Overview and Outlook

The Company's first quarter is generally its smallest revenue period as most schools are not in session, resulting in a seasonal loss. Despite this seasonality, as a result of a strong first quarter, the net loss for the quarter ended August 31, 2009 was significantly reduced to $23.0 million compared to a net loss of $49.1 million in the fiscal quarter ended August 31, 2008.

Accordingly, the Company is on plan to achieve significantly higher earnings and free cash flow in fiscal 2010, and if it reaches the high end of its guidance range, to achieve its goal of 9% operating margins. In particular, the Educational Publishing segment had a record quarter, with technology sales up more than 50% over the prior year as a result of strong execution, new products and adoptions, and the arrival of federal stimulus funds in local districts. Trade sales of the Company's children's books rose by 25%, driven by best-selling series including The 39 Clues® and Harry Potter®.

The Company continued to aggressively manage cost, sustaining last year's reductions. Selling, general and administrative expenses were generally flat. Lower payroll, travel and consulting expenses were offset by higher variable costs resulting from increased education revenues as well as increased stock compensation expense. The Company continues to experience difficulties in its UK operations and expects to restructure these operations in the current fiscal year.

The Company has strengthened its balance sheet by carefully controlling working capital and by generating substantial free cash flow over the past twelve months, while continuing to invest in core operations.

Results of Continuing Operations

Revenues for the quarter ended August 31, 2009 increased by $39.2 million, or 14.2%, to $315.6 million, compared to $276.4 million in the prior fiscal year quarter. This was due to higher revenues in the Educational Publishing and Children's Book Publishing and Distribution segments of $33.6 million and $15.1 million, respectively, partially offset by lower revenues in the International and Media, Licensing and Advertising segments of $8.5 million and $1.0 million, respectively.

Cost of goods sold as a percentage of revenue for the quarter ended August 31, 2009 decreased to 49.5%, compared to 52.8% in the prior fiscal year quarter, primarily due to growth in higher margin education technology sales.

Selling, general and administrative expenses as a percentage of revenue decreased to 55.0%, compared to 62.5% in the prior fiscal year quarter, primarily resulting from the higher revenues as well as reduced spending due to the implementation of cost cutting measures, partially offset by an increase in commission expense related to the higher education technology sales as well as higher stock compensation expense.

Bad debt expense increased to $2.1 million for the quarter ended August 31, 2009, compared to $1.1 million in the prior fiscal year quarter, primarily in the Children's Book Publishing and Distributionsegment.

Severance expense increased to $4.3 million for the quarter ended August 31, 2009, compared to $3.0 million in the prior fiscal year quarter, as the Company continued to implement its cost reduction plans.

The resulting operating loss for the quarter ended August 31, 2009 was $35.3 million, compared to $62.3 million in the prior fiscal year quarter.

Net interest expense decreased to $3.9 million in the quarter ended August 31, 2009, compared to $5.9 million in the prior fiscal year quarter, due to lower borrowings and lower interest rates.

The loss from continuing operations was $24.6 million, or $0.68 per share, for the quarter ended August 31, 2009, compared to a loss of $42.9 million, or $1.13 per share, in the prior fiscal year quarter.

The income from discontinued operations, net of tax, was $1.6 million, or $0.05 per share, for the quarter ended August 31, 2009, compared to a loss of $6.2 million, or $0.17 per share, in the prior fiscal year quarter. Prior period losses reflect higher severance and

SCHOLASTIC CORPORATION
Item 2. MD&A

impairment charges. Current period income reflects favorable accounts receivable collections without the higher level of offsetting charges.

The net loss was $23.0 million, or $0.63 per share, for the quarter ended August 31, 2009, compared to a net loss of $49.1 million, or $1.30 per share, in the prior fiscal year quarter.

Results of Continuing Operations - Segments

Children's Book Publishing and Distribution


                            Three months ended
($ amounts in millions)         August 31,
----------------------- - ---------- -- -------- -
                             2009         2008
----------------------- - ---------- -- -------- -

Revenues                  $     76.2    $   61.1
Operating loss                 (47.5 )     (54.6 )
----------------------- - -- ------- -- -- ----- -

Operating margin                     *           *

* Not meaningful

Revenues in the Children's Book Publishing and Distribution segment for the quarter ended August 31, 2009 increased by $15.1 million, or 24.7%, to $76.2 million, compared to $61.1 million in the prior fiscal year quarter. This improvement was due to an increase in revenues in the Company's trade business in the first fiscal quarter of 2010, driven by the release of Harry Potter and the Deathly Hallows paperback book and boxed sets of the series as well as higher sales of the multi platform series The 39 Clues®. School book clubs and book fairs have minimal activity in the Company's first fiscal quarter, as most schools are not in session.

Segment operating loss for the quarter ended August 31, 2009 decreased by $7.1 million, or 13.0%, to a loss of $47.5 million, compared to a loss of $54.6 million in the prior fiscal year quarter, principally due to the increase in revenues as well as reduced overhead expenses in the segment, driven by previously implemented cost reduction initiatives.

Educational Publishing


                            Three months ended
($ amounts in millions)         August 31,
----------------------- - ---------------------- -
                             2009         2008
----------------------- - ---------- -- -------- -

Revenues                  $    148.7    $  115.1
Operating income                41.3        21.5
----------------------- - -- ------- -- -- ----- -

Operating margin                27.8 %      18.7 %

Revenues in the Educational Publishing segment for the quarter ended August 31, 2009 increased by $33.6 million, or 29.2%, to $148.7 million, compared to $115.1 million in the prior fiscal year quarter. This increase was principally driven by higher sales of education technology products of approximately $35 million, due to improved sales and marketing execution, new product launches, including System 44, and new adoptions, in particular the California adoption of READ180 and System 44, as well as the impact of the federal economic stimulus funding for education, which began to reach school districts in the first quarter.

Segment operating income for the quarter ended August 31, 2009 increased by $19.8 million to $41.3 million, compared to $21.5 million in the prior fiscal year quarter, principally driven by the increase in revenues from education technology sales.

SCHOLASTIC CORPORATION
Item 2. MD&A

International


                             Three months ended
($ amounts in millions)          August 31,
----------------------- - ------------------------ -
                             2009          2008
----------------------- - ---------- -- ---------- -

Revenues                  $     75.6    $     84.1
Operating loss                  (1.9 )        (3.3 )
----------------------- - -- ------- -- -- ------- -

Operating margin                     *             *

* Not meaningful

Revenues in the International segment for the quarter ended August 31, 2009 decreased by $8.5 million, or 10.1%, to $75.6 million, compared to $84.1 million in the prior fiscal year quarter, primarily due to the unfavorable impact of foreign currency exchange rates of $7.6 million, in addition to a decrease in revenue of $1.6 million in the UK.

Segment operating loss for the quarter ended August 31, 2009 decreased to a loss of $1.9 million, compared to a loss of $3.3 million in the prior fiscal year quarter, primarily due to reduced employee-related expenses in the Company's Australia operations and the Company's export operations.

Media, Licensing and Advertising


                             Three months ended
($ amounts in millions)          August 31,
----------------------- - ------------------------ -
                             2009          2008
----------------------- - -- ------- -- -- ------- -

Revenues                  $     15.1    $     16.1
Operating loss                  (3.7 )        (4.8 )
----------------------- - -- ------- -- -- ------- -

Operating margin                     *             *

* Not meaningful

Revenues in the Media, Licensing and Advertisingsegment for the quarter ended August 31, 2009 decreased by $1.0 million, or 6.2%, to $15.1 million, compared to $16.1 million in the prior fiscal year quarter, primarily due to lower revenues from third party sales of software and interactive products, partially offset by higher revenues in the custom publishing business and higher production revenues. For additional information regarding changes in the Company's reporting structure and segments, please see Note 3 of Notes to Condensed Consolidated Financial Statements - Unaudited in Item 1, "Financial Statements."

Segment operating loss for the quarter ended August 31, 2009 decreased to a loss of $3.7 million, compared to a loss of $4.8 million in the prior fiscal year quarter, primarily due to reduced selling, general and administrative expenses in the segment driven by cost reduction initiatives.

SCHOLASTIC CORPORATION
Item 2. MD&A

Results of Discontinued Operations

In fiscal 2008, the Company determined to sell or shut down its domestic, Canadian and UK continuities businesses, and intends to sell a related warehousing and distribution facility located in Maumelle, Arkansas (the "Maumelle Facility") and an office and distribution facility in Danbury, Connecticut (the "Danbury Facility"). During fiscal 2009, the Company also ceased its operations in Argentina and Mexico, its door-to-door selling operations in Puerto Rico, its continuities business in Australia and New Zealand and its corporate book fairs business and closed its Scarsdale, NY store. The Company also sold a trade magazine. Additionally, the Company sold a non-core market research business and a non-core on-line resource for teachers business and intends to sell a Spanish language book channel. All of the above businesses are classified as discontinued operations in the Company's financial statements for fiscal 2010 and prior year periods.

The earnings from discontinued operations, net of tax, were $1.6 million for the quarter ended August 31, 2009, compared to a loss, net of tax, of $6.2 million in the prior fiscal year quarter. Prior period losses reflect higher severance and impairment charges, while current period income reflects favorable accounts receivable collections without the higher level of offsetting charges.

Seasonality

The Company's school-based book clubs, school-based book fairs and most of its magazines operate on a school-year basis. Therefore, the Company's business is highly seasonal. As a result, the Company's revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based book club and book fair revenues are greatest in the second and fourth quarters of the fiscal year, while revenues from the sale of instructional materials and educational technology products are highest in the first and fourth quarters. The Company historically has experienced a loss from operations in the first and third quarters of each fiscal year.

Liquidity and Capital Resources

The Company's cash and cash equivalents, including cash from discontinued operations, totaled $54.2 million at August 31, 2009, compared to $143.6 million at May 31, 2009 and $31.7 million at August 31, 2008.

Cash used in operating activities decreased by $82.7 million to $58.3 million for the three months ended August 31, 2009, compared to $141.0 million in the prior fiscal year period. In addition to the reduced loss of $26.1 million, the $82.7 million decrease was primarily related to favorable working capital changes which included:

• a $56.0 million increase in accounts payable and other accrued expenses compared to a $17.0 million increase in the prior year period;

• a $95.0 million increase in inventory in the current period compared to a $125.9 million increase in the prior period;

• partially offset by increased accounts receivable of $32.4 million in the current period compared to decreases of $16.2 million in the prior year period.

Accounts payable increases were primarily due to the timing of payments and improved terms with key vendors. Inventory reductions resulted from the timing of purchases and Company initiatives designed to reduce inventory levels. Higher accounts receivable balances resulted from higher August sales of education technology products.

Cash used in investing activities increased by $0.8 million to $19.2 million for the three months ended August 31, 2009, compared to $18.4 million in the prior fiscal year period. This change is related to the receipt of proceeds from the sale of discontinued operations of $4.0 million in the prior period, partially offset by reduced spending in property, plant and equipment.

Cash used in financing activities was $10.5 million for the three months ended August 31, 2009, compared to cash provided by financing activities of $68.3 million for the prior fiscal year period. The change is primarily due to reduced borrowings under lines of credit of $73.7 million and reduced borrowings under credit agreements and revolving loans of $40.0 million, partially offset by lower repayments under lines of credit of $28.7 million and lower repurchases of Common Stock of $1.0 million in the first fiscal quarter of 2010 compared to $11.7 million in the prior year fiscal quarter.

Due to the seasonal nature of its business as discussed under "Seasonality" above, the Company usually experiences negative cash flows in the June through October time period. As a result of the Company's business cycle, borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May.

SCHOLASTIC CORPORATION
Item 2. MD&A

The Company's operating philosophy is to use cash provided from operating activities to create value by paying down debt, reinvesting in existing businesses and, from time to time, making acquisitions that will complement its portfolio of businesses, as well as engaging in shareholder enhancement initiatives, such as share repurchases or dividend declarations. The Company believes that funds generated by its operations and funds available under its current credit facilities will be sufficient to finance its short-and long-term capital requirements for the foreseeable future.

Despite the current economic conditions, the Company has maintained sufficient liquidity to fund ongoing operations, dividends, authorized common share repurchases, debt service, planned capital expenditures and other investments. As of August 31, 2009, the Company's primary sources of liquidity consisted of cash and cash equivalents of $54.2 million, cash from operations, and borrowings remaining available under the Revolving Loan (as described under "Financing" below) totaling $325.0 million. Approximately 55% of the Company's outstanding debt is not due until fiscal 2013, and the remaining 45% is spread ratably over each preceding period. The Company may at any time, but in any event not more than once in any calendar year, request that the aggregate availability of credit under the Revolving Loan be increased by an amount of $10.0 million or an integral multiple of $10.0 million (but not to exceed $150.0 million). Accordingly, the Company believes these sources of liquidity are sufficient to finance its ongoing operating needs, as well as its financing and investing activities.

The Company's credit rating from Standard & Poor's Rating Services is "BB-" and from Moody's Investors Service is "Ba2." Both agencies have rated the outlook for the Company as "Stable." The Company believes that existing committed credit lines, cash from operations and other sources of cash are sufficient to meet the Company's liquidity needs for the near term, as the Company is currently compliant with its debt covenants and expects to remain compliant for the foreseeable future. The Company's interest rates for the Loan Agreement are associated with certain leverage ratios, and, accordingly, a change in the Company's credit rating does not result in an increase in interest costs under the Company's Loan Agreement.

Financing

Loan Agreement

On June 1, 2007, Scholastic Corporation and Scholastic Inc. (each, a "Borrower" and together, the "Borrowers") entered into a $525.0 million credit facility with certain banks (the "Loan Agreement"), consisting of a $325.0 million revolving credit component (the "Revolving Loan") and a $200.0 million amortizing term loan component (the "Term Loan"). The Loan Agreement is a contractually committed unsecured credit facility that is scheduled to expire on June 1, 2012. The $325.0 million Revolving Loan component allows the Company to borrow, repay or prepay and reborrow at any time prior to the stated maturity date, and the proceeds may be used for general corporate purposes, including financing for acquisitions and share repurchases. The Loan Agreement also provides for an increase in the aggregate Revolving Loan commitments of the lenders of up to an additional $150.0 million. The Term Loan, which may be prepaid at any time without penalty, requires quarterly principal payments of $10.7 million, with the first payment on December 31, 2007, and a final payment of $7.4 million due on June 1, 2012.

Interest on both the Term Loan and Revolving Loan is due and payable in arrears on the last day of the interest period (defined as the period commencing on the date of the advance and ending on the last day of the period selected by the Borrower at the time each advance is made). At the election of the Borrower, the interest rate charged for each loan made under the Loan Agreement is based on
(1) a rate equal to the higher of (a) the prime rate or (b) the prevailing federal funds rate plus 0.500% or (2) an adjusted LIBOR rate plus an applicable margin, ranging from 0.500% to 1.250% based on the Company's prevailing consolidated debt to total capital ratio. As of August 31, 2009, the applicable margin of the Term Loan was 0.875% and the applicable margin on the Revolving Loan was 0.700%. The Loan Agreement also provides for the payment of a facility fee ranging from 0.125% to 0.250% per annum on the Revolving Loan only, which at August 31, 2009 was 0.175%.

As of August 31, 2009, there was $0.5 million of outstanding standby letters of credit issued under the Loan Agreement. The Loan Agreement contains certain covenants, including interest coverage and leverage ratio tests and certain limitations on the amount of dividends and other distributions, and at August 31, 2009 the Company was in compliance with these covenants. Please see Note 4 of Notes to Condensed Consolidated Financial Statements - Unaudited in Item 1, for outstanding balances and interest rates for these notes.

SCHOLASTIC CORPORATION
Item 2. MD&A

5% Notes due 2013

In April 2003, Scholastic Corporation issued $175.0 million of 5% Notes (the "5% Notes"). The 5% Notes are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable semi-annually on April 15 and October 15 of each year through maturity. The Company may at any time redeem all or a portion of the 5% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or
(ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption. The Company repurchased $2.5 million and $14.5 million of the 5% Notes on the open market in fiscal 2009 and 2008, respectively. For the three months ended August 31, 2009, the Company repurchased an additional $5.0 million of the 5% notes on the open market.

Lines of Credit

As of August 31, 2009, the Company's credit lines available under unsecured money market bid rate credit lines totaled $20.0 million. There were no outstanding borrowings under these credit lines at August 31, 2009 and May 31, 2009. The credit lines had an outstanding balance of $37.8 million as of August 31, 2008 at a weighted average interest rate of 2.9%. All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term, not to exceed 180 days, agreed to at the time each loan is made.

As of August 31, 2009, the Company had various local currency credit lines, with maximum available borrowings in amounts equivalent to $39.4 million, underwritten by banks primarily in the United States, Canada and the United Kingdom. These credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender. There were borrowings outstanding under these international facilities equivalent to $13.4 million at August 31, 2009 at a weighted average interest rate of 2.9%; $10.9 million at May 31, 2009 at a weighted average interest rate of 3.3%; and $25.2 million at August 31, 2008 at a weighted average interest rate of 5.9%.

As of August 31, 2009 and May 31, 2009, the Company had open standby letters of credit of $7.4 million issued under certain credit lines, as compared to $8.1 million as of August 31, 2008. These letters of credit are scheduled to expire within one year; however, the Company expects that substantially all of these letters of credit will be renewed, at similar terms, prior to expiration.

The Company's total debt obligations were $290.6 million at August 31, 2009, $303.7 million at May 31, 2009 and $430.2 million at August 31, 2008. The lower level of debt at August 31, 2009 as compared to May 31, 2009 and August 31, 2008 was primarily due to repayments made on the Term Loan, a repurchase of the Company's 5% Notes on the open market and reduced borrowings resulting from lower debt requirements. The Company utilized existing cash balances in the first fiscal quarter of 2010 to meet seasonal working capital requirements. As a result, cash balances declined $89.4 million in such fiscal quarter.

For a more complete description of the Company's debt obligations, see Note 4 of Notes to Condensed Consolidated Financial Statements - Unaudited in Item 1, "Financial Statements."

SCHOLASTIC CORPORATION
Item 2. MD&A

New Accounting Pronouncements

In December 2008, the FASB issued Staff Position FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132R-1"). FSP 132R-1 requires additional disclosure regarding investment allocations, major categories, valuation techniques and concentrations of risk related to plan assets held in an employer's defined benefit pension or postretirement plan. FSP 132R-1 further requires disclosure of any effects of utilizing significant unobservable inputs as defined in SFAS No. 157, "Fair Value Measurements," upon the overall change in the fair value of the plan assets during the reporting period. FSP 132R-1 is effective for fiscal years ending after December 15, 2009.

In April 2009, the FASB issued FSP No. FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP No. FAS 157-4"), which provides additional guidance for estimating fair value in accordance with SFAS No. 157, "Fair Value Measurements," where the volume and level of activity for the asset or liability have significantly decreased. . The FSP provides additional guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability (or similar groups of assets or liabilities). FSP No. FAS 157-4 is effective for the Company for interim and annual reporting periods ending after June 15, 2009, and applies prospectively. This pronouncement did not impact the Company's condensed consolidated financial position, results of operations and cash flows.

In August 2009, the FASB issued Accounting Standard Update No. 2009-05, "Fair Value Measurements and Disclosures - Measuring Liabilities at Fair Value" ("ASU No. 2009-05"). The update provides clarification for circumstances in which a quoted price in an active market for an identical liability is not available. ASU No. 2009- 05 is effective for the first reporting period beginning after August 2009. The Company is currently evaluating the effect, if any, that the adoption of ASU No. 2009-05 will have on its condensed consolidated financial position, results of operations and cash flows.

Recently Adopted Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. In February 2008, the FASB issued FASB Staff . . .