School Market Outlook Challenges and Opportunities George McGuirk CFO/COO Pearson US School BMI Annual Conference October 24, 2006

Educating 100 million people worldwide, Pearson Education is the global leader in educational publishing – both in print & software. Pearson Education is part of Pearson, the international media company, whose other primary operations include the Financial Times Group and the Penguin Group. Educating 100 million people worldwide, Pearson Education is the global leader in educational publishing – both in print & software. Pearson Education is part of Pearson, the international media company, whose other primary operations include the Financial Times Group and the Penguin Group.

  OUTLOOK Industry trends & funding outlook   CHALLENGES Affecting our customers and our business   OPPORTUNITIES Adapting to changes & providing solutions OverviewOverview

“One of the problems we have in public schools today is that we are still preparing kids for the industrial or post- industrial society. The quality of instruction, the level of interaction, what we expect from students doesn’t match what the marketplace is really looking for at this point.... Right now we’re undergoing the most rapid advancement we’ve experienced in the entire history of the United States. So, in order to be prepared for that, schools have to reflect, understand, and respect change.” —Judith Johnson, Superintendent, Peekskill, New York schools

“One of the problems we have in public schools today is that we are still preparing kids for the industrial or post- industrial society. The quality of instruction, the level of interaction, what we expect from students doesn’t match what the marketplace is really looking for at this point.... Right now we’re undergoing the most rapid advancement we’ve experienced in the entire history of the United States. So, in order to be prepared for that, schools have to reflect, understand, and respect change.” —Judith Johnson, Superintendent, Peekskill, New York schools

Trends in Education Accountability Accountability Personalization Personalization Productivity Productivity Technology Technology

Funding Outlook State budgets are in good shape State budgets are in good shape Tax receipts remain high Tax receipts remain high Strong policy environment Strong policy environment Increasing spend per student Increasing spend per student

Source: National Centre for Education statistics 5.3% CAGR Long-term growth in School Total expenditure for US public schools, $bn

Strong Adoption Cycle Pearson estimates $660m $800m $900m $1.0bn

What are Our Customers Telling Us Accountability pressures continue Accountability pressures continue Increased focus on student and teacher outcomes Increased focus on student and teacher outcomes Teacher quality and school improvement are growing priorities Teacher quality and school improvement are growing priorities High drop out rates and low graduation rates are driving middle and high school change High drop out rates and low graduation rates are driving middle and high school change Emphasis on increasing efficiency will accelerate changes in schools and how work is done Emphasis on increasing efficiency will accelerate changes in schools and how work is done Integrated solutions (assess/instruct/intervene/assess) will be required Integrated solutions (assess/instruct/intervene/assess) will be required

How Does This Affect Us? Customer expectations are increasing; customized or personalized solutions Customer expectations are increasing; customized or personalized solutions Content management is key; new content models and development process Content management is key; new content models and development process Increasing technology and digital content investment Increasing technology and digital content investment New business and product models required New business and product models required Working with political leadership is increasing in importance Working with political leadership is increasing in importance New competitors New competitors

Integrated Digital and Print Program

Is Technology Replacing Text? The realities… (excerpt from K-12 Technology Trends, Eduventures) “…the textbook becomes the framework and the context for the academic engagement rather than the sole source of primary content.” “…all indications are the textbook will continue to dominate as the primary platform for K-12 learning.” “The textbook is the context – not just the content.”

Is Technology Replacing Text? The realities… (excerpt from K-12 Technology Trends, Eduventures) “…the textbook becomes the framework and the context for the academic engagement rather than the sole source of primary content.” “…all indications are the textbook will continue to dominate as the primary platform for K-12 learning.” “The textbook is the context – not just the content.”

Is Technology Replacing Text? The realities… (excerpt from K-12 Technology Trends, Eduventures) “…the textbook becomes the framework and the context for the academic engagement rather than the sole source of primary content.” “…all indications are the textbook will continue to dominate as the primary platform for K-12 learning.” “The textbook is the context – not just the content.”

Adapting to Change  Adapting to change is not new to publishers and our manufacturing partners  Some examples: Evolution of digital files and on-line proofingEvolution of digital files and on-line proofing Collaborating to produce cost effective print and cover designsCollaborating to produce cost effective print and cover designs Educating publishing staff on new manufacturing processes and paper propertiesEducating publishing staff on new manufacturing processes and paper properties Efforts to smooth seasonal capacity pressures at printers and millsEfforts to smooth seasonal capacity pressures at printers and mills Strategies to reduce investment in working capital, improve inventory management and reduce wasteStrategies to reduce investment in working capital, improve inventory management and reduce waste

New Equipment and Processes Industry investment in new equipment and processes benefits both publishers and vendor by:  Controlling cost  Improving time to market  Improving productivity  Maintaining quality  Meeting capacity demands We are well-positioned to meet demand for upcoming favorable adoption years

New Product Models New product models will:  Challenge existing forecast models  Increase inventory management and obsolescence risks  Increase number of shorter print runs  Require changes in our product development process  Require re-thinking product format and arrays

How Are We Addressing These Challenges?  Piloting new technologies like digital printing  Implementing strategies like automatic replenishment and common forms  Upgrading our finished goods and paper inventory forecasting and management systems  Leading efforts to implement an industry standard B2B platform and processes with our business partners

We Rely On You INNOVATEINVESTPARTNER

Pearson US School 2007 Revenue by Segment

Pearson US School 2007 Revenue by Type

In Closing  Education remains at the top of the agenda  Funding outlook looks good  New product models create challenges and opportunities  The textbook will continue as a primary platform for K-12 learning.