the Companies Act 1985.

SCHEME OF ARRANGEMENT

9.3   If a court shall direct that a meeting of the holders of Shares be
convened pursuant to section 425 of the Companies Act 1985 for the purposes of
considering a scheme of arrangement involving the reconstruction of the Company
or its amalgamation with any other company or companies then (unless rule 8.4
applies) a Participant may take the following action conditionally on either the
scheme of arrangement being approved by the shareholders' meeting or sanctioned
by the court

                                                                          Page 9
<PAGE>

(as determined by the Committee in its absolute discretion) (the RELEVANT
CONDITION), between the date of the court's direction and twelve noon on the day
immediately preceding the date for which the shareholders' meeting (the RELEVANT
DATE) is convened:

(i)   any Stock Option (whether or not it is already exercisable at the Relevant
      Date) may be conditionally exercised; and

(ii)  any Restricted Stock which has not already vested or lapsed at the
      Relevant Date may be conditionally exercised if and to the extent that the
      relevant performance conditions (that is, initially those set out in the
      Schedule by reference to the Company's most recent published annual
      accounts or half-yearly accounts if the Committee thinks fit) are met over
      the foreshortened period ending on the Relevant Date. For these purposes,
      the Shares comprised in the Deferred Tranche may be called for without
      regard to the condition in rule 6.2(c). If the Relevant Date occurs prior
      to the first anniversary of the Date of Grant of Restricted Stock, the
      Committee may release such number of Shares as it thinks fit.

Any Award not exercised by twelve noon on the Relevant Date shall cease to be
exercisable between that time and the first date on which it can be determined
whether or not the relevant condition is satisfied. If the Relevant Condition is
not satisfied, Awards shall continue. If the Relevant Condition is satisfied
Awards shall, unless validly exchanged under rule 9.6, lapse automatically on
the date on which the scheme of arrangement is sanctioned by the court.

Where new Shares would be issued on exercise of a Stock Option, the Committee
shall endeavour to procure that, provided a Participant has conditionally
exercised his or her Stock Option as described above prior to twelve noon on the
Relevant Date, the scheme of arrangement shall be extended to such Participant
as if each Share in respect of which the Stock Option was conditionally
exercised had been allotted and issued to him or her by that time.

9.4   Awards shall not without the consent of the Committee be exercisable under
rule 9.3 if the purpose and effect of the scheme of arrangement is to create a
new holding company for the Company, such company having substantially the same
shareholders and proportionate shareholdings as those of the Company immediately
prior to the scheme of arrangement. In that event, the Committee shall endeavour
to procure that an exchange of Awards is effected under rule 9.6.

VOLUNTARY WINDING-UP

9.5   If notice is duly given of a resolution for a voluntary winding-up of the
Company then a Participant may takes the following action within the period of
two months from the date of the resolution, failing which exercise the Awards
shall lapse automatically:

(i)   any Stock Option (whether or not it is already exercisable) may be
      exercised; and

                                                                         Page 10
<PAGE>

(ii)  any Restricted Stock which has not already vested or lapsed may be
      exercised if and to the extent that the relevant performance conditions
      (that is, initially those set out in Schedule Two by reference to the
      Company's most recent published annual accounts or half-yearly accounts if
      the Committee thinks fit) are met over the foreshortened period ending on
      the winding-up. For these purposes, the Shares comprised in the Deferred
      Tranche may be called for without regard to the condition in rule 6.2(c).
      In the event of a winding-up prior to the first anniversary of the Date of
      Grant of Restricted Stock, the Committee may release such number of Shares
      as it thinks fit.

EXCHANGE OF AWARDS

9.6   If any company (the ACQUIRING COMPANY) obtains Control of the Company as a
result of an event referred to in rules 9.1 or 9.3, each Participant may, at any
time within one month of the change of Control, with the agreement of the
Acquiring Company, release any Stock Option or Restricted Stock which has not
lapsed (the OLD RIGHT) in consideration of the grant to him or her of a new
award, which in the opinion of the Committee and the Acquiring Company is
equivalent to the Old Right but relates to shares in a different company
(whether the Acquiring Company itself or another company its group).

ADJUSTMENT OF AWARDS

10.   In the event of:

(i)   any variation in the share capital or reserves of the Company (including,
      without limitation, by way of capitalisation or rights issue or any
      consolidation, sub-division or reduction); or

(ii)  the implementation by the Company of a demerger or the payment by the
      Company of a super-dividend which would otherwise materially affect the
      value of an Award,

then

(a)   in relation to Stock Options, the Option Exercise Price and the number of
      Shares comprised in a Stock Option shall be adjusted in such manner as the
      Committee shall determine in its absolute discretion;

(b)   in relation to Restricted Stock, the number of Shares subject to the
      Restricted Stock and any performance conditions to which the Restricted
      Stock is subject shall be adjusted in such manner as the Committee shall
      determine in its absolute discretion.

PROVIDED THAT:

(aa)  in relation to both Stock Options and Restricted Stock, no adjustment
      shall be made pursuant to this rule unless and until the auditors for the
      time being of the Company (acting as experts not arbitrators) shall
      confirm in writing to the Committee that such adjustment is in their
      opinion fair and reasonable; and

                                                                         Page 11
<PAGE>

(bb)  in the case of Stock Options, no adjustment shall be made pursuant to this
      rule which would increase the aggregate amount payable on exercise of the
      Stock Options.

ALLOTMENT OR TRANSFER OF SHARES ON EXERCISE OF AWARDS

11.1  Subject to any necessary consents, to payment being made for the Shares
and to compliance by the Participant with the terms of the Plan, not later than
30 days after receipt of any valid notice of exercise, the Company shall either
allot and issue, or procure the transfer of, Shares to the Participant (or to
his or her nominee). The Company shall (unless the Shares are to be issued in
uncertificated form) as soon as practicable deliver to the Participant (or his
or her nominee) a definitive share certificate or other evidence of title in
respect of such Shares.

11.2  The Company shall not be obligated to issue or deliver Shares in
connection with any Award or take any other action under the Plan in a
transaction subject to the requirements of any applicable securities law, any
requirement under any listing agreement between the Company and any securities
exchange or automated quotation system or any other law, regulation or
contractual obligation of the company until the Company is satisfied that such
laws, regulations, and other obligations of the Company have been complied with
in full. The Company may require any Participant to make such representations
and furnish such information as it may consider appropriate in connection with
the issuance or delivery of Shares under the Plan. Certificates representing
Shares will be subject to such stop-transfer orders and other restrictions as
may be applicable under such laws, regulations and other obligations of the
Company, and a legend or legends may be placed thereon to reflect such
restrictions.

RIGHTS ATTACHING TO SHARES ALLOTTED OR TRANSFERRED PURSUANT TO AWARDS

12.1  All Shares allotted or transferred upon the exercise of an Option shall
rank pari passu in all respects with the Shares in issue at the date of exercise
save as regards any rights attaching to such Shares by reference to a record
date prior to the date of exercise.

12.2  Any Shares acquired on exercise of Awards shall be subject to the articles
of association of the Company from time to time.

AVAILABILITY OF NEW SHARES

13.1  The Company shall at all times keep available for issue sufficient
authorised but unissued Shares to permit the exercise of all unexercised Stock
Options under which Shares may be allotted or shall otherwise procure that
Shares are available for transfer in satisfaction of the exercise of Stock
Options.

13.2  The Company will, at its expense, make application to The London Stock
Exchange for admission to the Official List of Shares allotted on the exercise
of any Stock Options, and will take equivalent steps with the New York Stock
Exchange in relation to ADSs.

                                                                         Page 12
<PAGE>

ADMINISTRATION AND AMENDMENT

14.1  The decision of the Committee shall be final and binding in all matters
relating to the Plan and it may at any time discontinue the grant of further
Awards or amend any of the provisions of the Plan in any way it thinks fit
PROVIDED THAT:

(a)   the Committee shall not make any amendment that would materially prejudice
      the interests of existing Participants except with the prior consent or
      sanction of Participants who, if they exercised their Awards in full,
      would thereby become entitled to not less than three-quarters of all the
      Shares which would fall to be allotted or transferred upon exercise in
      full of all outstanding Awards; and

(b)   no amendment to the advantage of Executives or Participants may be made
      to:

            (i)   the definition of EXECUTIVE in rule 1.1;

            (ii)  the limit on the number of Shares available for issue under
                  the Plan;

            (iii) the basis for determining the number of Shares comprised in
                  either Stock Options or Restricted Stock;

            (iv)  the terms of Shares to be provided under the Plan; and

            (v)   the adjustment provisions of rule 10 of the Plan

      without the prior approval of the Company in general meeting except in the
      case of minor amendments to benefit the administration of the Plan, to
      take account of a change in legislation or developments in the law
      affecting the Plan or to obtain or maintain favourable tax, exchange
      control or regulatory treatment for Executives and Participants or any
      member of the Group; and

(c)   without prejudice to any provision of the Plan which provides for the
      lapse of an Award, the Committee may not cancel an Award unless the
      Participant agrees in writing to such cancellation.

14.2  Notwithstanding any other provision of the Plan, the Committee may
establish appendices to the Plan for the purpose of granting Awards to
Executives who are or may become primarily liable to tax outside the United
Kingdom on their remuneration, subject to such modifications as may be necessary
or desirable to take account of overseas tax, exchange control or securities
laws provided that any Shares made available under such appendices shall count
towards the limit set out in rule 3 hereof.

GENERAL

15.1  Any member of the Group may provide money to the trustees of any trust or
any other person to enable them or him or her to acquire Shares to be held for
the purposes of the Plan, or enter into any guarantee or indemnity for those
purposes, to the extent not prohibited by section 151 of the Companies Act 1985.

                                                                         Page 13
<PAGE>

15.2  The rights and obligations of a Participant under the terms and conditions
of his or her office or employment shall not be affected by his or her
participation in the Plan or any expectation or right which (notwithstanding
rule 2.1) he or she believes he or she may have to participate in the Plan. An
individual who participates in the Plan waives all and any rights to
compensation or damages in consequence of the termination of his or her office
or employment with any company for any reason whatsoever insofar as those rights
arise, or may arise, from his or her ceasing to have rights under or be entitled
to exercise any Award under the Plan as a result of such termination or from the
loss or diminution in value of such rights or entitlements. If necessary, the
Participant's terms of employment shall be deemed to be varied accordingly.

15.3  The existence of any Award shall not affect in any way the right or power
of the Company or its shareholders to make or authorise any or all adjustments,
recapitalisations, reorganisations or other changes in the Company's capital
structure, or any merger or consolidation of the Company, or any issue of
shares, bonds, debentures, preferred or prior preference stocks ahead of or
convertible into, or otherwise affecting the Shares or the rights thereof, or
the dissolution or liquidation of the Company or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.

15.4  Any notice or other document required to be given under or in connection
with the Plan may be delivered to a Participant or sent by post to him or her at
his or her home address according to the records of his or her employing company
or such other address as may appear to the Company to be appropriate. Notices
sent by post shall be deemed to have been given on the day following the date of
posting. Any notice or other document required to be given to the Company under
or in connection with the Plan may be delivered or sent by post to it at its
registered office (or such other place or places as the Committee may from time
to time determine and notify to Participants).

15.5  Benefits under the Plan shall not be pensionable.

15.6  The Company, or where the Committee so directs any Subsidiary, shall pay
the appropriate stamp duty on behalf of Participants in respect of any transfer
of Shares on the exercise of Awards, and the stamp duty reserve tax costs of
creating ADSs.

15.7  These rules shall be governed by, and construed in accordance with, the
laws of England.

                                                                         Page 14
<PAGE>

                                  SCHEDULE ONE

       STOCK OPTIONS - REAL GROWTH IN EPS PRE-GRANT PERFORMANCE CONDITION

This Schedule shall be used to determine real EPS growth for the purpose of rule
5.1. In particular, no Stock Option shall be granted unless the percentage
growth in the Company's Annualised EPS over the Prescribed Period prior to the
Grant of a Stock Option (comparing the Base Year with the final year in the
Prescribed Period) is an average of at least 3 per cent. per annum greater than
the percentage increase, if any, in the RPI Index, as adjusted (if appropriate)
pursuant to paragraphs 3 and 4 below, over that Prescribed Period.

The following provisions apply for the purposes of this Schedule.

1.    In this Schedule, unless the context otherwise requires, the following
words and expressions shall have the following meanings, namely:

ACCOUNTS means the consolidated accounts of the Company for a Financial Year;

ACCOUNTS DATE means the date on which the Accounts are published;

ANNUALISED EPS means Earnings per Share (adjusted proportionately upwards or
downwards in a case where the relevant Financial Year is greater than or less
than one calendar year);

AUDITORS means the auditors for the time being of the Company (acting as experts
not arbitrators);

BASE YEAR means, in relation to the Company, the Financial Year ending
immediately before the start of the Prescribed Period;

EARNINGS PER SHARE means, for any Financial Year of the Company, the earnings
per ordinary share of the Company calculated in accordance with Financial
Reporting Standard No. 3 issued by the Accounting Standards Board Limited or any
modification thereto provided that to ensure comparability of Financial Years of
the Company within a Prescribed Period and for the Base Year the Committee may:

(a)   adjust the figure for earnings per share as calculated in accordance with
      the relevant accounting standard to arrive at a figure which reflects the
      underlying business performance of the Group (and may, without limitation,
      adjust by excluding any or all extraordinary or exceptional items from the
      earnings per share calculation);

(b)   adjust the figure for any tax charge to ensure that the deduction for
      taxation in respect of the final year of the Prescribed Period shall be at
      the average tax rate applicable to the Base Year; and

(c)   ensure that the relevant accounting standards are applied on a consistent
      basis in respect of years falling within the Prescribed Period and for the
      Base Year;

                                                                         Page 15
<PAGE>

FINANCIAL YEAR means an accounting reference period as defined in accordance
with section 224 of the Companies Act 1985;

PRESCRIBED PERIOD means the period of three consecutive Financial Years ending
with the latest Financial Year for which Accounts have been published; and

RPI INDEX means the Index of Retail Prices (All Items) published the UK
Government.

2.    Prior to the grant of Stock Options, the Committee shall calculate the
percentage growth in Annualised EPS over the Prescribed Period and shall
determine whether that percentage growth is an average of at least 3 per cent.
per annum above the percentage increase, if any, in the RPI Index, as adjusted
(if appropriate) pursuant to paragraphs 3 and 4 below, over that Prescribed
Period.

3.    Where a Financial Year within a Prescribed Period or the Base Year is
greater than or less than one calendar year, the percentage increase in the RPI
Index for that Financial Year shall be adjusted proportionately upwards or
downwards as appropriate in order to secure that such percentage increase is
annualised in a manner consistent with the Annualised EPS.

4.    For the purposes of paragraph 2 the Committee shall make such adjustments
as they may consider appropriate to take account of any intervening capital
reorganisation of the Company including, without limitation, any capitalisation
issue, rights issue, sub-division or consolidation of share capital, reduction
of capital or demerger within the meaning of section 213 to 218 of the Income
and Corporation Taxes Act 1988 and any modifications to the relevant accounting
standard.

5.    If the composition of the RPI Index changes or the RPI Index is replaced
by another similar index, the Committee may make such adjustments to any
calculations using the RPI Index (or any replacement index) as they consider to
be fair and reasonable.

                                                                         Page 16
<PAGE>

                                  SCHEDULE TWO

         RESTRICTED STOCK - CUMULATIVE FREE CASH FLOW PERFORMANCE TARGET

1.    In this Schedule, unless the context otherwise requires, the following
words and expressions shall have the following meanings, namely:

CUMULATIVE FCF means the aggregate cumulative amount of Free Cash Flow over the
Test Period, expressed in pence per Share;

FREE CASH FLOW means the operating cash flow of the Company (expressed on a per
Share basis), as stated in the Company's accounts for each relevant Financial
Year, less tax liabilities on operating activities and interest paid (subject to
adjustment under paragraph 6 below);

FINANCIAL YEAR means an accounting reference period as defined in accordance
with section 224 of the Companies Act 1985; and

TEST PERIOD means, in relation to any Restricted Stock, the period of three
consecutive Financial Years commencing with the Financial Year starting
immediately before the Date of Grant of the relevant Restricted Stock.

2.    When granting any Restricted Stock which is subject to the performance
target contained in this Schedule, the Committee shall specify (and notify to
the Participant) the Threshold and Target levels of Cumulative FCF for the Test
Period that shall apply to the Restricted Stock.

3.    At the end of the Test Period, or as soon as is reasonably practicable
thereafter, the Committee shall calculate Cumulative FCF for the Test Period.

4.    Where a Financial Year within the Test Period is greater than or less than
one calendar year, Cumulative FCF shall be adjusted proportionately upwards or
downwards as appropriate in order to secure that this performance target is
calculated in a consistent manner.

5.    An Award of Restricted Stock shall vest to the extent of the percentage in
the right-hand column below according to Cumulative FCF achieved for the
relevant Test Period, as indicated in the left-hand column below (but, for the
avoidance of doubt, the remainder of the Award shall not vest and shall lapse in
respect of the Shares comprised in the unvested portion):

        CUMULATIVE FCF             PERCENTAGE OF RESTRICTED STOCK WHICH VESTS

At or above Target Cumulative FCF 100% of Shares comprised in Restricted Stock

At Threshold Cumulative FCF       50% of Shares comprised in Restricted Stock

Below Threshold Cumulative FCF    0% of Shares comprised in Restricted Stock

                                                                         Page 17
<PAGE>

6.    An Award of Restricted Stock may be exercised on a straight-line basis
where Cumulative FCF is between the Threshold and Target levels.

7.    In the event of a major revision to the Company's long-term capital
expenditure plans or material acquisitions or disposals of businesses by the
Company, the Committee may adjust Free Cash Flow in order to achieve
year-on-year comparability.

8.    The performance target set out in this Schedule may be calculated at an
earlier date than that set out in paragraph 3 above if any event set out in rule
9 of the Plan applies. In such circumstances the performance target shall be
calculated in accordance with the relevant sub-rule within rule 9 which is
applicable.

9.    As soon as practicable following determination of the performance target,
the Committee shall notify the Participant of the extent to which (if at all)
the Award of Restricted Stock is exercisable.

                                                                         Page 18
<PAGE>

                                   APPENDIX 1

                   UK INLAND REVENUE APPROVED PART OF THE PLAN

For any Executive to whom the Committee wishes to grant Stock Options under an
Inland Revenue approved Plan, the following provisions shall apply:

(A)   All the provisions of the Plan shall apply to the grant of Stock Options
under this Appendix subject to the modifications contained in the following
paragraphs.

(B)   The definition of EXECUTIVE shall be construed so that:

            (i)   no Stock Option may be granted under this Appendix to a
            director of any member of the Group unless such director is required
            to devote not less than 25 hours per week to the affairs of the
            Group; and

            (ii)  no Stock Option may be granted under this Appendix to an
            Executive who is ineligible to participate in the Plan by virtue of
            paragraph 9 of Schedule 4 to ITEPA.

(C)   The definition of SHARES shall be subject to the conditions that:

            (i)   they comprise ordinary shares in the capital of the Company
            (and not ADSs); and

            (ii)  they satisfy paragraphs 16 to 20 of Schedule 4 to ITEPA.

(D)   Rule 2.3 shall not apply to a Stock Option granted under this Appendix.

(E)   A new rule 4.3 shall be inserted as follows:

      "4.3  Notwithstanding any other provision of these rules, no Executive
            shall be granted a Stock Option which would, at the proposed Date of
            Grant, cause the aggregate of the market values (determined at their
            date of grant (in accordance with Part VIII of the Taxation of
            Chargeable Gains Act 1992)) of subsisting Stock Options held by him
            pursuant to a grant under this Appendix and subsisting options held
            by him under any Associated Plan, to exceed (pound)30,000 (or such
            other amount as shall be specified under paragraph 6 of Schedule 4
            of ITEPA from time to time)."

For the purposes of this paragraph (E) ASSOCIATED PLAN means any Share Option
Plan (other than the Plan) approved under Schedule 4 to ITEPA (but excluding any
savings-related share option scheme) and established by the Company or an
associated company of the Company within the meaning of section 416 of the
Income and Corporation Taxes Act.

(F)   Any performance condition imposed under rule 5.2, which applies after the
grant of the Stock Option, must be objective and must be approved in advance of
the date of grant by the Inland Revenue.

                                                                         Page 19
<PAGE>

(G)   Where Stock Options are granted in Option Tranches under rules 5.3 or 5.4,
the Committee may grant such Option Tranches as it thinks fit (if any) under
this Appendix.

(H)   For the purposes of rule 5.6, exercise of a Stock Option granted under
this Appendix shall not be effective unless and until the Company has received
payment for the Shares.

(I)   A new Rule 5.8 shall be inserted as follows:

(a)   In respect of a Stock Option granted under this Appendix before [DATE](1)
      2003, if a Tax Liability arises on the exercise of that Stock Option and
      at the time of exercise the Company either has not received the amount of
      such Tax Liability from the Participant or the Participant has not
      arranged another method of payment acceptable to the Company, then the
      Participant shall authorise the Company to sell or procure the sale of
      sufficient Shares acquired on the exercise of the Stock Option to satisfy
      such Tax Liability and to use the proceeds of such sale for the purposes
      of discharging the Tax Liability.

      For the purposes of this clause, a TAX LIABILITY arises where any current
      or former member of the Group is obliged to (or would suffer a
      disadvantage if it were not to) account for any taxation and employee's
      national insurance contributions for which the optionholder is liable by
      virtue of the exercise of the Stock Option.

(b)   A Stock Option granted under this Appendix on or after [DATE] 2003 may be
      granted subject to such conditions of exercise for payment of income tax,
      employees' national insurance contributions and employer's national
      insurance contributions liability as the Committee may determine
      (including the right to sell on the Participant's behalf sufficient Shares
      to satisfy any liability to taxation or employee national insurance
      contributions or employer national insurance contributions) and if any
      condition is imposed relating to the assumption, payment or reimbursement
      by the Participant of employer's national insurance contributions
      liability, such conditions shall comply with any applicable legislation or
      regulations and the Committee shall be entitled to waive in whole or in
      part the Participant's obligation in respect of such liability.

(J)   Any Stock Option granted under this Appendix may only be exercised by a
Participant who is not ineligible to participate in the Plan by virtue of
paragraph 9 of Schedule 4 to ITEPA.

(K)   Rule 8 shall be construed so that all Stock Options granted under this
Appendix shall be exercisable in full for a period of one year following the
date of death (and shall then lapse).

---------------
(1)   [DATE] - to insert the later of (1) the date on which the amendment is
      adopted by the Company and (2) the date on which the amendment is approved
      by the Inland Revenue

                                                                         Page 20
<PAGE>

(L)   Rule 9.6 shall not apply to a new Stock Option granted under this Appendix
following an event specified in rule 9.1 or 9.3. Instead a new rule 9.6 shall be
inserted as follows:

      "9.6A If any company (the ACQUIRING COMPANY):

      (a)   obtains Control of the Company as a result of making:

            (i)   a general offer to acquire the whole of the issued ordinary
                  share capital of the Company which is made on a condition such
                  that if it is satisfied the acquiring company will have
                  Control of the Company; or

            (ii)  a general offer to acquire all the Shares; or

      (b)   obtains Control of the Company in pursuance of a compromise or
            arrangement sanctioned by the Court under section 425 of the
            Companies Act 1985; or

      (c)   becomes bound or entitled to acquire shares in the Company under
            sections 428 to 430F of that Act,

      each Participant may at any time within the appropriate period (which
      expression shall be construed in accordance with paragraph 26(3) of
      Schedule 4 to ITEPA), by agreement with the acquiring company, release any
      Stock Option which has not lapsed (the OLD OPTION) in consideration of the
      grant to him of an option (the NEW OPTION) which (in accordance with rule
      9.6B below) is equivalent to the old option but relates to shares in a
      different company (whether the acquiring company itself or another company
      falling within paragraph 16(b) or (c) of Schedule 4) (the NEW GRANTOR).

      9.6B The new option shall not be regarded for the purposes of rule 9.6A as
      equivalent to the old option unless the conditions set out in paragraphs
      16 to 20 of Schedule 4 to ITEPA are satisfied and, in relation to the new
      option, the provisions of the Scheme shall be construed as if:

      (a)   the new option were an option granted under the Scheme at the same
            time as the old option;

      (b)   references to the COMPANY in rules 7 to 13 and 15 and in the
            definition of GROUP were references to the new grantor;

      (c)   references to the COMMITTEE in rules 7 to 13 and 15 were references
            to the remuneration committee of the new grantor;

      (d)   references to SHARES were references to shares in the new grantor;
            and

      (e)   any performance condition imposed under rule 5.2, which applies
            after the grant of the Stock Option, has been satisfied."

(M)   Rule 10(ii) shall not apply to a Stock Option granted under this Appendix.
      In construing rule 10(i) for the purposes of this Appendix the words "or
      reserves"

                                                                         Page 21
<PAGE>

      shall be deleted therefrom, and no adjustment pursuant to rule 10(i) in
      relation to a Stock Option granted under this Appendix shall take effect
      without the prior approval of the Inland Revenue.

(N)   In addition to its powers under rule 14.1(b), the Committee may make such
      amendments to this Appendix as are necessary or desirable to obtain or
      maintain Inland Revenue approval of this Appendix.

(O)   At a time when this Appendix is approved by the Inland Revenue, and if
      such approved status is to be maintained, no amendment to the rules of the
      Plan or this Appendix which amounts to an amendment to a key feature of
      [the Plan or] this Appendix for the purposes of Schedule 4 to ITEPA may
      take effect as regards this Appendix without the prior approval of the
      Inland Revenue (and if such approved status is not to be maintained, the
      Company shall notify the Inland Revenue of the relevant amendment).

                                                                         Page 22
<PAGE>

                                   APPENDIX 2

                         UNITED STATES PART OF THE PLAN

For any Executive whose remuneration is (or, at the time of Stock Option
exercise, is likely to be) subject to taxation in the United States of America
and to whom the Committee wishes to grant Stock Options under this Plan, the
following provisions shall apply:

(A)   All the provisions of the Plan shall apply to the grant of Stock Options
      subject to the modifications contained in the following paragraphs.

(B)   A Stock Option granted under this Appendix to an Executive shall be either
      an Incentive Stock Option or a Non-Qualified Stock Option, as determined
      by the Committee; provided that the number of Shares issued or transferred
      pursuant to the exercise of Incentive Stock Options shall not, in the
      aggregate, exceed 40 million Shares. The number of Shares available for
      issuance pursuant to the preceding sentence shall be subject to
      appropriate adjustment upon the occurrence of any event described in rule
      10.

      For the purposes of this Appendix:

            (i)   INCENTIVE STOCK OPTION means a Stock Option which, at the Date
                  of Grant, qualifies as an Incentive Stock Option within the
                  meaning of Section 422 of the Internal Revenue Code of 1986,
                  as amended (the CODE), and is designated by the Committee as
                  such; and

            (ii)  NON-QUALIFIED STOCK OPTION means a Stock Option which is not
                  an Incentive Stock Option.

(C)   In the case of any Incentive Stock Option granted to any person who owns
      more than 10% of the Shares for purposes of Section 422(b)(6) of the Code,
      the definition of OPTION EXERCISE PRICE in Rule 1.1 shall be modified by
      inserting "110% of" immediately prior to the words "Share Price on the
      Date of Grant", and the definition of OPTION PERIOD shall be modified by
      replacing "tenth" with "fifth".

(D)   In relation to the grant of Incentive Stock Options a new rule 4.2A shall
      apply as follows:

      "4.2A The United States dollar equivalent of the aggregate fair market
      value (determined as of the date the Incentive Stock Option is granted) of
      Shares with respect to which Incentive Stock Options are exercisable for
      the first time by an individual during any calendar year (under the Plan
      or any other Executive Plan) may not exceed $100,000; provided, that if
      the grant of any Incentive Stock Option shall exceed such limit, the
      excess shall be treated as a Non-Qualified Stock Option. In determining
      whether, and to what extent, the grant of an Incentive Stock Option
      exceeds such limit, Incentive Stock Options shall be taken into account in
      the order in which they are granted. The Committee shall determine the
      United States dollar equivalent of the

                                                                         Page 23
<PAGE>

      aggregate fair market value of the Shares on such good faith basis as they
      consider appropriate."

(E)   Rule 7.2 shall be modified by deleting subrule (b) therefrom (in the case
      of both Stock Options and Restricted Stock), and, in the case of any
      Incentive Stock Option, replacing "six months" with "three months" in
      subrule (i) (except where cessation of employment is by reason of
      disability within the meaning of Section 22(e)(3) of the Code). A Stock
      Option which loses its status as an Incentive Stock Option at the end of
      the three month period referred to in the preceding sentence shall
      nevertheless continue to be exercisable as a Non-Qualified Stock Option
      for any longer period specified in these rules.

(F)   If Shares acquired by exercise of an Incentive Stock Option are sold or
      otherwise disposed of within two years after the date of grant of the
      Incentive Stock Option or within one year after the transfer of such
      Shares to the Participant, the holder of the Shares immediately prior to
      the disposition shall promptly notify the Company in writing of the date
      and terms of the disposition and shall provide such other information
      regarding the disposition as the Company may reasonably require in order
      to secure any deduction then available against the Company's or any other
      corporation's taxable income.

(G)   For the purposes of this Appendix, any provisions of the Plan which are
      superseded by or otherwise inconsistent with the provisions of this
      Appendix as applied to an Executive who is employed or remunerated in the
      United States shall have no effect.

                                                                         Page 24
<PAGE>

                                APPENDIX - FRANCE

This Appendix is supplemental to the Pearson Long Term Incentive Plan (the
PLAN).

The rules of the Plan, in relation to any right granted to a person who is
resident for tax purposes in France, shall apply with the modifications set out
below:

1.    The definition of SUBSIDIARY shall be replaced with:

      "SUBSIDIARY means a company which is under the Control of the Company and
      a subsidiary of the Company within the meaning of Section 736 of the
      Companies Act 1985 and being a company in which the Company holds,
      directly or indirectly, at least 10% of the share capital."

2.    The following proviso shall be added to the definition of OPTION VESTING
      DATE:

      "Provided that the Option Vesting Date shall not be earlier than the
      fourth anniversary of the Date of Grant of a Stock Option Award".

3.    Rules 5.3 and 5.4 shall not apply.

4.    The following proviso shall be added to the definition of OPTION EXERCISE
      PRICE::

"Provided that:

(a)   in relation to Stock Options to subscribe for new Shares that are granted
      to Participants resident in France, the Option Exercise Price, at the date
      the Stock Option is granted, shall not be less than 80% of the average
      middle market quotation for a Share on the London Stock Exchange (as
      derived from the Daily Official List) for the 20 days in which dealings in
      Shares took place preceding the day on which the Stock Option is granted;
      and

(b)   in relation to Stock Options to acquire existing Shares that are granted
      to Participants resident in France, the Option Exercise Price, at the date
      the Stock Option is granted, shall not be less than the lower of (i) 80%
      of the average middle market quotation for a Share on the London Stock
      Exchange (as derived from the Daily Official List) for the 20 days in
      which dealings in Shares took place preceding the day on which the Stock
      Option is granted, and (ii) 80% of the average middle acquisition price of
      Shares acquired by the Company for the purpose of granting Stock Options
      and held by the Company for the same purpose as the date the Stock Option
      is granted."

5.    In applying rule 7.2 to any Stock Option which is not already exercisable
      at the date of cessation of employment, sub-paragraphs (b), (c) and (d)
      shall be disapplied, and the right of exercise in sub-paragraph (a) shall
      be restricted to circumstances of disability (and such of the events
      specified in rule 7.2A below as qualify under French law for favourable
      tax treatment for Stock Options prior to the fourth anniversary of grant).

                                                                         Page 25
<PAGE>

6.    A new rule 7.2A shall be inserted as follows:

"7.2A Where a Participant ceases, before the date on which a Stock Option
becomes exercisable, to be an employee of a member of the Group by reason of:

(a)   injury, ill-health or redundancy (as determined by the Committee);

(b)   retirement at or after the date on which he or she is bound to retire
      under his or her contract of employment;

(c)   his or her employing company or business ceasing to be part of the Group;
      or

(d)   any other reason if the Committee so decides in its absolute discretion

then, unless the exercise of that Stock Option qualifies under French law for
favourable tax treatment in any event (in which case rule 7.2 applies), that
Stock Option may only be exercised within the period of six months following the
Option Vesting Date, and will then lapse PROVIDED THAT the Committee may specify
a later date (not being later than the expiry of the Option Period) on which the
Stock Option shall lapse."

                                                                         Page 26