EDUCATIONAL DEVELOPMENT CORP — Annual Report 2003

May 12, 2003

Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from___to__. Commission file number: 0-4957 EDUCATIONAL DEVELOPMENT CORPORATION (Exact name of registrant as specified in its charter) Delaware 73-0750007 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10302 East 55th Place, Tulsa, Oklahoma 74146-6515 Registrant's telephone number: (918) 622-4522 (Address of principal executive offices) (Zip Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.20 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [ ] No [X] As of April 17, 2003, 3,878,677 shares of common stock were outstanding. The aggregate market value of the voting shares held by non-affiliates of the registrant, based on 2,720,485 shares (total outstanding less shares held by all officers, directors and 401(k) Plan) extended at the closing market price on April 17, 2003, of these shares traded on the Nasdaq National Market, was approximately $26,933,000. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Annual Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the annual meeting of stockholders to be held on July 10, 2003. 1 TABLE OF CONTENTS

2 EDUCATIONAL DEVELOPMENT CORPORATION FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED FEBRUARY 28, 2003 FACTORS AFFECTING FORWARD LOOKING STATEMENTS This annual Report on Form 10-K contains certain "forward looking statements" within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in "Item 7 - Management Discussion and Analysis" are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions that may ultimately prove to be inaccurate. Actual events and results may be materially different from anticipated results described in such statements. The Company's ability to achieve such results is subject to certain risks and uncertainties. Such risks and uncertainties include but are not limited to, product prices, continued availability of capital and financing, and other factors affecting the Company's business that may be beyond its control. Although Educational Development Corporation believes that the expectations reflected by such forward looking statements are reasonable based on information currently available to the Company, no assurances can be given that such exceptions will prove to have been correct. PART 1 Item 1. BUSINESS (a) General Development of Business Educational Development Corporation ("EDC" or the "Company"), a Delaware corporation with its principal office in Tulsa, Oklahoma, is the exclusive trade publisher of a line of children's books produced in the United Kingdom by Usborne Publishing Limited. The Company was incorporated on August 23, 1965. The Company's original corporate name was Tutor Tapes International Corporation of Delaware. Its name was changed to International Teaching Tapes, Inc. on November 24, 1965, and changed again to the present name on June 24, 1968. During Fiscal Year ("FY") 2003 the Company operated two divisions: Home Business Division ("Usborne Books at Home" or "UBAH") and Publishing Division. The Home Business Division distributes books through independent consultants who hold book showings in individual homes, and through book fairs, direct sales and Internet sales. The Home Business Division also distributes these titles to school and public libraries. The Publishing Division markets books to bookstores, toy stores, specialty stores and other retail outlets. The Company makes available free of charge through the Investor Relations portion of its Internet website at www.edcpub.com its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Significant Events During Fiscal Year 2003 There were no significant events during fiscal year 2003. 3 (b) Financial Information about Industry Segments See part II, Item 8 - Financial Statements and Supplementary Data (c) Narrative Description of Business (i) General The principal product of both the Home Business Division ("Usborne Books at Home" or "UBAH") and Publishing Division is a line of children's books produced in the United Kingdom by Usborne Publishing Limited. The Company is the sole United States trade publisher of these books. The Company currently offers approximately 1,300 different titles. The Company also distributes a product called "Usborne Kid Kits". These Kid Kits take an Usborne book and combine it with specially selected items and/or toys which complement the information contained in the book. The Kid Kits are packaged in a reusable vinyl bag. Alternatively, 19 Kid Kits are also available in an attractive box package. Currently 65 different Kid Kits are available. The Company considers the political risk of importing books from the United Kingdom to be negligible as the two countries have maintained excellent relations for many years. Likewise there is little direct economic risk to the Company in importing books from the United Kingdom as the Company pays for the books in U.S. dollars and is not directly subject to any currency fluctuations. There is risk of physical loss of the books should an accident occur while the books are in transit, which could cause the Company some economic loss due to lost sales should the supply of some titles be depleted in the event of a lost shipment. The Company considers this to be highly unlikely as this type of loss has yet to occur. There is some risk involved in having only one source for its products - Usborne Publishing Limited. The Company has an excellent working relationship with its foreign supplier Usborne Publishing Limited and can foresee no reason for this to change. Management believes that the Usborne line of books are the best available books of their type. (ii) Industry Segments (a) Home Business Division The Home Business Division markets the Usborne line of approximately 1,300 titles and 65 Kid Kits through a combination of direct sales, home parties, book fairs and the Internet, sold through a network marketing system. The division also sells to schools and public libraries. (b) Publishing Division The Publishing Division distributes the Usborne line to bookstores, toy stores, specialty stores and other retail outlets utilizing an inside telephone sales force as well as independent field sales representatives. (iii) Research and Development The Company spent approximately $14,000 in fiscal year 2001 and $120,000 in fiscal year 2000 in development of a new product, "Make Reading Fun", a fully interactive reading and phonics program. The Company began sales of this product during the last quarter of FY 2001. 4 (iv) Marketing (a) Home Business Division The Home Business Division markets through commissioned consultants using a combination of direct sales, home parties, book fairs and the Internet. The division had approximately 7,000 consultants in 50 states at February 28, 2003. (b) Publishing Division The Publishing Division markets through commissioned trade representatives who call on book, toy, specialty stores and other retail outlets; and through marketing by telephone to the trade. This division markets to approximately 6,000 book, toy and specialty stores. Significant orders totaling 36% of the Publishing Division's sales have been received from major book chains. During fiscal year 2003 the division continued to expand into mass merchandising outlets such as drug, department and discount stores. (v) Competition (a) Home Business Division The Home Business Division faces significant competition from several other direct selling companies which have more financial resources. In addition, federal and state funding cuts will also impact the availability of funds to the school libraries. The Company is unable to estimate the effect of these funding cuts on the division's future sales to school libraries, because the magnitude of funding cuts has yet to be determined by Congress. Management believes its superior product line and consultant network will enable this division to be highly competitive in its market area. (b) Publishing Division The Publishing Division faces strong competition from large U.S. and international companies that have more financial resources. Industry sales of juvenile paperbacks approach $876 million annually, down 1.3% from the previous year. The Publishing Division's sales are approximately 0.9% of industry sales. Competitive factors include product quality, price and deliverability. Management believes its product line will enable this division to compete well in its market area. (vi) Seasonality (a) Home Business Division The level of sales for Home Business Division is greatest during the Fall as individuals prepare for the holiday season. (b) Publishing Division The level of sales for the Publishing Division is greatest in the Fall while retailers are stocking up for the holiday season. (vii) Government Funding Local, state and federal funds are important to the Home Business Division but not to the Publishing Division. In many cities and states in which the Company does business, school funds have been severely cut, which impacts sales to school libraries. 5 (viii) Trademarks, Copyrights and Patents ( none ) (ix) Employees As of April 1, 2003, the Company had 76 full-time employees and 1 part-time employee. The Company believes its relations with its employees to be good. Item 2. PROPERTIES The Company is located at 10302 E. 55th Pl, Tulsa, Oklahoma. In January 2002, the Company purchased for $1.8 million the warehouse and office facilities it formerly leased. These facilities contain approximately 80,400 square feet of office and warehouse space. The Company's operating facility is well maintained, in good condition and is adequately insured. Equipment items are well maintained and in good operating condition consistent with the requirement of the Company's business. The Company believes that its operating facility meets both its present and future capacity needs. Item 3. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of EDC is traded on the Nasdaq National Market (symbol--EDUC). The high and low closing quarterly common stock quotations for fiscal years 2003 and 2002, as reported by the National Association of Securities Dealers, Inc., were as follows:

The number of shareholders of record of EDC's common stock at April 17, 2003 was 993. The Company paid a $0.06 per share annual dividend during fiscal year 2003 and a $0.04 per share annual dividend during fiscal year 2002. In January 2003, the Company announced that the Board of Directors had approved a policy to pay 20% of annual net earnings as a cash dividend. Accordingly, the Company announced that it will pay a $0.10 per share dividend on June 11, 2003 to shareholders of record as of May 28, 2003. 6 Item 6. SELECTED FINANCIAL DATA

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (a) Results of Operations FY 2003 The Home Business Division's net sales increased 31.3% during FY 2003 when compared with FY 2002. Each quarter of FY 2003 recorded a sales increase when compared with the same quarter of FY 2002. A quarterly comparison of FY 2003 versus FY 2002 shows the first quarter up 41.1%, the second quarter up 14.2%, the third quarter up 38.5% and the fourth quarter up 28.2%. The Company attributes these increases to the fact that the number of active sales consultants increased 14% during FY 2003. In addition, the Company continued to offer leadership skills seminars throughout FY 2003. These seminars are designed to help supervisors build their business and the seminars proved to be very popular with these supervisors. The Home Business Division will hold its Seventh National Convention in June 2003, in Tulsa, Oklahoma. Management is optimistic that this division will continue in FY 2004 the growth trend experienced in FY 2003. The Publishing Division's net sales increased 2.7% in FY 2003 when compared with FY 2002. Increased marketing efforts contributed to the sales increase. The Company has an aggressive in-house sales force which maintains contact with over 6,000 customers. During FY 2003, the telesales force opened 509 new accounts compared with 547 new accounts in FY 2002. The Company also offers two display racks to assist stores in displaying the Company's products. One is a six-foot rack with five adjustable shelves which can hold approximately 250 titles. The second rack is a four-sided rack with three levels which will hold between 50 and 60 of the Company's Kid Kits. There were 3,690 of these attractive racks in retail stores throughout the country at the end of FY 2003 compared with 3,545 at the end of FY 2002. In addition, the Company attends major national trade shows throughout the country to further enhance product visibility. The trend of prior years in which smaller independent book and gift stores closed due to intense competition from larger chains continues. Our in-house telesales force, which contacts smaller independent stores, estimated a 13.5% decrease in sales to the smaller independent book and gift stores during FY 2003. Sales to the national chains continue to dominate the bookstore market. The Company's sales to these national chains increased 13% during FY 2003. The Company plans to continue to actively target the national chains through cooperative advertising, joint promotional efforts and institutional advertising in trade publications. Significant potential for growth exists with the national chains and the Company is strongly committed to increasing these sales. For these reasons, management is optimistic that the Publishing Division can maintain its market share. 7 Cost of sales increased 18.1% during FY 2003 when compared with FY 2002. Cost of sales as a percentage of gross sales was 26.6% for FY 2003 and 26.7% for FY 2002. Cost of sales as a percentage of gross sales will fluctuate depending upon the product mix being sold. However, management expects the cost of sales percentage for FY 2004 will remain consistent with FY 2003. Operating and selling expenses increased 13.1% during FY 2003 when compared with FY 2002. As a percentage of gross sales, these costs were 11.7% for FY 2003 and 12.2% for FY 2002. Contributing to the increase in operating and selling expenses were increased payroll costs, higher freight costs, increased credit card costs and increased marketing costs. Those increased costs are attributed to the overall increase in sales in FY 2003 over sales in FY 2002. Management expects operating and selling expenses to be approximately 11% to 13% of gross sales in FY 2004. Sales commission increased 30.0% during FY 2003 when compared with FY 2002. As a percentage of gross sales, these costs were 17.6% in FY 2003 and 16.0% in FY 2002. Sales commissions as a percentage of gross sales are determined by the product mix sold and the division that makes the sale. Commission expense in the Publishing Division increased 3.0% during FY 2003 when compared with FY 2002, the result of increased sales. Commission expense in the Home Business Division increased 30.6%, the result of increased sales and the higher commission structure in the Home Business Division. General and administrative expenses increased 7.3% in FY 2003 versus FY 2002. As a percentage of gross sales, these expenses were 4.4% in FY 2003 and 4.8% in FY 2002. An increase in payroll costs, attributed to adding employees and general salaries increases, contributed to the increase in general and administrative expenses. Interest expense declined 95.7% in FY 2003 when compared with FY 2002, the result of lower borrowings during the year. As a percentage of gross sales, interest expense was nominal in FY 2003 and 0.7% in FY 2002. FY 2002 The Home Business Division's net sales increased 28.8% during FY 2002 when compared with FY 2001. Each quarter of FY 2002 recorded a sales increase when compared with the same quarter of FY 2001. A quarterly comparison of FY 2002 versus FY 2001 showed the first quarter up 28.7%, the second quarter up 42.4%, the third quarter up 22.5% and the fourth quarter up 26.6%. The Company attributed these increases to the fact that the number of consultants selling increased 28% during FY 2002. The Company continued offering its leadership skills seminars throughout FY 2002. These seminars are designed to help supervisors build their business and the seminars proved to be very popular with these supervisors. The Home Business Division held its Sixth National Convention in June, 2002, in Tulsa, Oklahoma. 8 The Publishing Division's net sales increased slightly in FY 2002 when compared with FY 2001. Increased marketing efforts contributed to the sales increase. The Company has an aggressive in-house sales force which maintains contact with over 9,000 customers. During FY 2002, the telesales force opened 547 new accounts compared with 679 new accounts in FY 2001. The Company offered two display racks to assist stores in displaying the Company's products. One was a six-foot rack with five adjustable shelves which can hold approximately 250 titles. The second rack was a four-sided rack with three levels which will hold between 50 and 60 of the Company's Kid Kits. There were 3,545 of these attractive racks in retail stores throughout the country at the end of FY 2002 compared with 3,428 at the end of FY 2001. The Company attended major national trade shows throughout the country to further enhance product visibility. The trend of prior years in which smaller independent book stores and gift stores closed due to intense competition from larger chains continued. However, this trend appeared to be slowing. Our in-house telesales force, which contacts smaller independent stores, reported a slight sales increase during FY 2002. Our field representatives had a slight sales decrease during FY 2002. Sales to the national chains continued to dominate the bookstore market. The Company's sales to these national chains increased 4.5% during FY 2002. The Company continued its aggressive approach to the national chains in the areas of cooperative advertising, joint promotional efforts and institutional advertising in trade publications. Cost of sales increased 11.4% during FY 2002 when compared with FY 2001. Cost of sales as a percentage of gross sales was 26.7% for both FY 2002 and FY 2001. Cost of sales as a percentage of gross sales will fluctuate depending upon the product mix being sold. Operating and selling expenses increased 12.8% during FY 2002 when compared with FY 2001. As a percentage of gross sales, these costs were 12.2% for FY 2002 and 12.1% for FY 2001. Contributing to the increase in operating and selling expenses were increased payroll costs and higher freight costs. Increased credit card costs and increased marketing costs in the Home Business Division, the result of increased sales, also contributed to the increase Sales commission increased 30.0% during FY 2002 when compared with FY 2001. As a percentage of gross sales, these costs were 16.0% in FY 2002 and 13.7% in FY 2001. Sales commissions as a percentage of gross sales was determined by the product mix sold and the division that makes the sale. Commission expense in the Publishing Division remained unchanged between FY 2002 and FY 2001. Commission expense in the Home Business Division increased 30.9%, the result of increased sales and the higher commission structure in the Home Business Division. General and administrative expenses increased 2.2% in FY 2002 versus FY 2001. As a percentage of gross sales, these expenses were 4.8% in FY 2002 and 5.3% in FY 2001. An increase in materials and supplies contributed to the increase in general and administrative expenses. Interest expense declined 80.6% in FY 2002 when compared with FY 2001. As a percentage of gross sales, interest expense was 0.07% in FY 2002 and 0.4% in FY 2001. The Company's note payable to the bank was paid off August 29, 2001. This along with lower borrowings during the first six months of FY 2002 and lower interest rates contributed to lower interest expense in FY 2002. (b) Financial Position Working capital was $9.4 million for fiscal year end 2003 and $7.5 million at fiscal year end 2002. The net effect of an increase in accounts receivable, an increase in inventory and an increase in accounts payable resulted in the increase in working capital at fiscal year end 2003. Management expects its financial position to remain strong and to increase working capital during the next fiscal year. 9 (c) Liquidity and Capital Resources Management believes the Company's liquidity at February 28, 2003, is adequate. There are no known demands, commitments, events or uncertainties that would result in a material change in the Company's liquidity during fiscal year 2004. Capital expenditures are expected to be less than $750,000 during fiscal year 2004. These expenditures would consist primarily of software and hardware enhancements to the Company's existing data processing equipment, property improvements and additions to equipment in the warehouse. Effective June 30, 2002, the Company signed a Third Amendment to the Credit and Security Agreement with State Bank which provides a $3,500,000 line of credit. The line of credit is evidenced by a promissory note in the amount of $3,500,000 payable June 30, 2003. The note bears interest at the Wall Street Journal prime floating rate minus 0.25% payable monthly (4.00% at February 28, 2003). The note is collateralized by substantially all of the assets of the Company. At February 28, 2003 the Company had no borrowings outstanding. Available credit under the revolving credit agreement was $3,500,000 at February 28, 2003. The Company uses the credit facility to fund routine operations. The Company plans to renew this facility when it matures on June 30, 2003. The Company believes its borrowing capacity under this line to be adequate for anticipated operating levels. The Company generated cash of $1.1 million from operating activities during fiscal year 2003 and $4.2 million during FY 2002. Net income for FY 2003 of $2,038,085 contributed to a significant portion of cash flows from operating activities. It was offset by the changes in accounts receivable and inventory. The change in accounts payable and accrued expenses also contributed to cash flows from operating activities. Accounts receivable increased slightly during the year as several large orders in the Publishing Division were received in February. In addition, the Publishing Division offered special dating terms during the fourth quarter with payment due during the first quarter of fiscal year 2004. The Company plans to continue to maximize its collection efforts in order to maintain cash flows during fiscal year 2004. Inventory levels increased 30.8% from fiscal year end 2002 to fiscal year end 2003, the result of the timing of deliveries from the Company's principal supplier. The Company continues to monitor inventory levels to ensure that adequate inventory is on hand to support sales as well as to meet the six to eight month resupply requirements of its principal supplier. The Company expects inventory levels to increase moderately over the next year. Approximately $4.5 million of total accounts payable is payable to the Company's principal supplier. Increases and decreases in inventory levels directly affect the level of accounts payable. Also the timing of the purchases and the payment terms offered by the suppliers affect the year-end levels of accounts payable. The Company expects accounts payable to increase moderately next year. Management anticipates cash flows from operating activities to increase in the foreseeable future. Cash used in investing activities during fiscal year 2003 was primarily for building improvements. During the year the Company continued the stock buyback program by purchasing 107,498 shares of its common stock at a cost of $765,227. The Company paid a dividend of $0.06 per share or $230,146. 10 (d) Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectable accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. The Company's significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, the Company considers the following accounting policies to be more dependent on the use of estimates and assumptions Revenue Recognition Revenue from merchandise sales is net of returns and allowances. The provisions of the SEC Staff Accounting Bulletin No.101, "Revenue Recognition in Financial Statements," have been applied, and as a result, a reserve is provided for estimated future sales returns. The Company's sales return policy allows the customer to return all purchases for an exchange or refund for up to 30 days after the customer receives the item. Management has estimated and included a reserve for sales returns of $101,000 as of February 28, 2003 and 2002. The reserve for sales returns is estimated by management using historical sales returns data. Allowance for Doubtful Accounts The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer's financial condition and current economic trends. If the actual uncollected amounts significantly exceed the estimated allowance, then the Company's operating results would be significantly adversely affected. Management has estimated allowance for doubtful accounts of $88,962 and $83,076 as of February 28, 2003 and 2002, respectively Inventory Management continually estimates and calculates the amount of non-current inventory. The inventory arises due to the Company occasionally purchasing book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of the Company's primary supplier. Noncurrent inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2 1/2 years of anticipated sales was classified as noncurrent inventory. Noncurrent inventory balances were $511,500 and $817,500 at February 28, 2003 and 2002, respectively. Inventories are presented net of a reserve for obsolete inventory. Management has estimated and included a reserve for obsolescence for both current and noncurrent inventory. This reserve is based on management's identification of obsolete inventory on hand at February 28, 2003 and 2002. Management has estimated reserves for both current and noncurrent inventory of $215,990 and $179,990 as of February 28, 2003 and 2002, respectively. 11 Deferred Tax Assets As discussed in Note 4 of the consolidated financial statements, the Company does not currently have a valuation allowance recorded against its deferred tax assets. If management determines it is more likely than not that its deferred tax assets would not be realizable in the future, a valuation allowance would be recorded to reduce the deferred tax asset to its net realizable value. Long-lived Assets In evaluating the fair value and future benefits of long-lived assets, we perform an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets and reduce their carrying value by the excess, if any, of the result of such calculation. We believe at this time that the long-lived assets' carrying values and useful lives continues to be appropriate. (e) New Accounting Standards In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123, which is effective for fiscal years ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 was adopted as of February 28, 2003. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this interpretation did not impact the Company's financial statements. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material market risk. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 begins at page F-1, following page 23 hereof. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements on any matter of accounting principles or practices or financial statement disclosure within the twenty-four months prior to February 28, 2003. 12 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors The information required by this Item 10 is furnished by incorporation by reference to all information under the caption "Election of Directors" in the Company's definitive Proxy Statement to be filed in connection with the annual Meeting of Shareholders to be held on July 10, 2003. (b) Identification of Executive Officers The following information is furnished with respect to each of the executive officers of the Company, each of whom is elected by and serves at the pleasure of the Board of Directors.

*The prior business experience for these executive officers who have been employed by the Company for less than five years is as follows: In April 2001, Craig M. White, son of Randall W. White, Chairman of the Board, President and Chief Executive Officer, was elected Vice President of Information Systems. Craig White graduated from Oklahoma State University in December 1994 with a BS degree in Electrical and Computer Engineering. He joined EDC in December 1994 as an Inventory Analyst. In July 1995 he was named Manager - - Information Systems. In July 2002, Ronald T. McDaniel was elected Vice President of the Publishing Division. Ronald McDaniel joined EDC on September 25, 2000 as National Sales Manager of the Publishing Division. Prior to that he was affiliated with Prudential Detrick Realty, serving as a Residential and Light Commercial Sales Associate. In addition, he was President of The McDaniel Company, a residential management and rehabilitation company. (c) Compliance With Section 16 (a) of the Exchange Act The information required by this Item 10 is furnished by incorporation by reference to all information under the caption "Compliance With Section 16 (a)" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 10, 2003. 13 Item 11. EXECUTIVE COMPENSATION The information required by this Item 11 is furnished by incorporation by reference to all information under the caption "Executive Compensation" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 10, 2003. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is furnished by incorporation by reference to all information under the caption "Voting Securities and Principal Holders Thereof" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 10, 2003. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company sells to the EDC Employee 401(k) Plan treasury shares at a cost equal to or greater than the Company's cost of those shares. During fiscal year 2003 the EDC Employee 401(k) Plan acquired 48,298 shares priced from $3.13 - $5.00 per share, for a total cost of approximately $183,800. Item 14. CONTROLS AND PROCEDURES An evaluation was performed of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) and 15d-14(c) within 90 days of the filing date of this Annual Report on Form 10-K. This evaluation was conducted under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer. Based on that evaluation, the Company's Chief Executive Officer and its Chief Financial Officer concluded that he Company's disclosure controls were effective to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in accordance with the rules and forms of the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls since the date controls were evaluated. 14 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report:

Schedules have been omitted as such information is either not required or is included in the financial statements. 2. Exhibits 3.1 Restated Certificate of Incorporation of the Company dated April 26, 1968, Certificate of Amendment there to dated June 21, 1968 and By-Laws of the Company are incorporated herein by reference to Exhibit 1 to Registration Statement on Form 10 (File No. 0-4957). 3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated August 27, 1977 and By-Laws of the Company as amended are incorporated herein by reference to Exhibits 20.1 and 20.2 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-4957). 3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated November 17, 1986, is incorporated herein by reference to Exhibit 3.3 to Form 10-K for fiscal year ended February 28, 1987 (File No. 0-4957). 3.4 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated March 22, 1996. 15 4.1 Specimens of Common Stock Certificates are incorporated herein by reference to Exhibits 3.1 and 3.2 to Registration Statement on Form 10-K (File No. 0-4957). 10.1 Educational Development Corporation Incentive Stock Option Plan of 1981, is incorporated herein by reference to Exhibit 10.9 to Form 10-K for fiscal year ended February 28, 1982 (File No. 0-4957). 10.2 Agreement by and among the Company, Usborne Publishing Ltd., and Hayes Books, Inc., dated May 17, 1983, is incorporated herein by reference to Exhibit 10.16 to Form 10-K for fiscal year ended February 29, 1984 (File No. 0-4957). 10.3 Settlement Agreement dated August 7, 1986, by and between the Company and Hayes Publishing Ltd., Cyril Hayes Books, Inc. (formerly named Hayes Books, Inc.), and Cyril Hayes is incorporated herein by reference to Exhibit 10.1 to Form 8-K dated August 7, 1986 (File No. 0-4957). 10.4 Usborne Agreement-Contractual agreement by and between the Company and Usborne Publishing Limited dated November 25, 1988, is incorporated herein by reference to Exhibit 10.12 to Form 10-K dated February 28, 1989 (File No. 0-4957). 10.5 Party Plan-Contractual agreement by and between the Company and Usborne Publishing Limited dated March 14, 1989, is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 28, 1989 (File No. 0-4957). 10.6 Loan Agreement dated January 18, 1990, by and between the Company and State Bank & Trust, N.A., Tulsa, OK (formerly WestStar Bank, N.A., Bartlesville, OK), is incorporated herein by reference to Exhibit 10.11 to Form 10-K dated February 28, 1990 (File No. 0-4957). 10.7 Lease Agreement by and between the Company and James D. Dunn dated March 1, 1991, is incorporated herein by reference to Exhibit 10.12 to Form 10-K dated February 28, 1991 (File No. 0-4957). 10.8 Agreement for Exchange of Contract Rights and Securities by and between the Company and Robert D. Berryhill dated October 1, 1990, is incorporated herein by reference to Exhibit 10.1 to Form 10-K dated February 28, 1991 (File No. 0-4957). 10.9 Amendment dated January 1, 1992 to Usborne Agreement - Contractual agreement by and between the Company and Usborne Publishing Limited is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 29, 1992 (File No. 0-4957). 16 10.10 First Amendment dated January 31, 1992 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by reference to Exhibit 10.14 to Form 10-K dated February 29, 1992 (File No. 0-4957). 10.11 Educational Development Corporation 1992 Incentive Stock Option Plan is incorporated herein by reference to Exhibit 4(c) to Registration Statement on Form S-8 (File No. 33-60188) 10.12 Second Amendment dated June 30, 1992 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by reference to Exhibit 10.12 to Form 10-KSB dated February 28, 1994 (File No. 0-4957). 10.13 Third Amendment dated June 30, 1993 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by reference to Exhibit 10.13 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.14 Fourth Amendment dated June 30, 1994 to Loan Agreement between the Company and State Bank & Trust, N.A, Tulsa, OK, is incorporated herein by reference to Exhibit 10.14 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.15 Fifth Amendment dated March 13, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.15 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.16 Sixth Amendment dated March 27, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.16 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.17 Seventh Amendment dated April 27, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.17 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.18 Amendment dated February 28, 1995 to the Lease Agreement by and between the Company and James D. Dunn, is incorporated herein by reference to Exhibit 10.18 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.19 Eighth Amendment Dated July 27, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.19 to Form 10-KSB dated February 29, 1996 (File No. 0-4957). 17 10.20 Restated Loan Agreement dated September 25, 1995 between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.20 to Form 10-KSB dated February 29, 1996 (File No. 0-4957). 10.21 Restated Loan Agreement dated June 10, 1996 between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.21 to Form 10-K dated February 28, 1997 (File No. 0-4957). 10.22 First Amendment dated June 30, 1997 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.22 to Form 10-K dated February 28, 1998 (File No. 0-4957). 10.23 Second Amendment dated June 30, 1998 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.23 to Form 10-K dated February 28, 1999 (File No. 0-4957). 10.24 Restated Loan Agreement dated June 30, 1999 between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.24 to Form 10-K dated February 29, 2000 (File No. 0-4957). 10.25 Lease agreement by and between the Company and James D. Dunn dated July 1, 1999, is incorporated herein by reference to Exhibit 10.25 to Form 10-K dated February 29, 2000 (File No. 0-4957). 10.26 First Amendment dated June 30, 2000 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.25 to Form 10-K dated February 28, 2001 (File No. 0-4957). 10.27 Second Amendment dated June 30, 2001 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.25 to Form 10-K dated February 28, 2002 (File No. 0-4957). 10.28 Educational Development Corporation 2002 Incentive Stock Option Plan is incorporated herein by reference to Exhibit A to DEF 14A dated May 23, 2002 (File No. 0-4957) 10.29 Third Amendment dated June 30, 2002 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK. 10.30 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated July 15, 2002. 10.31 Registration of 1,500,000 shares of Common Stock is incorporated herein by reference to Form S-8 dated October 22, 2002 (File No. 333-100659) 18 10.32 Amendment dated November 12, 2002 to Usborne Agreement - Contractual agreement by and between the Company and Usborne Publishing Limited 23. Independent Auditors' Consent - ------------------- *Filed Herewith (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EDUCATIONAL DEVELOPMENT CORPORATION Date: May 12, 2003 By /s/ W. Curtis Fossett ------------------------- W. Curtis Fossett Principal Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Date: May 12, 2003 /s/ Randall W. White ----------------------------- Randall W. White Chairman of the Board President, Treasurer and Director May 12, 2003 /s/ Robert D. Berryhill ----------------------------- Robert D. Berryhill, Director May 12, 2003 /s/ Dean Cosgrove ----------------------------- G. Dean Cosgrove, Director May 12, 2003 /s/ James F. Lewis ----------------------------- James F. Lewis, Director May 12, 2003 /s/ W. Curtis Fossett ----------------------------- W. Curtis Fossett Principal Financial and Accounting Officer 20 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. In connection with the Annual Report of Educational Development Corporation (the "Company") on Form 10-K for the period ending February 28, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Randall W. White, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 12, 2003 By /s/ Randall W. White -------------------------------- Randall W. White President and Chief Executive Officer In connection with the Annual Report of Educational Development Corporation (the "Company") on Form 10-K for the period ending February 28, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, W. Curtis Fossett, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 12, 2003 By /s/ W. Curtis Fossett ------------------------- W. Curtis Fossett Chief Financial Officer 21 CERTIFICATION I, Randall W. White, President and CEO of Educational Development Corporation certify that: 1. I have reviewed this annual report on Form 10-K of Educational Development Corporation. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 By /s/ Randall W. White -------------------------------- Randall W. White President and Chief Executive Officer 22 I, W. Curtis Fossett, CFO of Educational Development Corporation certify that: 1. I have reviewed this annual report on Form 10-K of Educational Development Corporation. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 By /s/ W. Curtis Fossett --------------------------------- W. Curtis Fossett Chief Financial Officer 23 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Educational Development Corporation: We have audited the accompanying balance sheets of Educational Development Corporation (the "Company") as of February 28, 2003 and 2002, and the related statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended February 28, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at February 28, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended February 28, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP - --------------------------- Tulsa, Oklahoma April 4, 2003 -F-1- EDUCATIONAL DEVELOPMENT CORPORATION BALANCE SHEETS FEBRUARY 28, 2003 AND 2002

See notes to financial statements. -F-2- EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF EARNINGS YEARS ENDED FEBRUARY 28, 2003, 2002 AND 2001

See notes to financial statements. -F-3- EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED FEBRUARY 28, 2003, 2002 AND 2001

See notes to financial statements. -F-4- EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED FEBRUARY 28, 2003, 2002 AND 2001

See notes to financial statements. -F-5- EDUCATIONAL DEVELOPMENT CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 28, 2003, 2002 AND 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS - Educational Development Corporation (the "Company") distributes books and publications through its Publishing and Usborne Books at Home Divisions to book, toy and gift stores, libraries and home educators located throughout the United States ("U.S."). The Company is the sole U.S. distributor of books and related items, which are published by an England based publishing company. The England based publishing company is the Company's primary supplier. ESTIMATES - The Company's financial statements were prepared in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Actual results could differ from these estimates. BUSINESS CONCENTRATION - A significant portion of inventory purchases by the Company are concentrated with an England based publishing company. Purchases from this England based publishing company were approximately $11.1 million, $6.1 million and $6.8 million for fiscal 2003, 2002 and 2001, respectively. Total inventory purchases were approximately $13.9 million, $8.1 million and $8.7 million for fiscal 2003, 2002 and 2001, respectively. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and cash on deposit in banks. INVENTORIES - Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method. The Company presents a portion of its inventory as a noncurrent asset. Occasionally the Company purchases book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of the Company's primary supplier. These excess quantities were included in noncurrent inventory. Noncurrent inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2-1/2 years of anticipated sales was classified as noncurrent inventory. Inventories are presented net of a reserve for obsolete inventory. Management has estimated and included a reserve for obsolescence for both current and noncurrent inventory. This reserve is based on management's identification of obsolete inventory on hand at February 28, 2003 and 2002. PREPAID EXPENSES AND OTHER ASSETS - Prepaid expenses and other assets at February 28, 2003 and 2002, include notes receivable of approximately $14,000 and $26,000, respectively, due from directors and related parties of the Company. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives, which range from 2 to 30 years. -F-6- INCOME TAXES - The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using the regular tax rate expected to be in effect when the taxes are actually paid or recovered. The Company records net deferred tax assets related to the recognition of future tax benefits, to the extent that realization of such benefits is considered more likely than not to occur. INCOME RECOGNITION - Sales are recognized and recorded when products are shipped. The estimated allowance for sales returns is recorded as sales are recognized and recorded. Management uses prior experience to estimate the allowance for sales returns. ADVERTISING COSTS - The Company expenses advertising costs as incurred. EARNINGS PER SHARE - Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS the Company has utilized the treasury stock method. The following reconciles the diluted earnings per share:

Stock options representing 249,600 of common shares for the year ended 2001 were not included in calculation of diluted earnings per share since the effect was antidilutive. There were no stock options for the years ended 2003 and 2002 excluded from the diluted earnings per share calculation. FAIR VALUE OF FINANCIAL INSTRUMENTS - For cash and cash equivalents, accounts receivable and accounts payable, the carrying amount approximates fair value because of the short maturity of those instruments. LONG-LIVED ASSET IMPAIRMENT - The Company reviews the value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future cash flows. No impairment was noted as a result of such review during the years ended February 28, 2003, 2002 or 2001. STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay -F-7- to acquire the stock. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123. NEW ACCOUNTING STANDARDS - In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123, which is effective for fiscal years ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. See Note 7 for the required disclosures as prescribed by SFAS No. 148. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this interpretation did not impact the Company's financial statements. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform with the 2003 presentation. 2. INVENTORIES Inventories consist of the following:

-F-8- 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:

1. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising the Company's net deferred tax assets and liabilities as of February 28, 2003 and 2002 are as follows:

-F-9- Management has determined that no valuation allowance is necessary to reduce the deferred tax assets as it is more likely than not that such assets are realizable. The components of income tax expense are as follows:

The following reconciles the Company's expected income tax expense utilizing statutory tax rates to the actual tax expense:

1. EMPLOYEE BENEFIT PLAN The Company has a profit sharing plan which incorporates the provisions of Section 401(k) of the Internal Revenue Code. The 401(k) plan covers substantially all employees meeting specific age and length of service requirements. Matching contributions from the Company are discretionary and amounted to $60,412, $52,258 and $40,557 in fiscal years 2003, 2002 and 2001, respectively. 6. COMMITMENTS The Company has a $3,500,000 revolving credit agreement, with interest payable monthly at prime minus .25%, collateralized by substantially all assets of the Company and maturing on June 30, 2003. Available credit under the revolving credit agreement was $3,500,000 at February 28, 2003 and 2002. The agreement contains provisions that require the Company to maintain specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amount of compensation, salaries, investments, capital expenditures and leasing transactions. The Company is in compliance with all restrictive covenants at February 28, 2003. The Company intends to renew the bank agreement or obtain other financing upon maturity. The Company had no borrowings outstanding on the above revolving credit agreement at February 28, 2003 or 2002. -F-10- At February 28, 2003, the Company had outstanding commitments to purchase inventory from its primary vendor totaling approximately $4,978,000. The Company leased its office and warehouse facilities under a noncancelable operating lease until January 2002. On January 7, 2002, the Company purchased its leased office and warehouse facilities for $1,790,000 and simultaneously terminated its lease. Total rent expense related to these facilities was $204,000 in fiscal 2002, and $240,000 in fiscal 2001. 7. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS The Board of Directors adopted the 1992 Incentive Stock Option Plan (the "1992 Plan") in June of 1992, which authorized the Company to grant up to 1,000,000 stock options. The 1992 Plan expired in June of 2002 upon which the Board of Directors adopted the 2002 Stock Option Plan (the "2002 Plan"). The 2002 Plan also authorized the Company to grant up to 1,000,000 stock options. Options granted under the 1992 Plan and 2002 Plan (collectively the "Incentive Plans") vest at date of grant and are exercisable up to ten years from the date of grant. The exercise price on options granted is equal to the market price at the date of grant. Options outstanding at February 28, 2003 expire beginning in April 2003 through October 2012. A summary of the status of the Company's Incentive Plans as of February 28, 2003, 2002 and 2001, and changes during the years then ended is presented below:

The following table summarizes information about stock options outstanding at February 28, 2003:

All options outstanding are exercisable at February 28, 2003. -F-11- The Company applies APB Opinion No. 25 and related interpretations in accounting for its Incentive Plan. Accordingly, no stock-based employee compensation cost is reflected in net earnings, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

The fair value per option granted in 2003, 2002 and 2001, was $2.09, $0.51 and $1.22, respectively. The fair value of options granted under the Incentive Plan was estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for options granted in 2003: no dividend yield, expected volatility of 27.64%, risk free interest rate of 3.68%, and expected life of ten years; the following assumptions were used for options granted in 2002: no dividend yield, expected volatility of 35.60%, risk free interest rate of 1.98%, and expected life of one year; the following assumptions were used for options granted in 2001: no dividend yield, expected volatility of 84%, risk free interest rates between 5.13% and 6.16%, and expected life of ten years. -F-12- 8. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended February 28, 2003, 2002 and 2001:

During the fourth quarter of fiscal year 2001, the Company corrected the depreciation calculated on certain property and equipment, which resulted in a decrease in depreciation expense of approximately $30,000. 9. BUSINESS SEGMENTS The Company has two reportable segments: Publishing and Usborne Books at Home ("UBAH"). These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. The Publishing Division markets its products to retail accounts, which include book, toy and gift stores, school supply and museums, through commissioned sales representatives, trade and specialty wholesalers and an internal telesales group. The UBAH Division markets its product line through a network of independent sales consultants through a combination of direct sales, home shows and book fairs. The UBAH Division also distributes to school and public libraries. -F-13- The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on operating profits of the segments, which is defined as segment net sales reduced by direct cost of sales and direct expenses. Corporate expenses, including interest and depreciation, and income taxes are not allocated to the segments. The Company's assets are not allocated on a segment basis. Information by industry segment for the years ended February 28, 2003, 2002 and 2001 is set forth below:

1. SUBSEQUENT EVENT On April 2, 2003, the Company announced that it will pay a $0.10 per share dividend on June 11, 2003 to shareholders of record as of May 28, 2003. * * * * * * -F-14- INDEX TO EXHIBITS

2. ------------------------- * Filed Herewith