Good day ladies and gentlemen, and welcome to the Scholastic Q2 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Matthews, Vice President of Corporate Strategy, Business Development, and Investor Relations. Please go ahead.

Thank you Ellie and good morning everyone. Before we begin, I would like to point out that the slides for this presentation are available for simultaneous viewing by going to our Web site, Scholastic.com, clicking on Investor Relations, and following the links on that page. I would also like to note that this presentation contains certain forward-looking statements, which are subject to various risks and uncertainties, including the conditions of the Children’s Books and Educational Materials markets, acceptance of the company’s products in those markets, and other risk and factors identified from time to time in the company’s filings with the Securities and Exchange Commission. Actual results could differ materially from those currently anticipated. Our comments today also includes references to certain non-GAAP financial measures as defined in Regulation G. Reconciliation of these non-GAAP financial measures with the relevant GAAP financial information and other information required by Regulation G is provided in our earnings release which is posted in the Company's Investor Relation Web site at Investor.Scholastic.com. Now I will introduce Dick Robinson, the Chairman, CEO, and President of Scholastic to begin our presentation.

Thank you, Jeff and good morning and thank you everyone for joining us on our fiscal 2011-second quarter conference call. This morning, I am joined by Maureen O'Connell, Chief Administrative Officer and CFO, and other members of the executive team are available to answer questions at the end of the prepared comments. Last quarter we celebrated Scholastic's 90th birthday with the launch of Read Every Day, Lead a Better Life, a global literacy campaign underscoring the importance of reading as the pathway for young people to succeed in the 21st century. We believe our mission of helping kids read and learn has never been more relevant at a time when reading and learning is becoming more digital and more global. Even as we launched New COOL, our completely revamped e-commerce system to all of our club customers this fall and as we prepared to beta test a major online eBook store in early Spring, our print children’s book business is alive and well and thriving. School Book Fairs and trades hit strong growth and in Clubs, we sustained last year’s revenue levels. We also achieved significant revenue gains in International driven by positive results in Canada, Australia, Asia and Export. In Scholastic Education, we held much but not all of the revenue gains, we achieved last year when the 2009 federal stimulus program contributed to record growth. Finally, we returned 156 million to shareholders through a successful tender offer funded by cash to free cash flow during the quarter only temporarily drawing down our credit facility. We remain committed to using our strong free cash flow to return capital to shareholders and have approximately 44 million still authorized for open market repurchases. In addition, yesterday Scholastic Sport increased their regular dividend to $0.40 annually. While revenues were positive overall last…

Thanks Dick and good morning everyone. Looking at the second quarter results, revenues rose 2% primarily reflecting higher sales in children’s books and international, partially offset by a decline in educational publishing. Costs of goods sold increased in absolute dollars and is a percent of sales reflecting increased incentives and enhanced service in book clubs as well as lower sales of higher margin educational technology products. SG&A increased relative to a year ago, primarily due to higher Club promotion and planned spending on digital initiatives. This was partially offset by lower corporate overhead due to lower bonus and pension expense. The prior year period also included one-time severance expense of 1.9 million associated with restructuring in the U.K. In the prior year period, we recorded a one-time non-cash, asset impairment charge of $40.1 million. Excluding approximately $42 million of mostly non-cash one-time items in the prior year operating income declined by $18.9 million in the second quarter. This decline was primarily the result of a lower educational sales base. Higher promotion spending in clubs and planned increase in investment on digital initiatives of approximately $6 million. Overall, earnings per diluted share from continuing operations were $2.19 compared to adjusted earnings per share of $2.29 a year ago. Last quarter's EPS included approximately $0.10 per share of accretion associated with the company's share repurchase program. Free cash flow for the quarter was $132.8 million compared to $141.3 million last year, reflecting non-cash charges in the prior year period partially offset by strong working capital management last quarter. Accounts payable increased as we secured more favorable terms from our largest vendors. As Dick described last quarter we returned $156 million to shareholders through a successful tender offer buying 5.2 million shares of common stock as $30 per share. We were able to…

Thank you Maureen. We believe second quarter results illustrate the solid foundations of Scholastic's businesses as well as our progress investing in their long-term growth. Our traditional children’s book business is growing strongly as we mix significant progress in our top digital growth opportunities, e-commerce and eBooks. Scholastic Educations long-term growth fundamentals are sound as reflected in the growing number of school districts who rely on us everyday as a key partner. The long-term positive funding environment and pipeline of major new products and enhancements should drive growth over the next two years. Our financial management cost controls and cash discipline remain very strong. As a result we continue generating strong free cash flow allowing us to both invest in the business and return capital to shareholders. While we have modestly lowered our outlook for the year we continue to believe that these three legs of our strategy represent a powerful formula to pursue our mission of improving reading and learning whether in print or digitally to grow our business and create shareholder value. With that I will moderate a question-and-answer period. In addition to Maureen, I am joined this morning by Ellie Berger, President of Scholastic Trade; Deborah Forte, President of Scholastic Media; Margery Mayer, President of Scholastic Education; Judith Newman, President of Scholastic Book Clubs; and Hugh Roome, President of Scholastic Consumer and Professional Publishing. With that, let’s open the call to questions.

(Operator Instructions) Our first question comes from Drew Crum of Stifel Nicolaus. Please go ahead.

Okay. Thanks. Good morning, everyone. Maureen, I think you answered this question but I just want to make sure I understand. The educational publishing guidance for fiscal '11 or I guess the second half is expected to be level, not fiscal '11, is that correct?

That is correct Drew. We're expecting the second half to be level -

Got it.

with the prior year to do our growth and service business, our new product launches and we also believe they'll be a slightly improved funding environment as the deadline reaches to spend the funds that the government [indiscernible].

Okay and then maybe more intermediate to longer term question as it relates to educational publishing, maybe Margery you can answer this? How has the outlook for the firm changed given the mid term election results?

Hi Drew, it's Margery. The one area there seems to be consensus between the Democrats and the Republicans is around education and we hear both sides of the aisle talking about and continued focus on accountability, continued drive to getting even our most challenged students ready for college and career. So we remain optimistic that education is going to be a priority for both parties and that a lot of the conversation that's going on about the kind of change we need in education where it's more personalized, more data driven. We think that those are trends that are going to really positively affect our business going forward.

Okay and Margery, you guys issued a press release a couple of weeks ago about your participation in proclamation 2011, the Texas Pre-K reading adoption, when is that happening? Is that a fiscal '11 event for you guys or is that fiscal '12 and how big is the market opportunity for the company?

Yes. It's fiscal '12. The revenues really come in the summer. We're going to start hearing decisions about the proclamation adoption probably in February and March so we'll be able to tell you more about what's going on there. And the opportunity is north of $40 million. There's five or six programs that are competing for the fund and that's an adoption where we've done well in the past and we think we have a really strong program and a strong team. So we believe we are going to do well there. Now we are having to spend money right now on that adoption and that excelling and marketing expense is in our numbers in the second quarter and there will be some more in the third quarter.

Okay. That's very helpful. Shifting gears to the trade business, you guys have had a really good start to fiscal '11. Could you comment on the performance in some of your international subsidiaries and generally speaking what are you seeing in terms of pricing and inventory levels of retail? And then the final question as it relates to trade is, how are you guys managing your exposure to Borders and Barnes & Nobles, where it seems those two businesses are continuing to struggle?

Internationally our trade is great. It's partly driven by our great U.S. trade list and reselling those books extremely well in Canada where we are the number one children’s publisher in Australia and in the U.K. And our trade business in everyone of those countries is up. Our trade business in export is also quite strong and then we have a growing English language, trade distribution business in Asia. So the trade picture for print children's books right now around the world is strong and perhaps even stronger than it is in the United States. Do you want move on to the question of Borders and Barnes & Noble?

Yes, for some time now both Barnes & Noble and Borders, we've been watching the level of current payments against the age payments and making sure that we manage our receivable outstanding so that it stays within acceptable limits that we're comfortable with. Of course we have increased our bad debt reserves. We did that last year relative to the company's given their performance but we have carefully managed what we shift based on what is being paid for. And so we're comfortable with our position for both those companies.

Okay. Two last questions from me. The digital investments you guys are making for fiscal '11. I think it's $11 million year-to-date? Is the guidance still 20 million and the cost of goods sold was up considerably in the quarter, is that a trend we should expect going forward?

Let me try the digital one. I think we're right on target with the spending as you point out. These are primarily e-commerce improvements relative to our COOL platform, as we broaden the COOL platform to sell eBooks and other things, plus some significant investments in developing our eBooks system, which I referred to earlier and in enhancing several hundred titles for eBooks, so that we were able to deliver a really strong experience through our eReader applications, when we beta test this in the next couple of months. So we're right on target with that. This doesn't include any marketing investments for the fall launch, which will probably come in the summer.

And then Drew, your question about costs to goods sold and the rate decline. Really the decline in the quarter was related to the enhancement centers and service that we're offering in Clubs as well as the mix in business toward service versus product within education, and so we will still have an enhanced service going forward. We'll have less promotional activity in Clubs and less incentives and rewards and free books. So it will be less of an impact in the second half but there will be some impact here year-over-year when you include the service, higher service component as education as well as continued service enhancement in our Club business.

Okay. Thanks guys.

Thank you.

Thank you.

Our next question comes from Barry Lucas of Gabelli & Company. Please go ahead.

Thanks and good morning. Dick, if you could maybe drill down a little bit deeper on the Club business. I really was a bit surprised given the absence of teacher dislocations and the new, what seemed to be early success selling on the new platform, parent involvement, et cetera et cetera? What do you think went wrong there?

Well I think most broadly Barry is a transition for our customers as well as for the company in moving to more sophisticated e-commerce and eventually into the sale of digital products. So we launched New COOL, which was a different and much richer, and more enhanced platform to all of our 900 and some thousand teacher sponsors who in term will offer this to the parents who ordered by credit card and through our e-commerce system. So this is a pretty major change in the way our business is conducted. And of course it's a very favorable change long-term because it's building our relationships with our customers in a more expanded e-commerce format leading to digital sales. But the growing pains on this are real and we also, the way people are ordering has changed. So, they're being more efficient in ordering in some respects and are using their bonus points up front. Because you can see on our Club ordering platform. It's just exactly what number of bonus points you can spend right now and so some of there were moving towards a bonus point used right up front instead of paying cash. So we're using their credit card. In addition we offer expanded service and we took off some of the restrictions on size of orders so we got a lot more small orders, which increased our cost. And also teachers spent less when they just ordered periodically and they didn't sort of accumulate their order. So this had an effect on our cost base and I think also affected the size of the order and the amount of total cash we received. So these are all growing pains from our Club with strategy change and the use of more e-commerce. We're learning from it and we believe we'll have stronger growth in the second half and of course as we continue with this platform we'll have, we'll be much more knowledgeable about how our customers are responding. Judy, do you want to add some thoughts to that?

Sure. Hi, Barry. As Dick said we are making this strategic conversion online and what we're excited about is, as you know the increase we're seeing in teacher sponsors using COOL. As we said, up 6% and also much more engagement with parents ordering directly online which we know is our big opportunity. So for the very first time we're really having a direct relationship with parents and we can recommend books and have a much more targeted experience for them, which we believe, will really result in much higher shopping carts. And we're very excited about the engagement we got in the fall and our teachers are loving us. As Dick said, they're using their points, they're ordering like crazy and on the second half of the year we'll be applying some of those learning’s to really focus on increasing the size of each order and modifying the costs as best as we can.

One follow-up on kind of the longer term. Margery, maybe you could expand a little on the enhancements or differences in this new generation, READ 180 and maybe you could touch on some of the other new products in math and what have you? [Indiscernible] that can provide a list for next fiscal year?

Hi, Barry. Well READ 180 Next Generation is our first major new release of READ 180 since our Enterprise edition, which came out in 2005. Every year we've made enhancements to READ 180 to keep it current on new technology to add new features for customers but this is really a major new release. Now what we've done here is we wanted to stick with the basic model and the technology that works so well because we have over 40 studies that prove that READ 180 works. We've been cited in the What Works Clearinghouse. We have a very large footprint throughout the country where there's great success. So the fundamental premise of the program, the science behind the program, we have kept in place. And we really have to look at a new set of companies to think about what this revision should look like. So, we've been studying the practices of company's like Johnson & Johnson, Apple, Nike, places like that rather than traditional publishing models for revision. What we've done though is really re-engineer the experience of the user so that the program is more effective, smarter. We're going to empower teachers in a more powerful way, make their jobs easier by doing, using algorithms to help them group students in new ways. So there's a lot of new things in the program that we're not going to talk about right now but basically the focus on the program is to keep the great science and the great effectiveness, the engagement the kids have, the power of data and technology but to make it all that much better.

Great and other -

Oh and on the other products going forward, we have a lot of activity going on right now with, in Math and more literacy programs. I'd rather not talk about those too specifically because they're competitive but we are very geared up and we've got lots of interesting stuff going on.

Great, thanks very much Margery.

Thank you, Barry.

I'm showing no further questions at this time and would like to turn the conference back over to Dick Robinson.

Thank you all for your attention and support. We look forward to the rest of the fiscal year and unveiling our plans for the following years so we'll talk to you again in March. Thank you very much.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.