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McGraw-Hill Educational Sales Decline in Q2

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August 3 – 17, 2006 Edition

McGraw-Hill

Educational Sales

Decline in Q2

NEW YORK, NY/7/25/06—The McGraw-Hill Companies (NYSE: MHP) reported diluted earnings per share increased 17.6% to $0.60 for the second quarter of 2006 compared to the same period last year. The 2006 results include incremental stock-based compensation of $0.03 per share. Net income for the second quarter was $221.0 million, an increase of 13.3% versus last year. Revenue for the second quarter of 2006 increased 4.9% to $1.5 billion. Foreign exchange rates had minimal impact on revenue and operating profit in the second quarter of 2006.

"Record results at Financial Services, a solid performance in the U.S. college and university market, and effective cost containment were key to our second quarter," said Harold McGraw III, chairman, president and chief executive officer of The McGraw-Hill Companies. "As a result, our operating margin improved to 25.8%, up from 23.6% for the same period last year.

"For the first half of 2006, diluted earnings per share were $0.79, including a one-time charge of $0.04 for the elimination of the restoration stock option program in the first quarter. The first half results also reflect incremental stock-based compensation of $0.07. Net income for the first half was $295.2 million. Revenue for the first half of 2006 was up 7.4% to $2.7 billion. Foreign exchange rates negatively impacted revenue by $11.0 million and had minimal impact on operating profit in the first half of 2006.

Education: "Revenue for this segment declined 2.7% to $611.6 million in the second quarter compared to the same period last year. Including incremental expenses of $2.5 million for stock-based compensation, the segment’s operating profit decreased 5.3% to $67.8 million.

"Revenue for the McGraw-Hill School Education Group declined 5.8% in the second quarter to $390.4 million. Revenue for the McGraw-Hill Higher Education, Professional and International Group grew by 3.3% to $221.3 million in the second quarter compared to the same period last year.

"Challenging comparisons following last year’s 17% gain in second quarter revenue and limited opportunities in this year’s state new adoption market, which is expected to decline by approximately 30%, were key factors in the McGraw-Hill School Education Group’s performance in the second quarter.

"Our new elementary basal reading program, Treasures, is off to an excellent start in the open territories. Our growing lineup of intervention products, including Jamestown Reading Navigator for secondary students, Early Interventions in Reading, Kaleidoscope and Number Worlds for the primary grades, is winning new customers in the open territory and also in adoption states where most schools can access federal and other funding for these programs. Our alternative basal, Everyday Mathematics, produced solid growth.

"In this year’s key state new adoptions, science in Florida and social studies in California, our programs for the secondary schools are leading the market. But second quarter results were affected by delays in ordering middle and high school products both in Florida and California and by disappointing performances of our elementary programs in those states. The delayed orders will be fulfilled in the third quarter.

"In the testing market, the continued decline of our more profitable norm- referenced products offset the gains we are making in providing the customized assessments that states need to meet the requirements of the No Child Left Behind Act. Under the Act, schools now must use assessments based on state standards to test students each year in grades three through eight in reading and math and report the results to the public. Schools face sanctions for failing to achieve improvements in test scores.

"In the Higher Education, Professional and International Group, we benefited from a solid performance in the U.S. college and university market. Our three major imprints—Science, Engineering and Math; Humanities, Social Science and Languages; and Business and Economics—all produced gains in the second quarter. We also experienced solid growth in the career colleges channel. Best-sellers in the second quarter included Ober, Keyboarding, 10th edition; Lucas, The Art of Public Speaking, 9th edition; Shier, Hole’s Essentials of Human Anatomy and Physiology, 9th edition.

"Softness in the professional markets was partially offset by growth in digital subscription products and strong results with business titles. Five titles appeared on national best-seller lists during the second quarter:

Succeed on Your Own Terms (Wall Street Journal, New York Times, USA Today) The Millionaire Maker (BusinessWeek) Chasing Daylight (New York Times) Crucial Conversations (BusinessWeek) The Millionaire Real Estate Agent (BusinessWeek) "International markets softened as Mexico deferred anticipated school orders to the second half.

Financial Services: "Revenue for this segment increased 13.4% in the second quarter to $677.3 million compared to the same period last year. Excluding the prior year’s revenue of $34.8 million from Corporate Value Consulting, which was sold at the end of September 2005, and April and May revenue of $8.1 million from CRISIL, Ltd. (majority interest acquired on June 1, 2005), revenue for the second quarter grew by $106.6 million on a non-GAAP basis. Of the non-GAAP revenue growth, 38.6% was produced by structured finance and 34.8% came from corporate and government ratings.

"Including the incremental expenses of $6.3 million for stock-based compensation in the second quarter, the segment’s operating profit increased 21.5% to $313.9 million. Corporate Value Consulting contributed approximately $7.5 million to operating results in the second quarter of 2005.

"Strong double-digit growth for ratings in the U.S. and international markets helped Financial Services set new records for revenue and operating profit in the second quarter. International ratings accounted for 37.4% of ratings revenue in the second quarter versus 36.7% for the same period a year ago.

"Strength in global structured finance was again a key factor as all asset classes contributed to the year-over-year improvement. Particularly noteworthy was the activity in U.S. Collateralized Debt Obligations, which was driven by leveraged loans for mergers and acquisitions, new hybrid structures and arbitrage opportunities. And, while dollar volume issuance in U.S. Residential Mortgage-Backed Securities market declined by 1.2% in the second quarter, we benefited from an 8.6% pick up in the number of deals coming to market and solid gains in more active overseas markets.

"A surging corporate market also contributed to Standard & Poor’s second quarter performance. Both investment grade and high-yield markets were up solidly. Public finance was soft as refunding volume continued to decline.

"New issue dollar volume increased in the U.S. and European bond markets in the second quarter versus the same period last year, according to reports from Securities Data Corporation and Harrison Scott Publications/S&P estimates.

"In the U.S., total new issue dollar volume was up 16.7%. Corporate new issuance was up 54.7%. Public finance declined by 6.8%. Mortgage-backed securities were off 0.7%. Asset-backed securities were down 12.5%, while collateralized debt obligations were up 162.0%. In Europe, new issue dollar volume was up 1.7%.

"Growth in ratings and services that are not tied to the new issue market also benefited S&P. These products and services, which include bank loans, counterparty and infrastructure finance ratings, ratings evaluation services as well as derivative ratings, produced 24.2% of ratings revenue in the second quarter, up from 21.5% for the same period last year.

"Our data and information products and services posted solid gains in the U.S. and European markets. We are adding new customers and increased the usage of our enhanced services with existing clients.

"The rise in assets under management in exchange-traded funds and the increased trading of derivative contracts based on Standard & Poor’s indexes also contributed to our growth in the second quarter. At the end of June, assets under management in exchange-traded funds based on S&P indexes rose 21.3% to $143.4 billion versus the same period last year.

Information and Media: "Revenue for this segment increased 3.6% to $238.6 million in the second quarter compared to the same period last year. Including incremental expenses of $3.7 million for stock-based compensation, the segment’s operating profit decreased $652,000, or 4.8%, to $13.0 million in the second quarter.

"The Broadcasting Group’s revenue grew by 14.3% to $31.9 million. Increases in political and local advertising were key to the second quarter performance in 2006 versus the same period last year.

The Outlook: "Based on the strength of our first half performance we are raising our guidance for the year,? a company spokesman said.

"Our previous guidance called for earnings per share of $2.36 to $2.41, excluding the incremental impact of all stock-based compensation.

"Our new guidance for 2006 improves the full-year forecast by $0.08. Therefore, we now expect EPS for 2006 of $2.44 to $2.49 excluding the incremental impact of all stock-based compensation ($0.13 for incremental stock-based compensation and $0.04 for the one-time charge for the elimination of the restoration stock option program in the first quarter).

"With more robust opportunities taking shape next year, we expect to return to double-digit earnings growth in 2007."