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Six analysts and top management from twelve sector firms examine the education sector in this special 85-page Education Industry issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info465.htm.

TWST: Peter, what, in your view, are the two or three most important reasons why investors should own education stocks in 2002, and should they take a sector approach to the group or buy a portfolio of individual education names?

Mr. Martin: There are a couple of things. I think Jerry did a good job describing the long-term macro environment, where demographics and privatization are really pushing forward to help this industry establish itself. I think you should take a sector approach because the dynamics between the fundamentals of the corporate training, K-12, and higher education sectors are very different. As we’ve seen throughout 2001, price performance for each sector has been very different based on the positive and negative changes to fundamentals in this difficult economic environment. For most of the year, the corporate training environment took the brunt of the poor performance based on the deceleration of corporate spending on IT and training. On the other hand, K-12 and higher education stocks posted strong performance based on both a positive political environment and a positive spending environment. Since September 11, we’ve seen a significant change in the economy and in the K-12 spending environment, which we believe will put significant pressure on K-12 business models. Even though the educational spend on K-12 products and services will continue to increase on an absolute basis, the increases that were proposed for the 2000-2001 school year are starting to be pressured by budget cuts because of a dramatic drop-off in capital gains, tourism and retail sales tax revenue. This change in the market environment will really put a damper on some of the spending initiatives at the local level, especially in technology, due to the size of proposed expenditures to take schools into the new century. So in terms of your question regarding a portfolio management style, I think investors need to take a basket approach in the space rotating between sectors as fundamentals change and valuation inefficiencies are created. At the beginning of the year we advised investors to overweight themselves in K-12 and higher education names due to the negative fundamentals of the corporate sector. This proved to be a wise decision with higher ed rising over 40% and K-12 nearly 30% at peak, while the corporate space fell over 40%. Currently we believe the higher ed sector is the only group exhibiting positive dynamics on a fundamental and valuation basis. We are neutral on the corporate sector due to the economy and we think K-12 is heading into a negative area due to the budget cutbacks.

TWST: Peter, what are you recommending in this sector?

Mr. Martin: At this point, in terms of valuation, market opportunity and management team, we are recommending SmartForce (Nasdaq:SMTF) and Click2learn (Nasdaq:CLKS). Both of them are coming at the market in different directions. Click2learn is an infrastructure play. They have one of the leading technology platforms broken up into three modules, which we think is the ideal way of selling platforms. They have a leading authoring tool, a knowledge management system, and a learning management system. SmartForce comes at it from the content side. They have the largest library of content, which they’re expanding into the soft skills and business skills area, which is in direct competition with SkillSoft. SmartForce, with their positive earnings and significant cash balance, has been consolidating small companies to expand their technology platform, which was their biggest weakness in terms of the competitive environment in the beginning of 2001. Again, based on valuation, product and management team, CLKS and SMTF are the two names we would be touting. We have been reluctant to really pound the table, as Jeff says, on the space, because of the economic environment and because of the execution risk that still prevails.

1) Education Industry - In an in-depth (11,600 words) Analyst Roundtable, Peter L. Martin, Senior Vice President at Jefferies & Company, Inc., Gerald R. Odening, Managing Director at J.P. Morgan H&Q and Jeffrey M. Silber, Senior Vice President at Gerard Klauer Mattison & Company, Inc. examine the outlook for the sector including enrollments in higher education, regulatory issues and share specific stock recommendations.

2) Educational Publishing & Service Companies - In an in-depth (4,700 words) Analyst Interview, Peter Appert, Managing Director at Deutsche Banc Alex. Brown, Inc., examines the outlook for the sector and shares specific stock recommendations.

3) Outlook for Education Stocks - In an in-depth (4,000 words) Analyst Interview, Greg W. Cappelli, Managing Director at Credit Suisse First Boston, examines the outlook for the sector and shares specific stock recommendations.

4) Knowledge Technologies - In an in-depth (4,700 words) Analyst Interview, George Sutton, Managing Director at RBC Capital Markets, examines the outlook for the sector and shares specific stock recommendations.

5) The TWST confidential Off-The-Record survey of management performance at eighteen sector firms asked market insiders about the ability of management teams to create shareholder value.

6) CEO interviews (average 2,500 words). Top management of twelve sector firms examine the outlook for their firm and the sector.