MD&A contains statements that are forward-looking and include numerous risks which you should carefully consider. Additional risks and uncertainties may also materially and adversely affect our business. You should read the following discussion in connection with our financial statements, including the notes to those statements, included in this document. Our fiscal years end on February 28.

Management Summary

Educational Development Corporation is the sole distributor in the United States of the Usborne line of children's books. We operate two separate divisions, Publishing and Usborne Books and More ("UBAM"), to sell these books. Our Corporate headquarters, including the distribution facility for both divisions, is located in Tulsa, Oklahoma.

These two divisions each have their own customer base. The Publishing Division markets its products on a wholesale basis to various retail accounts. The UBAM Division markets its products to individual consumers as well as to school and public libraries through direct-selling consultants.

Publishing Division

The Publishing Division operates in a market that is highly competitive, with a large number of companies engaged in the selling of books. Sales in the book industry were approximately $24.3 billion for calendar year 2008. Sales in the trade industry, defined as wholesale sales to retailers, were approximately $8.1 billion for calendar year 2008.

The Publishing Division's customer base includes national book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. To reach these markets, the Publishing Division utilizes a combination of commissioned sales representatives located throughout the country and a commissioned telesales group located in our headquarters. The Vice President of the Publishing Division manages sales to the national chains.

                    Publishing Division Sales by Market Type



                        FY 2009   FY 2008
National chain stores        34 %      32 %
All other                    66 %      68 %
Total net sales             100 %     100 %

The Publishing Division uses a variety of methods to attract potential new customers and maintain current customers. Company personnel attend many of the national trade shows held by the book selling industry each year, allowing us to make contact with potential buyers who may be unfamiliar with our books. We actively target the national chains through joint promotional efforts and institutional advertising in trade publications. The Publishing Division also participates with certain customers in a cooperative advertising allowance program, under which we pay back up to 2% of the net sales to that customer. Our products are then featured in promotions, such as catalogs, offered by the vendor.

We may also acquire, for a fee, an end cap position in a bookstore (our products are placed on the end of a shelf), which in the publishing industry is considered an advantageous location in the bookstore. The costs of these promotions have been classified as reductions in revenue in the statements of earnings.

The Publishing Division's in-house telesales group targets the smaller independent book and gift store market. Our semi-annual, full-color, 160-page catalogs, are mailed to over 5,000 customers and potential customers. We also offer two display racks to assist stores in displaying our products.

Publishing Division's net revenues decreased $18,100 in fiscal year 2009 from fiscal year 2008, or 0.2%. Net revenues were down 5% for inside sales, offset by an increase of 5% for national chain stores.

Usborne Books and More ("UBAM") Division

The UBAM Division is a multi-level selling organization that markets its products through independent sales representatives ("consultants") located throughout the United States. The customer base of UBAM consists of individual purchasers, as well as school and public libraries. Revenues are generated through home shows, direct sales, Internet sales, book fairs and contracts with school and public libraries.

An important factor in the continued growth of the UBAM Division is the addition of new sales consultants and the retention of existing consultants. Current active consultants recruit new sales consultants. UBAM makes it easy to recruit by providing low-cost signing kits. For one month, kits containing sample products and supplies were free to new recruits when a minimum dollar home show was submitted by the new recruit. UBAM provides an extensive handbook that is a valuable tool in explaining the various programs to the new recruit.

                            Consultants During Year



                                                  FY 2009   FY 2008
New Sales Representatives                           6,000     5,500
Active Sales Representatives End of Fiscal Year     8,400     7,900

The UBAM Division presently has six levels of sales representatives:

† Consultants

† Supervisors

†          Senior Supervisors

†          Executive Supervisors

†          Senior Executive Supervisors

†          Directors

Upon signing up, each individual is considered a consultant. Consultants receive commissions from each sale they make; the commission rate being determined by the marketing program under which the sale is made. In addition, consultants receive a monthly sales bonus once their sales reach an established monthly goal. Consultants who recruit other consultants and meet certain established criteria are eligible to become supervisors. Upon reaching this level, they receive monthly override payments based upon the sales of their downline groups.

Once supervisors reach certain established criteria, they become senior supervisors and are eligible to earn promotion bonuses on their consultants. Once senior supervisors reach certain established criteria, they become executive supervisors, senior executive supervisors or directors. Executive supervisors and higher may receive an additional monthly override payment based upon the sales of their downline groups.

               Percent of Net Revenues by UBAM Marketing Program



                                                     FY 2009   FY 2008
             Home Shows                                   37 %      39 %
             Direct Sales                                  2 %       3 %
             School & Library, including Book Fair        38 %      36 %
             Internet                                     13 %      11 %
             Transportation Revenue                       10 %      11 %
             Totals                                      100 %     100 %

                   Number of Orders by UBAM Marketing Program



                   FY 2009   FY 2008
Home Shows          31,000    33,900
Direct Sales         5,600     6,500
School & Library    12,800    11,700
Internet            51,500    47,800
                   100,900    99,900

Net revenues from home shows declined 14% or $895,600 during fiscal year 2009. This was a combination of per order averages which were down 6% and a lower number of orders placed during the period. Homes shows were the original marketing program when UBAM began in 1989. Consultants contact individuals ("hostesses") to hold book shows in their homes. The consultant assists the hostess in setting up the details for the show and makes a presentation at the show and takes orders for the books. The hostess earns free books based upon the total sales at the show. Customer specials are available for customers when they order a selected amount. Additionally, home shows provide an excellent opportunity for recruiting new consultants.

Net revenues from direct sales declined 17% or $67,700 during fiscal year 2009. This resulted from a 14% decrease in the number of orders placed during the year and a 3% decrease in the per order average. Direct sales are sales without a hostess being involved. This program makes it possible for consultants to work directly out of their homes by selling to friends, neighbors and other customers. It is

especially convenient for those individuals who wish to order books from a consultant but are unable to attend a home show. The UBAM Division offers many promotions (customer specials) throughout the year. These promotions offer the customer the opportunity to purchase selected items at a discount if the customer meets the defined criteria. The discounts under these promotions are recorded in discounts and allowances.

The school and library marketing program, including book fairs, increased 1% or $61,100 during fiscal year 2009. The number of orders placed during the year were up 9% while the per order average decreased 7%. Our book fair program is comparable to Scholastic's program, which continues to dominate the book fair market. Many schools hold joint book fairs with UBAM and our competitors, but in many cases, UBAM book fairs have been the only participant.

School and library sales are restricted to consultants who have received additional, specialized training which allows them to sell to schools and libraries. The UBAM consultant is the only source that a library or school has for library-bound Usborne books. They are not available through any of the school supply distribution companies.

Book fairs can be held with almost any organization as the sponsor. The consultant provides promotional materials to acquaint parents with the books. Parents turn in their orders at a designated time. The book fair program generates free books for the sponsoring organization. UBAM also has a Reach for the Stars fundraiser program. This is a pledge-based reading incentive program that provides cash and books to the organization and books for the children.

Internet sales continue to show growth for UBAM, increasing 12% or $201,300 during fiscal year 2009. Consultants utilize in-house-developed and hosted web sites in their businesses for a nominal monthly fee. They can customize the web sites to their own particular needs or they can maintain the generic site. Orders are transmitted to us through a shopping cart arrangement and the consultant receives sales credit and commission on the sales. Web-only specials are changed frequently and have proved successful, contributing to the growth in this market.

The cost of free books provided under the various UBAM marketing programs is recorded as operating and selling expense in the statements of earnings.

We believe that the UBAM Division has the greatest growth potential for us. While there are many multi-level companies in the United States, UBAM is the only one exclusively selling books. We believe this is a fertile market with excellent opportunities for continued growth. The keys to future growth in the UBAM Division are recruiting and retaining consultants.

(1-2) Liquidity and Capital Resources

EDC has a history of profitability and positive cash flow. We can continue to grow with minimal additional capital requirements. Our primary source of cash is generated from operations. Our primary uses of cash are to pay dividends, acquire treasury stock, purchase property and equipment, and repay borrowings on our line of credit. We utilize our bank credit facility to meet our short-term cash requirements, when needed.

We expect our ongoing cash flow to continue to exceed cash required to operate the business. Consequently, we expect short-term borrowings to remain at a minimum during the current fiscal year.

During fiscal year 2009 we experienced a positive cash flow from operations of $4,010,600. Cash flow from operations was increased by a decrease in inventories of $2,095,700 and an increase in current liabilities of $105,000, offset by a decrease in other assets of $148,800.

Cash used in investing activities was $740,300 primarily due to $709,800 related to the Kane/Miller Book Publishers acquisition as well as $30,500 for capital expenditures. We estimate that cash used in investing activities for fiscal year 2010 will be less than $500,000. This would consist of software and hardware enhancements to our existing data processing equipment, property improvements and additional warehouse equipment.

Cash used in financing activities was $2,814,400 which was primarily due to dividend payments of $3,055,900, and $802,800 paid to acquire treasury stock. These were offset by cash received from financing activities of $848,700 from the exercise of stock options and $195,600 from the sale of treasury stock. In September 2002, the Board of Directors authorized paying a minimum annual cash dividend of 20% of net earnings. In fiscal years 2009 and 2008 we paid 160% and 36%, respectively, of net earnings as a cash dividend.

Our Board of Directors adopted a stock repurchase plan in which we may purchase up to an additional 500,000 shares as market conditions warrant. Management believes the stock is undervalued and when stock becomes available at an attractive price, we can utilize free cash flow to repurchase shares. Management believes this enhances the value to the remaining stockholders and that these repurchases will have no adverse effect on our short-term and long-term liquidity.

(3) Results of Operations

Earnings as a Percent of Net Revenues



                               FY 2009   FY 2008
Net revenues                     100.0 %   100.0 %
Cost of sales                     36.0 %    35.2 %
Gross margin                      64.0 %    64.8 %
Operating expenses:
Operating & selling               25.0 %    24.3 %
Sales commissions                 22.6 %    23.4 %
General & administrative           6.3 %     5.4 %
Total operating expenses          53.9 %    53.1 %
Income from Operations            10.1 %    11.7 %
Other income                       0.6 %     0.5 %
Earnings before income taxes      10.7 %    12.2 %
Income taxes                       4.2 %     4.6 %
Net earnings                       6.5 %     7.6 %

Fiscal Year 2009 Compared with Fiscal Year 2008


The following presents an overview of our results of operations for the years
ended February 28, 2009 and February 29, 2008.  We had earnings before income
taxes of $3,138,900 for fiscal year 2009 compared with $3,732,100 for fiscal
year 2008.



                                       Revenues             $ Increase/
                                FY 2009        FY 2008       (decrease)
Gross sales                   $ 40,283,500   $ 40,600,300   $   (316,800 )
Less discounts & allowances    (12,462,200 )  (11,806,700 )     (655,500 )
Transportation revenue           1,577,100      1,727,100       (150,000 )
Net revenues                  $ 29,398,400   $ 30,520,700   $ (1,122,300 )

The UBAM Division's gross sales decreased 1.1% or $257,600 during FY 2009 when compared with FY 2008. This decrease is attributable to lower sales in the home party, direct sale market, and school and library/book fair market, offset by increased sales in the internet markets. Average sales per order for this division were down 6.2%, while the overall number of orders was up 1.0% primarily due to additional book fair and internet sales orders. The Publishing Division's gross sales decreased 0.4% or $59,200 during FY 2009 when compared with FY 2008.

The Publishing Division's discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAM Division due to the different customer markets that each division targets. The Publishing Division's discounts and allowances were $8.7 million in both fiscal years 2009 and 2008. To be competitive with other wholesale book distributors, the Publishing Division sells at discounts between 48% and 55% of the retail price, based upon the quantity of books ordered and the dollar amount of the order. The Publishing Division's discounts and allowances were 51.8% of Publishing's gross sales in both fiscal year 2009 and 2008.

The UBAM Division's discounts and allowances were $3.8 million in fiscal year 2009 and $3.1 million in fiscal year 2008. Most sales in the UBAM Division are at retail. As a part of the UBAM

Division's marketing programs, discounts between 40% and 50% of retail are offered on selected items at various times throughout the year. The discounts and allowances in the UBAM Division will vary from year to year depending upon the marketing programs in place during any given year. The UBAM Division's discounts and allowances were 16.1% of UBAM's gross sales in fiscal year 2009 and 13.0% in fiscal year 2008.

Transportation revenues decreased $150,000 in fiscal year 2009 relatively consistent with the decrease in sales during the year.

                                    Expenses             $  Increase/
                             FY 2009        FY 2008       (decrease)
Cost of sales              $ 10,581,600   $ 10,750,200   $   (168,600 )
Operating & selling           7,358,300      7,424,500        (66,200 )
Sales commissions             6,645,100      7,137,600       (492,500 )
General & administrative      1,849,300      1,653,100        196,200
Total                      $ 26,434,300   $ 26,965,400   $   (531,100 )

Cost of sales decreased approximately 1.6% in fiscal year 2009 when compared with fiscal year 2008. Our cost of products is 25% to 34% of the gross sales price, depending upon the product. In comparing the percentage change in gross sales with the percentage change in cost of goods, consideration must be given to the mix of products sold. Approximately 70% of our products come from one vendor, where the cost of the products is a fixed percentage of the retail price.

Cost of sales is the inventory cost of product sold (including the cost of the product itself and inbound freight charges). Operating and selling expenses include purchasing and receiving, inspection, warehousing, and other costs of our distribution network. These costs totaled $1,114,300 in FY2009 and $1,132,000 in FY2008. When comparing our gross margins with the gross margins of other companies, note that we do not include the costs of our distribution network in our cost of sales.

In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing Division, the UBAM Division and the order entry and customer service functions. Operating and selling expenses as a percentage of gross sales were 18.3% for both fiscal years 2009 and 2008.

Sales commissions in the Publishing Division increased $1,000 for the fiscal year ended 2009. Sales commissions for this division fluctuate depending upon the amount of sales made to our "house accounts," which are our largest customers and do not have any commission expense associated with them, and sales made by the Company's outside sales representatives. Publishing Division sales commissions are paid on net sales and were 1.7% of net sales in both fiscal years 2009 and 2008.

Sales commissions in the UBAM Division decreased $493,500. UBAM Division sales commissions are paid on retail sales and were 36.0% for fiscal year 2009 and 36.3% for fiscal year 2008. The fluctuation in the percentages of commission expense to retail sales is the result of the type of sale. Home shows, book fairs, school and library sales and direct sales have different commission rates. Also

contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants' monthly sales and downline sales. The decrease in sales commissions is the result of lower sales in the UBAM Division.

General and administrative expenses include the executive department, accounting department, information services department, general office management and building facilities management. General and administrative expenses as a percentage of gross sales were 4.6% for fiscal year 2009 and 4.1% for fiscal year 2008.

The tax provision for fiscal year 2009 was $1,226,300. The effective rate for fiscal year 2009 was 39.1% and for fiscal year 2008 was 37.7%. Our effective tax rate is higher than the Federal statutory rate due to state income taxes.

Contractual Obligations

The registrant is a smaller reporting company and is not required to provide this information.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our 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. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.

Stock-Based Compensation

We account for stock-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at date of grant and recognized as compensation expense over the vesting period.

Revenue Recognition

Sales are recognized and recorded when products are shipped. Products are shipped FOB shipping point. The UBAM Division's sales are paid before the product is shipped. These sales accounted for 72% of net revenues in fiscal year 2009 and 73% of net revenues in fiscal year 2008. The provisions of the SEC Staff Accounting Bulletin No.104, "Revenue Recognition in Financial Statements," have been applied, and as a result, a reserve is provided for estimated future sales returns.

Estimated allowances for sales returns are recorded as sales are recognized and recorded. Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily from the retail stores. The damages occur in the stores, not in shipping to the stores. It is industry practice to accept returns from wholesale customers. Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped. Management has estimated and included a reserve for sales returns of $84,000 as of February 28, 2009 and February 29, 2008.

Allowance for Doubtful Accounts

We maintain an allowance for estimated losses resulting from the inability of our 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, customers' financial conditions and current economic trends. Management has estimated allowance for doubtful accounts of $92,900 as of February 28, 2009 and $74,400 as of February 29, 2008.

Inventory

Management continually estimates and calculates the amount of non-current inventory. The inventory arises due to occasional purchases of book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of our primary supplier. Noncurrent inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2 ½ years of anticipated sales was classified as noncurrent inventory. Noncurrent inventory balances were $913,000 and $764,000 at February 28, 2009 and February 29, 2008, respectively.

Inventories are presented net of a valuation allowance. Management has estimated and included a valuation allowance for both current and noncurrent inventory. This allowance is based on management's identification of slow moving inventory on hand. Management has estimated a valuation allowance for both current and noncurrent inventory of $370,000 and $331,200 as of February 28, 2009 and February 29, 2008, respectively.

Our product line contains approximately 1,500 titles, each with different rates of sale, depending upon the nature and popularity of the title. Almost all of our product line is saleable as the books are not topical in nature and remain current in content today as well as in the future. Our products are printed in Europe, China, Singapore, India, Malaysia and Dubai resulting in a four to six-month lead-time to have a title reprinted and delivered to us.

Our principal supplier, based in England, imposes minimum order requirements before reprinting a title. At the current time we must reorder 7,500 or more of a title in order to get a solo print run. If we order less than 7,500 of a title, then we must share a print run with the supplier's other customers. Sharing

a print run has resulted in delays of up to twelve months in receiving the ordered title. Anticipating customer preferences and purchasing habits requires historical analysis of similar titles in the same series. We then place the initial order or re-order based upon this analysis.

These factors and historical analysis have led Management to determine that 2 ½ . . .