SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2006May 31, 2007
   
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
10302 East 55th Place, Tulsa, Oklahoma74146-6515(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code(918) 622-4522
Indicate by check mark whether the registrant (1) has filed all reports 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. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero     Accelerated filero Non-accelerated filerþ
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yeso      Noþ
As of JanuaryJuly 10, 2007 there were 3,751,6403,766,135 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.
 
 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4 CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
Item 1A RISK FACTORS
Item 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Item 5 OTHER INFORMATION
Item 6 EXHIBITS
SIGNATURES
EXHIBIT INDEX
CerrtificationCertification of CEOChief Executive Officer Pursuant to Section 302
Certification of ControllerPrincipal Financial and Corporate SecretaryAccounting Officer Pursuant to Section 302
Certification Pursuant to 18 U.S.C. Section 1350906

EDUCATIONAL DEVELOPMENT CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED BALANCE SHEETS (UNAUDITED)
        
 November 30, 2006           
 (unaudited) February 28, 2006  May 31, 2007 February 28, 2007 
ASSETS
  
  
CURRENT ASSETS:  
Cash and cash equivalents $3,009,392 $321,537  $831,700 $1,254,300 
Accounts receivable — (less allowances for doubtful accounts and returns: 11/30/06 - $158,992; 2/28/06 - $185,209) 3,412,547 2,946,462 
Inventories – Net 11,416,187 12,159,360 
Accounts receivable, less allowance for doubtful accounts and sales returns $156,500 (May 31) and $158,900 (February 28) 2,951,400 2,849,300 
Inventories—Net 11,499,100 12,388,000 
Prepaid expenses and other assets 56,811 119,508  128,300 95,400 
Income taxes receivable — 3,400 
Deferred income taxes 118,500 141,700  135,500 117,500 
          
Total current assets 18,013,437 15,688,567  15,536,000 16,707,900 
  
INVENTORIES — Net 453,085 379,570 
INVENTORIES—Net 483,000 459,100 
  
PROPERTY AND EQUIPMENT 
at cost (less accumulated depreciation: 
11/30/06 - $2,012,676 2/28/06 - $1,904,934) 2,421,129 2,493,929 
PROPERTY, PLANT AND EQUIPMENT—Net 2,450,600 2,385,300 
  
DEFERRED INCOME TAXES 98,700 81,900  67,900 149,600 
          
  
TOTAL $18,537,500 $19,701,900 
 $20,986,351 $18,643,966      
      
LIABILITIES AND SHAREHOLDERS’ EQUITY
  
  
CURRENT LIABILITIES:  
Note payable to bank $— $676,000 
Accounts payable 4,496,472 3,042,937  $2,162,800 $3,308,300 
Accrued salaries and commissions 882,454 566,379  543,100 560,900 
Income taxes 57,319 71,749 
Dividends payable — 750,785 
Income taxes payable 198,900 — 
Other current liabilities 318,644 197,486  143,500 171,400 
          
Total current liabilities 5,754,889 5,305,336  3,048,300 4,040,600 
  
COMMITMENTS  
  
SHAREHOLDERS’ EQUITY:  
Common Stock, $.20 par value (Authorized 8,000,000 shares; Issued 5,776,840 (11/30/06) and 5,771,840 shares (02/28/06); Outstanding 3,754,818 (11/30/06) and 3,753,923 (2/28/06) shares) 1,155,368 1,154,368 
Common stock, $0.20 par value; Authorized 8,000,000 shares; Issued 5,791,840 (May 31) and 5,791,840 (February 28) shares; Outstanding 3,766,323 (May 31) and 3,757,323 (February 28) shares 1,158,400 1,158,400 
Capital in excess of par value 7,603,328 7,577,495  7,649,100 7,649,100 
Retained earnings 17,219,392 15,300,999  17,467,000 17,707,700 
          
 25,978,088 24,032,862  26,274,500 26,515,200 
Less treasury shares, at cost  ( 10,746,626)  ( 10,694,232)
Less treasury stock, at cost  (10,785,300)  (10,853,900)
          
 15,231,462 13,338,630  15,489,200 15,661,300 
          
  
TOTAL $18,537,500 $19,701,900 
 $20,986,351 $18,643,966      
     
See notes to condensed financial statements.

2

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 31,
                        
 Three Months Ended November 30, Nine Months Ended November 30,  2007 2006 
 2006 2005 2006 2005 
REVENUES: 
Gross sales $12,729,245 $12,397,509 $32,532,560 $32,940,404 
Less discounts & allowances  (3,527,495)  (3,233,126)  (9,540,281)  (9,444,019)
GROSS SALES $10,136,100 $10,743,400 
Less discounts and allowances  (2,905,600)  (3,041,600)
Transportation revenue 618,763 518,598 1,419,581 1,207,427  375,900 405,200 
              
Net revenues 9,820,513 9,682,981 24,411,860 24,703,812 
NET REVENUES 7,606,400 8,107,000 
COST OF SALES 3,421,601 3,390,245 8,817,471 9,134,241  2,706,500 2,879,400 
              
Gross margin 6,398,912 6,292,736 15,594,389 15,569,571  4,899,900 5,227,600 
              
 
OPERATING EXPENSES:  
Operating & selling 2,152,898 2,109,538 5,634,372 5,295,484 
Operating and selling 1,835,900 1,841,700 
Sales commissions 2,534,110 2,573,278 5,811,029 5,967,110  1,730,600 1,873,200 
General & administrative 420,632 427,897 1,330,271 1,257,136 
General and administrative 408,800 425,000 
Interest 4 32,597 7,581 75,545  — 2,700 
              
 5,107,644 5,143,310 12,783,253 12,595,275  3,975,300 4,142,600 
              
  
OTHER INCOME 12,690 17,580 284,259 33,657  13,200 5,500 
              
  
EARNINGS BEFORE INCOME TAXES 1,303,958 1,167,006 3,095,395 3,007,953  937,800 1,090,500 
  
INCOME TAXES 505,800 428,000 1,176,600 1,128,900  352,500 393,900 
              
  
NET EARNINGS $798,158 $739,006 $1,918,795 $1,879,053  $585,300 $696,600 
              
  
BASIC AND DILUTED EARNINGS PER SHARE:  
Basic $0.21 $0.20 $0.51 $0.50  $0.16 $0.19 
              
Diluted $0.21 $0.19 $0.49 $0.48  $0.15 $0.18 
              
  
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING:  
Basic 3,758,422 3,753,923 3,756,975 3,745,704  3,760,101 3,756,461 
              
Diluted 3,872,277 3,898,439 3,876,375 3,901,772  3,878,975 3,886,939 
              
DIVIDENDS DECLARED PER COMMON SHARE $— $— $— $0.15 
         
See notes to condensed financial statements.

3

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 31, 2007
                             
  Common Stock      ��            
  (par value $.20 per share)              Treasury Stock    
  Number of      Capital in      Number        
  Shares      Excess of  Retained  of      Shareholders’ 
  Issued  Amount  Par Value  Earnings  Shares  Amount  Equity 
BALANCE, MAR. 1, 2006  5,771,840  $1,154,368  $7,577,495  $15,300,999   2,017,917  $(10,694,232) $13,338,630 
                             
Purchases of treasury stock  —   —   —   —   15,412   (112,360)  (112,360)
                             
Sales of treasury stock  —   —   5,196   —   (11,307)  59,966   65,162 
                             
Exercise of options at $2.50/share  5,000   1,000   11,500   —   —   —   12,500 
                             
Tax benefit-stock options  —   —   9,137   —   —   —   9,137 
                             
Cash dividends – net of accrual  —   —   —   (402)  —   —   (402)
                             
Net earnings  —   —   —   1,918,795   —   —   1,918,795 
                      
                             
BALANCE NOV. 30, 2006  5,776,840  $1,155,368  $7,603,328  $17,219,392   2,022,022  $(10,746,626) $15,231,462 
                      
                             
  Common Stock              
  (par value $0.20 per share)              
  Number of      Capital in      Treasury Stock    
  Shares      Excess of  Retained  Number of      Shareholders’ 
  Issued  Amount  Par Value  Earnings  Shares  Amount  Equity 
BALANCE—March 1, 2007  5,791,840  $1,158,400  $7,649,100  $17,707,700   2,034,517  $(10,853,900) $15,661,300 
Sales of treasury stock                  (8,812)  68,600   68,600 
Dividends declared              (826,000)          (826,000)
Net earnings              585,300           585,300 
                           
                      
BALANCE—May 31, 2007  5,791,840  $1,158,400  $7,649,100  $17,467,000   2,025,705  $(10,785,300) $15,489,200 
                      
See notes to condensed financial statements.

4

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 31,
         
  Nine Months Ended November 30, 
  2006  2005 
CASH FLOWS FROM OPERATING ACTIVITIES $4,175,545  $1,354,442 
         
CASH FLOWS FROM INVESTING ACTIVITIES –        
Purchases of property and equipment  (34,942)  (219,453)
       
         
Net cash used in investing activities  (34,942)  (219,453)
       
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Borrowings under revolving credit agreement  3,295,000   11,332,000 
Payments under revolving credit agreement  (3,971,000)  (12,227,000)
Cash received from exercise of stock options  12,500   49,375 
Tax benefit of stock options exercised  9,137   12,240 
Cash received from sale of treasury stock  65,162   135,213 
Cash paid to acquire treasury stock  (112,360)  (77,250)
Dividends paid  (751,187)  (560,719)
       
         
Net cash used in financing activities  (1,452,748)  (1,336,141)
       
         
Net Increase (decrease ) in Cash and Cash Equivalents  2,687,855   (201,152)
Cash and Cash Equivalents, Beginning of Period  321,537   364,024 
       
Cash and Cash Equivalents, End of Period $3,009,392  $162,872 
       
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid for interest $11,449  $75,400 
       
Cash paid for income taxes $1,177,400  $1,036,100 
       
         
  2007  2006 
CASH FLOWS FROM OPERATING ACTIVITIES: $436,400  $1,271,800 
         
CASH FLOWS FROM INVESTING ACTIVITIES—        
Purchases of property and equipment  (101,600)  — 
       
         
Net cash used in investing activities  (101,600)  — 
       
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Borrowings on revolving credit agreement  —   1,200,000 
Payments on revolving credit agreement  —   (1,876,000)
Cash received from exercise of stock options  —   2,500 
Cash received from sale of treasury stock  68,600   42,100 
Dividends paid  (826,000)  (751,200)
       
         
Net cash used in financing activities  (757,400)  (1,382,600)
       
         
NET DECREASE IN CASH AND CASH EQUIVALENTS  (422,600)  (110,800)
         
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD  1,254,300   321,500 
       
         
CASH AND CASH EQUIVALENTS—END OF PERIOD $831,700  $210,700 
       
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid for interest $—  $6,100 
       
Cash paid for income taxes $76,500  $201,400 
       
         
See notes to condensed financial statements.

5

EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 — The information shown with respect to the three months ended May 31, 2007 and nine months ended November 30, 2006, and 2005, which is unaudited, includes all adjustments which in the opinion of Management are considered to be necessary for a fair presentation of earnings for such periods. The adjustments reflected in the financial statements represent normal recurring adjustments. The results of operations for the three months ended May 31, 2007 and nine months ended November 30, 2006, and 2005, respectively, are not necessarily indicative of the results to be expected at year end due to seasonality of the product sales.
These financial statements and notes are prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and should be read in conjunction with the Financial Statements and accompanying notes contained in the Company’sour Annual Report to Shareholders for the Fiscal Year ended February 28, 2006.2007.
Note 2 — Effective June 30, 2006 the Company2007 we signed an Eightha Ninth Amendment to the Credit and Security Agreement with Arvest Bank which provided a $5,000,000 line of credit through June 30, 2007.2008. Interest is payable monthly at theWall Street Journal prime-floating rate minus 0.75% (7.50%(7.25% at November 30, 2006)May 31, 2007) and borrowings are collateralized by substantially all the assets of the Company. At November 30, 2006May 31, 2007 the Company had no debt outstanding under this agreement. Available credit under the revolving credit agreement was $5,000,000 at November 30, 2006. BorrowingsMay 31, 2007. No borrowings were outstanding under the agreement ranged from $0 to $17,000 during the thirdfirst quarter ended NovemberMay 31, 2007.
This agreement also contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue, or obtain issuance of commercial or standby letters of credit provided that no letters of credit will have an expiry date later than June 30, 2006.2008 and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.
Note 3 — Inventories consist of the following:
        
         2007 
 November 30, 2006 February 28, 2006  May 31. February 28, 
Current:  
Book inventory $11,448,147 $12,186,820  $11,534,100 $12,421,400 
Inventory valuation allowance  (31,960)  (27,460)  (35,000)  (33,400)
          
  
Inventories net — current $11,416,187 $12,159,360 
Inventories net–current $11,499,100 $12,388,000 
          
  
Non-current: 
Noncurrent: 
Book inventory $818,000 $657,000  $808,000 $808,000 
Inventory valuation allowance  (364,915)  (277,430)  (325,000)  (348,900)
          
  
Inventories — non-current $453,085 $379,570 
Inventories net–noncurrent $483,000 $459,100 
          
The Company     We occasionally purchasespurchase book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of the Company’sour primary supplier. These amounts are included in non-current inventory.
Significant portions of our inventory purchases by the Company are concentrated with an England basedEngland-based publishing company. Purchases from this England based publishing company were approximately $3.5$1.7 million and $3.4$1.8 million for the three months ended November 30,May 31, 2007 and 2006, and 2005, respectively. Total inventory purchases from all suppliers were approximately $4.3$1.7 million and $3.7$2.0 million for the three months ended November 30,May 31, 2007 and 2006, and 2005, respectively.
Purchases from this England based publishing company were approximately $7.6 million and $9.1 million for the nine months ended November 30, 2006 and 2005, respectively. Total inventory purchases from all suppliers were approximately $9.4 million and $10.4 million for the nine months ended November 30, 2006 and 2005, respectively.
Note 4 — Basic earnings per share (“EPS”) is computed by dividing net earnings 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 haswe have utilized the treasury stock method.

6

The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share (“EPS”) is shown below.

6

EDUCATIONAL DEVELOPMENT CORPORATIONEarnings Per Share:
                 
  Three Months Ended November 30,  Nine Months Ended November 30, 
  2006  2005  2006  2005 
Net Earnings $798,158  $739,006  $1,918,795  $1,879,053 
             
                 
Basic EPS:                
Weighted Average Shares Outstanding  3,758,422   3,753,923   3,756,975   3,745,704 
             
Basic EPS $0.21  $0.20  $0.51  $0.50 
             
Diluted EPS:                
Weighted Average Shares Outstanding  3,758,422   3,753,923   3,756,975   3,745,704 
Assumed Exercise of Options  113,855   144,516   119,400   156,068 
             
Shares Applicable to Diluted Earnings  3,872,277   3,898,439   3,876,375   3,901,772 
             
Diluted EPS $0.21  $0.19  $0.49  $0.48 
             
         
  Three Months Ended May 31, 
  2007  2006 
Net earnings applicable to common shareholders $585,300  $696,600 
       
         
Shares:
        
         
Weighted average shares outstanding — basic  3,760,101   3,756,461 
Assumed exercise of options  118,874   130,478 
       
         
Weighted average shares outstanding — diluted  3,878,975   3,886,939 
       
         
Basic Earnings Per Share
 $0.16  $0.19 
       
Diluted Earnings Per Share
 $0.15  $0.18 
       
Since March 1, 1998, when the Company began its stock repurchase program, 2,343,848 shares of the Company’s common stock at a total cost of $11,918,297 have been acquired. The     In April 2004, our Board of Directors has authorized purchasingus to purchase up to 2,500,000500,000 additional shares as market conditions warrant.of our common stock under a plan initiated in 1998. This plan has no expiration date. During the first quarter of fiscal year 2008, we did not repurchase any share of common stock. The maximum number of shares that may be repurchased in the future is 146,939.
Note 5 — The Company accountsWe 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.
In the fourth quarter of fiscal year 2005, the Company early adopted Statement of Financial Accounting Standards No. 123 (revised 2004) “Share Based Payment” (SFAS No. 123R) which eliminates the alternative of applying the intrinsic value measurement provision of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” to stock compensation awards and requires that share-based payment transactions with employees, such as stock options and restricted stock, be measured at fair value and recognized as compensation expense over the vesting period. The Company adopted SFAS No. 123R on the modified retrospective application method to all prior years for which SFAS No. 123R was effective. For the Company, this began with its fiscal year ended February 28, 1997. There were no stock options granted during the quarter ended November 30, 2006.
Note 6— Freight costs and handling costs incurred are included in operating & selling expenses and were $755,434$593,400 and $709,640$559,000 for the three months ended November 30,May 31, 2007 and 2006, and 2005, respectively. Freight costs and handling costs were $1,819,403 and $1,755,043 for the nine months ended November 30, 2006 and 2005, respectively.
Note 7 — The Company hasWe have 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, school supply, toy and gift stores 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, book fairs and the Internet.
The accounting policies of the segments are the same as those of the Company. The Company evaluatesrest of the company. We evaluate segment performance based on earnings (loss) before income taxes of the segments, which is defined as segment net sales reduced by direct cost of sales and direct expenses. Corporate expenses, depreciation, interest expense and income taxes are not allocated to the segments, but are listed in the “other” column. Corporate expenses include the executive department, accounting department, information services department, general office management and building facilities management. The Company’sOur assets and liabilities are not allocated on a segment basis.
Information by industry segment for the three months ended May 31, 2007 and nine months ended2006 follows:
                 
  Publishing UBAH Other Total
2007
                
                 
Net revenues $2,031,400  $5,575,000  $—  $7,606,400 
Earnings (loss) before income taxes  615,100   1,204,000   (881,300) $937,800 
                 
2006
                
                 
Net revenues $2,071,200  $6,035,800  $—  $8,107,000 
Earnings (loss) before income taxes  658,400   1,325,100   (893,000) $1,090,500 
Note 8 — The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable to us.
     In February 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 155 “Accounting for Certain Hybrid Financial Instruments” amending SFAS No. 133 and SFAS No. 140. SFAS No. 155 eliminates the exemption from applying SFAS No. 133 to securitized financial assets. The provisions of SFAS No. 155 are to be applied to financial instruments issued or acquired during fiscal periods beginning after September 15, 2006. The adoption of SFAS No. 155 did not have a material impact on our financial position or results of operations.
     FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48) was issued in June 2006. It clarifies recognition and derecognition criteria for tax positions taken in a return that may be subject to challenge upon audit. If it is “more likely than not,” that the tax position will be sustained upon examination, the benefit is to be recognized in the financial statements. Conversely, if the position is less likely than not to be sustained, the benefit should not be recognized. The recognition/derecognition decision should be reflected in the first interim period when the status changes and not deferred to a future settlement upon audit. General tax reserves to cover aggressive positions taken in filed returns are no longer allowable. Each issue must be judged on its own merits and a recognition/derecognition decision recorded in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. This Interpretation did not have a material effect on our financial position or results of operations in future periods.
     In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” which amends and puts in one place guidance on the use of fair value measurements which had been spread through four APB Opinions and 37 FASB Standards. No extensions of the use of fair value measurements are contained in this new pronouncement, and with some special industry exceptions (e.g., broker-dealers), no significant changes in practice should ensue. The standard is to be applied to financial statements beginning after November 30, 200615, 2007. The adoption of SFAS No. 157 is not expected to have a material impact on our financial position or results of operations.
     In February 2007, the FASB issued SFAS No. 159 “Fair Value Option for Financial Assets and 2005Financial Liabilities — including an amendment of FASB Statement No. 115”. This standard permits the use of fair value measurement of financial assets and liabilities in the balance sheet with the net change in fair value recognized in periodic net income. The Standard is set forth below:effective for fiscal years beginning after November 15, 2007. The adoption of this standard is not expected to have a material effect on our financial position or results of operations.

7

EDUCATIONAL DEVELOPMENT CORPORATION
                 
  Publishing UBAH Other Total
Three Months Ended November 30, 2006
                
                 
Net revenues from external customers $1,998,605  $7,821,908  $—  $9,820,513 
Earnings before income taxes $698,829  $1,583,452  $(978,323) $1,303,958 
                 
Three Months Ended November 30, 2005
                
                 
Net revenues from external customers $1,900,920  $7,782,061  $—  $9,682,981 
Earnings before income taxes $638,332  $1,523,159  $(994,485) $1,167,006 
                 
Nine Months Ended November 30, 2006
                
                 
Net revenues from external customers $6,167,274  $18,244,586  $—  $24,411,860 
Earnings before income taxes $1,942,629  $3,788,447  $(2,635,681) $3,095,395 
                 
Nine Months Ended November 30, 2005
                
                 
Net revenues from external customers $6,325,992  $18,377,820  $—  $24,703,812 
Earnings before income taxes $2,115,013  $3,719,349  $(2,826,409) $3,007,953 
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors Affecting Forward Looking Statements
This Quarterly Report on Form 10-Q, including the documents incorporated herein by reference,MD&A contains certain “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended,statements that are forward-looking and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are not historical facts but are expectations or projections based on certain assumptions and analyses made by our senior management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors. 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 certaininclude numerous risks and uncertainties. Suchwhich you should carefully consider. Additional risks and uncertainties include but are not limitedmay also materially and adversely affect our business. You should read the following discussion in connection with our consolidated financial statements, including the notes to product prices, continued availability of capital and financing, and other factors affecting the Company’s business that may be beyond its control.
The words “estimate,” “project,” “intend,” “expect,” “anticipate,” “believe” and similar expressions are intended to identify forward-looking statements. These forward-lookingthose statements, are found at various places throughout this report and the documents incorporatedincluded in this report by reference as well as in other written materials, press releases and oral statements issued by us ordocument. Our fiscal years end on our behalf. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date that they are made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report.February 28.
Overview
The Company operates     We operate two separate divisions, Publishing and Usborne Books at Home (“UBAH”), to sell the Usborne line of children’s books. These two divisions each have their own customer base. The Publishing Division markets its products on a wholesale basis to various retail accounts. The UBAH Division markets its products to individual consumers as well as school and public libraries.
The following table sets forthshows consolidated statement of earningsincome data as a percentage of nettotal revenues.

8

EDUCATIONAL DEVELOPMENT CORPORATIONEarnings as a Percent of Total Revenues
For the quarter ended May 31,
                
 Three Months Ended November 30, Nine Months Ended November 30,         
 2006 2005 2006 2005  2007 2006
Net revenues  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
Cost of sales  34.8%  35.0%  36.1%  37.0%  35.6%  35.5%
              
Gross margin  65.2%  65.0%  63.9%  63.0%  64.4%  64.5%
         
Operating expenses:  
Operating & selling  21.9%  21.8%  23.1%  21.4%  24.1%  22.7%
Sales commissions  25.8%  26.6%  23.8%  24.2%  22.8%  23.1%
General & administrative  4.3%  4.4%  5.4%  5.1%  5.4%  5.3%
Interest  0.0%  0.3%  0.1%  0.3%  0.0%  0.0%
              
Total operating expenses  52.0%  53.1%  52.4%  51.0%  52.3%  51.1%
              
 
Income from Operations  12.2%  13.4%
Other income  0.1%  0.2%  1.2%  0.2%  0.2%  0.0%
         
      
Earnings before income taxes  13.3%  12.1%  12.7%  12.2%  12.3%  13.4%
Income taxes  5.2%  4.5%  4.8%  4.6%  4.6%  4.8%
              
Net earnings  8.1%  7.6%  7.9%  7.6%  7.7%  8.6%
              
Operating Results for the Three Months Ended November 30, 2006May 31, 2007
The Company had     We earned income before income taxes of $1,303,958$937,800 for the three months ended November 30, 2006May 31, 2007 compared with $1,167,006$1,090,500 for the three months ended November 30, 2005May 31, 2006.
Revenues
                                
 Three Months Ended November 30, $ Increase/ % Increase/  For the Three Months Ended May 31, $ Increase/ % Increase/ 
 2006 2005 (decrease) (decrease)  2007 2006 (decrease) (decrease) 
Gross sales $12,729,245 $12,397,509 $331,736  2.7% $10,136,100 $10,743,400 $(607,300)  (5.7)%
Less discounts & allowances  (3,527,495)  (3,233,126)  (294,369)  9.1%  (2,905,600)  (3,041,600) 136,000  (4.5)%
Transportation revenue 618,763 518,598 100,165  19.3% 375,900 405,200  (29,300)  (7.2)%
                  
Net revenues $9,820,513 $9,682,981 $137,532  1.4% $7,606,400 $8,107,000 $(500,600)  (6.2)%
                  
The UBAH Division’s gross sales increased 2.0%decreased 8.1% or $171,876$521,800 during the three month period ending November 30, 2006May 31, 2007 when compared with the same quarterly period a year ago. The Company attributes this increase primarily toThis decrease consists of a 7.4% increase12% decrease in the number of consultants who made sales during the quarter ended November 30, 2006 when compared with the same period last year. A breakdown by market segment for the three months ended November 30, 2006 versus November 30, 2005 shows home party sales, declined 4.8%,a 5% decrease in direct sales increased 9.8%,and a 7% decrease in school and library sales, declined 40.2%, book fairoffset by a 29% increase in Internet sales. The decline in home party sales increased 4.7%is attributed primarily to a 7% decline in the total number of home shows held and weba $10 decrease in average per order sales. The decline in home party sales increased 51.9%.and direct sales occurred as more consultants replaced these with Internet orders. The decline in school and library sales is due to the decline in funding received by the schools.

8

     The Publishing Division’s gross sales increased 4.1%decreased 1.8% or $159,860,$79,500 during the three month period ending November 30, 2006May 31, 2007 when compared with the same quarterly period a year ago. SalesWe attribute this to a 41.3% increase in sales to the smaller books stores, offset by a 31.3% decrease in sales to the national chains increased 27% during the 3rd quarter when compared with last year. The core number of titles that the national chains have been ordering has increased over last year and has lead to ana 20.1% increase in sales to these chains. Sales to the smaller bookstores remained the same during the 3rd quarter this year when compared with the 3rd quarter last year.other accounts.
The UBAH Division’s discounts and allowances were $1,431,347$706,200 and $1,202,840$795,500 for the three monthsquarterly periods ended November 30,May 31, 2007 and 2006, and 2005, respectively. The UBAH Division is a multi-level selling organization that markets its products through independent sales representatives (“consultants”). Sales are made to individual purchasers and school and public libraries. Most sales in the UBAH Division are at retail. As a part of the UBAH 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 UBAH Division will vary from year to year depending upon the marketing programs in place during any given year. The UBAH Division’s discounts and allowances were 16.6%11.9% of UBAH’s gross sales for the three monthsquarterly period ended November 30, 2006May 31, 2007 and 14.2%12.4% for the three monthsquarterly period ended November 30, 2005.May 31, 2006.
The Publishing Division’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAH Division due to the different customer markets that each division targets. The Publishing Division’s discounts and allowances were $2,096,147$2,199,500 and $2,030,286$2,246,000 for the three monthsquarterly periods ended November 30,May 31, 2007 and 2006, and 2005, respectively. The

9

EDUCATIONAL DEVELOPMENT CORPORATION
Publishing Division sells to retail book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. 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 51.3% of Publishing’s gross sales for the three months ended November 30, 2006 and 51.7% for the three months ended November 30, 2005.
The increase in transportation revenues for the three months ended November 30, 2006 is the result of the January 2006 increase in the shipping rates charged in the UBAH Division.
Expenses
                 
  Three Months Ended November 30,  $ Increase/  % Increase/ 
  2006  2005  (decrease)  (decrease) 
Cost of sales $3,421,601  $3,390,245  $31,356   0.9%
Operating & selling  2,152,898   2,109,538   43,360   2.1%
Sales commissions  2,534,110   2,573,278   (39,168)  (1.5%)
General & administrative  420,632   427,897   (7,265)  (1.7%)
Interest  4   32,597   (32,593)  (100.0%)
             
Total $8,529,245  $8,533,555  $(4,310)  (0.0%)
             
Cost of sales increased 0.9% or $31,356 for the three months ended November 30, 2006 when compared with the three months ended November 30, 2005. In comparing the 0.9% increase in cost of sales with the 2.7% increase in gross sales, consideration must be given to the mix of products sold. The Company’s cost of products it sells from inventory ranges from 25% to 34% of the gross sales price, depending upon the product sold. Cost of sales as a percentage of gross sales was 26.9% for the three months ended November 30, 2006 and for the three months ended November 30, 2005 was 27.3%. Cost of sales is the inventory cost of the product sold, which includes the cost of the product itself and inbound freight charges. Purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network are included in operating and selling expenses. These costs totaled $320,468 in the quarter ended November 30, 2006 and $310,085 in the quarter ended November 30, 2005. Readers are advised to be cautious when comparing our gross margins with the gross margins of other companies, since some companies include the costs of their distribution networks in 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 UBAH Division and the order entry and customer service functions. Operating and selling expenses as a percentage of gross sales were 16.9% and 17.0% for the three months ended November 30, 2006 and 2005. Operating and selling expenses increased because of an increase in promotional costs of $69,982 in both divisions and an increase in payroll and benefit costs of $29,070, necessary to keep the Company competitive in the local job market. Estimated costs of travel contests held by the UBAH Division declined $45,304 during the period, primarily due to the timing of the various contests.
Sales commissions in the Publishing Division increased 13.4% to $26,435 for the three months ended November 30, 2006. Publishing Division sales commissions are paid on net sales and were 1.3% of net sales for the three months ended November 30, 2006 and 1.2% for the three months ended November 30, 2005. Sales commissions in the Publishing Division will fluctuate depending upon the amount of sales made to the Company’s “house accounts,” which are the Publishing Division’s largest customers and do not have any commission expense associated with them, and sales made by the Company’s outside sales representatives. Sales commissions in the UBAH Division decreased 1.7% to $2,507,676 for the three months ended November 30, 2006, the direct result of decreased retail sales in this division. UBAH Division sales commissions are paid on retail sales and were 38.0% of retail sales for the three months ended November 30, 2006 and 38.1% of retail sales for the three months ended November 30, 2005. 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 commissions 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 Company’s effective tax rate was 38.8% and 36.7% for the three months ended November 30, 2006 and 2005, respectively. These rates are higher than the federal statutory rate due to state income taxes.

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EDUCATIONAL DEVELOPMENT CORPORATION
Operating Results for the Nine Months Ended November 30, 2006
The Company had income before income taxes of $3,095,395 for the nine months ended November 30, 2006 compared with $3,007,953 for the nine months ended November 30, 2005.
Revenues
                 
  Nine months Ended November 30,  $ Increase/  % Increase/ 
  2006  2005  (decrease)  (decrease) 
Gross sales $32,532,560  $32,940,404  $(407,844)  (1.2%)
Less discounts & allowances  (9,540,281)  (9,444,019)  (96,262)  1.0%
Transportation revenue  1,419,581   1,207,427   212,154   17.6%
             
Net revenues $24,411,860  $24,703,812  $(291,952)  (1.2%)
             
The UBAH Division’s gross sales decreased 0.3% or $61,828 during the nine month period ending November 30, 2006 when compared with the same nine month period a year ago. A breakdown by market segment for the nine months ended November 30, 2006 versus November 30, 2005 shows home party sales declined 6.8%, direct sales decreased 6.6%, school and library sales declined 27.2%, book fair sales increased 6.8% and web sales increased 48.0%. The number of consultants who made sales during the nine months ended November 30, 2006 when compared with the same period last year increased 2.2%. The Publishing Division’s gross sales decreased 2.7% or $346,016, during the nine month period ending November 30, 2006 when compared with the same period a year ago. Sales to the national chains decreased 2.0% during the nine months ended November 30, 2006 when compared with last year, the result of a special one time order received last year that was not duplicated this year. However, the core number of titles that the national chains have been ordering has increased this year over last year and has resulted in an overall increase in sales this year to these chains. Sales to the smaller bookstores declined 1.2% during the nine months ended November 30, 2006 when compared with last year.
The UBAH Division’s discounts and allowances were $2,960,949 and $2,689,925 for the nine months ended November 30, 2006 and 2005, respectively. The UBAH Division is a multi-level selling organization that markets its products through independent sales representatives (“consultants”). Sales are made to individual purchasers and school and public libraries. Most sales in the UBAH Division are at retail. As a part of the UBAH 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 UBAH Division will vary from year to year depending upon the marketing programs in place during any given year. The UBAH Division’s discounts and allowances were 14.9% of UBAH’s gross sales for the nine months ended November 30, 2006 and 13.5% for the nine months ended November 30, 2005.
The Publishing Division’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAH Division due to the different customer markets that each division targets. The Publishing Division’s discounts and allowances were $6,579,331 and $6,754,094 for the nine months ended November 30, 2006 and 2005, respectively. The Publishing Division sells to retail book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. 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 51.7%52.0% of Publishing’s gross sales for the nine-month periodsquarterly period ended November 30, 2006May 31, 2007 and November 30, 2005.52.1% for the quarterly period ended May 31, 2006.
The increasedecrease in transportation revenues for the ninethree months ended November 30, 2006 isMay 31, 2007 proportionate to the result ofdecrease in sales for the January 2006 increase in the shipping rates charged in the UBAH Division.

11

EDUCATIONAL DEVELOPMENT CORPORATIONperiod.
Expenses
                
                 For Three Months Ended May 31,     
 Nine months Ended November 30, $ Increase/ % Increase/  $ Increase/ % Increase/ 
 2006 2005 (decrease) (decrease)  2007 2006 (decrease) (decrease) 
Cost of sales $8,817,471 $9,134,241 $(316,770)  (3.5%) 2,706,500 $2,879,400 $(172,900)  (6.0%)
Operating & selling 5,634,372 5,295,484 338,888  6.4% 1,835,900 1,841,700 (5,800)  (0.3%)
Sales commissions 5,811,029 5,967,110  (156,081)  (2.6%) 1,730,600 1,873,200  (142,600)  (7.6%)
General & administrative 1,330,271 1,257,136 73,135  5.8% 408,800 425,000 (16,200)  (3.8%)
Interest 7,581 75,545  (67,964)  (90.0%) — 2,700  (2,700) (100%)
                  
Total $21,600,724 $21,729,516 $(128,792)  (0.1%) $6,681,800 $7,022,000 $(340,200)  (4.8%)
                  
Cost of sales decreased 3.5% or $316,7706.0% for the ninethree months ended November 30, 2006 when comparedMay 31, 2007, consistent with the nine months ended November 30, 2005. In comparing the 1.2% decrease in gross sales withfor the 3.5% decrease in cost of sales, consideration must be given to the mix of products sold. During the nine months ended November 30, 2006, the cost of sales on consignment titles decreased 43% or $391,552 over the same period last year. Consignment titles cost the Company 34% of gross sales price. The Company’s cost of products it sells from inventory ranges from 25% to 34% of the gross sales price, depending upon the product.quarter. Cost of sales as a percentage of gross sales was 26.7% for the ninethree months ended November 30, 2006 was 27.1%May 31, 2007 and for the ninethree months ended November 30, 2005May 31, 2006 was 27.7%26.8%. Cost of sales is the inventory cost of the product sold, which includes the cost of the product itself and inbound freight charges. Purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network are included in operating and selling expenses. These costs totaled $877,219$293,100 in the nine monthsquarter ended November 30, 2006May 31, 2007 and $833,451$290,700 in the nine monthsquarter ended November 30, 2005.May 31, 2006. Readers are advised toshould be cautious when comparing our gross margins with the gross margins of other companies, since some companies include the costs of their distribution networks in 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 UBAH Division and the order entry and customer service functions. Operating and selling expenses decreased because of a $4,400 decrease in the estimated costs of the travel contests held by the UBAH

9

Division and a decrease in sales incentives offered by the UBAH Division totaling $7,400. These increases were offset by a $9,100 increase in postage and freight. Advertising costs in the Publishing Division decreased $42,400 as we did not participate in cooperative advertising programs with the major book chains that we participated in last year. This decrease was partially offset by an increase in postage and freight of $32,600 due to higher fuel costs and free shipping specials offered during the quarter. Operating and selling expenses as a percentage of gross sales were 17.3%18.1% for the nine monthsquarter ended November 30, 2006May 31, 2007 and 16.1%17.1% for the nine monthsquarter ended November 30, 2005. Operating and selling expenses increased because of an $78,099 increase in the estimated costs of travel contests held by the UBAH Division, an increase in promotional costs of $189,175 in both divisions and an increase in payroll and benefit costs of $67,532, necessary to keep the Company competitive in the local job marketMay 31, 2006.
Sales commissions in the Publishing Division increased 12.0%25.3% to $85,308$35,000 for the ninethree months ended November 30, 2006.May 31, 2007. Publishing Division sales commissions are paid on net sales and were 1.7% of net sales for the three months ended May 31, 2007 and 1.4% of net sales for the ninethree months ended November 30, 2006 and 1.2% for the nine months ended November 30, 2005.May 31, 2006. Sales commissions in the Publishing Division will fluctuate depending upon the amount of sales made to the Company’sour “house accounts,” which are the Publishing Division’s largest customers and do not have any commission expense associated with them, and sales made by the Company’sour outside sales representatives.
     Sales commissions in the UBAH Division decreased 2.8%8.1% to $5,725,722$1,695,600 for the ninethree months ended November 30, 2005,May 31, 2007, the direct result of decreased sales from home shows and school and library sales in this division. UBAH Division sales commissions are paid on retail sales and were 36.9%32.6% of retail sales for the ninethree months ended November 30, 2006May 31, 2007 and 37.8%34.6% of retail sales for the ninethree months ended November 30, 2005.May 31, 2006. 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 commissionscommission 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.
Other income increased $250,602 for the nine months ended November 30, 2006. During the 2nd quarter of the current fiscal year the Company entered into a Plan of Reorganization and Dip Financing Agreement with a company in Chapter 11 bankruptcy as a prelude to acquiring that bankrupt company. The Company was not the successful bidder in an auction held by the U.S. Bankruptcy Court, but the Court awarded the Company a $250,000 breakup fee that is recorded as other income.
The Company’s     Our effective tax rate was 38.0%36.2% and 36.1% for the nine monthsquarterly periods ended November 30,May 31, 2007 and 2006, and 37.5% for the nine months ended November 30, 2005, respectively. These rates are higher than the federal statutory rate due to state income taxes.
Liquidity and Capital Resources
The Company’s     Our primary source of cash is operating cash flow. Our primary uses of cash provided by operating activities are to purchase property and equipment and pay annual dividends, repay borrowings and for working capital. The Company utilizes itsdividends. We utilize our bank credit facility to meet itsour short-term cash needs.needs when necessary.
The Company’s     Our Board of Directors has adopted a stock repurchase plan in which the Companywe may purchase up to 2,500,000 shares as market conditions warrant. Management believes the stock is undervalued and when stock becomes available at an attractive price, the Companywe will 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 the Company’sour short-term and long-term liquidity. The Company hasWe did not repurchase any shares during the quarter ended May 31, 2007.
     We have a history of profitability and positive cash flow. The CompanyWe can sustain planned growth levels

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EDUCATIONAL DEVELOPMENT CORPORATION
with minimal capital requirements. Consequently, cash generated from operations is used to liquidate any existing debt and then to repurchase shares outstanding or capital distributions through dividends. The Company expects its ongoing cash flow to exceed cash required to operate the business. During the first nine months of fiscal year 2007 the Company repurchased 15,412 shares of its common stock under the stock repurchase program at a cost of $112,360.dividends
The Company’s     Our primary source of liquidity is cash generated from operations. During the first ninethree months of fiscal year 2007 the Company2008 we experienced a positive cash flow from operating activities of $4,175,545.$436,400. Cash flowsflow from operating activities was increased due toprimarily by a decreasedecline in inventory of $ 669,658$865,000 and an increase in income taxes payable of $198,900. Offsetting this was a increasedecrease in accounts payable and accrued expenses of $1,890,768, offset by a net increase$1,163,300. Fluctuations in accounts receivableinventory involve the timing of $466,085. The Company believesshipments received from our principal supplier. We believe that the inventory levels are at an adequate level to meet sales requirements and doesdo not foresee increasing inventory significantly during the balance of fiscal year 2007. The increase in accounts receivable is due primarily to a special sales promotion in the Publishing Division which offered payment terms extended to mid-December.2008. Fluctuations in accounts payable and accrued expenses involve timing of shipments received from the Company’sour principal supplier and the payments associated with these shipments.
The Company believes     We believe that in fiscal year 2007 it2008 we will experience a positive cash flow and that this positive cash flow along with the bank credit facility will be adequate to meet its liquidity requirements for the foreseeable future.
Cash used in investing activities during the quarter ended May 31, 2007 was $34,942. The principal uses of cash in investing activities were $24,471 in property improvements, $5,879$101,600 to replace our office and warehouse equipmentbuilding roof and $4,592 in computerpurchase PC equipment. The Company estimatesWe estimate that total cash used in investing activities for fiscal year 20072008 will be less than $250,000. This would consist of software and hardware enhancements to the Company’sour existing data processing equipment, property improvements and additional warehouse equipment.
Cash used in financing activities was $1,452,748,$757,400, comprised of a net decrease of $676,000 in borrowings under the bank credit agreement, $12,500 received from the exercise of stock options, $9,137 tax benefit of stock options exercised, $65,162$68,600 received from the sale of treasury stock $112,360 paid to acquire treasury stock and a $751,187payment of $826,000 in cash dividend payment.dividends.

10

As of November 30, 2006 the CompanyMay 31, 2007 we did not have any commitments in excess of one year.
Bank Credit Agreement
Effective June 30, 2006 the Company2007 we signed an EighthNinth Amendment to the Credit and Security Agreement with Arvest Bank which provided a $5,000,000 line of credit through June 30, 2007.2008. Interest is payable monthly at theWall Street Journal prime-floating rate minus 0.75% (7.50%(7.25% at November 30, 2006)May 31, 2007) and borrowings are collateralized by substantially all the assets of the Company.our assets. At November 30, 2006 the CompanyMay 31, 2007 we had no debt outstanding under this agreement. Available credit under the revolving credit agreement was $5,000,000 at November 30, 2006. BorrowingsMay 31, 2007. No borrowings were outstanding under the agreement ranged from $0 to $700,000 during the nine monthsfirst quarter ended NovemberMay 31, 2007.
     This agreement also contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue, or obtain issuance of commercial or standby letters of credit provided that no letters of credit will have an expiry date later than June 30, 2006.2008 and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.
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 uncollectible 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’sOur significant accounting policies are described in the notes accompanying the financial statements included elsewhere in the Company’s Annual Report to Shareholders for the Fiscal Year ended February 28, 2006.this report. However, the Company considerswe consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.
Revenue Recognition
Sales are recognized and recorded when products are shipped. Products are shipped FOB shipping point. The UBAH Division’s sales are paid before the product is shipped. These sales accounted for 75%72% of net revenues for the nine monthsquarter ended November 30, 2006May 31, 2007 and 74% for the nine monthsquarter ended November 30, 2005.May 31, 2006. The provisions of the SEC Staff Accounting Bulletin No.104,

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EDUCATIONAL DEVELOPMENT CORPORATION
“Revenue “Revenue Recognition in Financial Statements,” have been applied, and as a result, a reserve is provided for estimated future sales returns. The Company’s
     Our 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. 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. The Company isWe 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 $78,000$84,000 as of November 30, 2006May 31, 2007 and $110,000$78,000 as of February 28, 2006.2007.
Allowance for Doubtful Accounts
The Company maintains     We maintain an allowance for estimated losses resulting from the inability of itsour customers to make required payments. An estimate of uncollectibleuncollectable 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’sour operating results would be significantly adversely affected. Management has estimated and included an allowance for doubtful accounts of $80,992$72,500 and $112,209$81,000 as of November 30, 2006May 31, 2007 and February 28, 2006,2007, respectively.

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Inventory
Management continually estimates and calculates the amount of non-current inventory. Non-current 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’sour primary supplier. Non-current inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 21/2 years of anticipated sales was classified as noncurrent inventory. Noncurrent inventory balances, before valuation allowance, were $818,000$808,000 at November 30, 2006both May 31, 2007 and $657,000 at February 28, 2006.2007.
Inventories are presented net of a valuation allowance. Management has estimated and included a valuation allowance for both current and noncurrent inventory. This reserve is based on management’s identification of slow moving inventory on hand at November 30, 2006May 31, 2007 and February 28, 2006.2007. Management has estimated a valuation allowance for both current and noncurrent inventory of $396,875$360,000 and $304,890$382,200 as of November 30, 2006May 31, 2007 and February 28, 2006,2007, respectively.
Deferred Tax Assets
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 continue to be appropriate.
Stock-BasedStock- Based Compensation
The Company accounts     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.
Item 33..QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     The Company doesWe do not have any material market risk.
Item 4CONTROLS AND PROCEDURES

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EDUCATIONAL DEVELOPMENT CORPORATION
An evaluation was performed of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of November 30, 2006.February 28, 2007. This evaluation was conducted under the supervision and with the participation of the Company’sour management, including itsour Chief Executive Officer and its Controller and our Controller/Corporate Secretary (Principal Financial and Accounting Officer).
     Based on that evaluation, the Company’s Chief Executive Officer and its Controller and Corporate Secretary (Principal Financial and Accounting Officer)these officers concluded that the Company’sour disclosure controls and procedures 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 within the time periods specified in Securities and Exchange Commission rules and forms. 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
     During the fiscal quarter covered by this report on Form 10-Q, there have been no changes in the Company’sour internal control over financial reporting that have materially affected or are reasonably likely to materially affect, itsour internal control over financial reporting, since the date these controls were evaluated.reporting.

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PART II OTHER INFORMATION
Item 1ARISK FACTORS
     No material changes occurred in the risk factors discussed in our Fiscal Year 2007 Form 10-K.
Item 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     The following table sets forth certain information concerning the repurchaseshows repurchases of the Company’sour Common Stock made by the Company during the thirdfirst quarter ended November 30, 2006.May 31, 2007.
ISSUER PURCHASES OF EQUITY SECURITIES
                 
              (d) Maximum 
          (c) Total Number  Number (or 
          of Shares (or  Approximate 
          Units) Purchased  Dollar Value) 
          as Part of  of Shares (or 
          Publicly  Units) that May 
  (a) Total Number  (b) Average  Announced  Yet Be Purchased 
  of Shares (or  Price Paid per  Plans  Under the 
Period Units Purchased  Share (or Unit)  or Programs (1)  Plans or Programs 
September 1, 2006 – September 30, 2006  250  $6.77   250   160,323 
                 
October 1, 2006 – October 31, 2006  50  $7.45   50   160,273 
                 
November 1, 2006 – November 30, 2006  4,121  $7.17   4,121   156,152 
              
                 
Total  4,421  $7.15   4,421     
              
(d) Maximum
(c) Total NumberNumber (or
of Shares (orApproximate
Units) PurchasedDollar Value)
as Part ofof Shares (or
PubliclyUnits) that May
(a) Total Number(b) AverageAnnouncedYet Be Purchased
of Shares (orPrice Paid perPlansUnder the
PeriodUnits) Purchased (1)Share (or Unit)or Programs (2)Plans or Programs
March 1, 2007 – March 31, 2007———146,939
April 1, 2007 – April 30, 2007———146,939
May 1, 2007 – May 31, 2007———146,939
Total———
 
(1) In July 1998,All of the Board of Directors authorized the Company to purchase up to 1,000,000 shares of the Company’s common stock set forth in this column (a) were purchased pursuant to a publicly announced plan that was announced publicly on October 14, 1998. In May 1999, the Board of Directors authorized the Company to purchase up to an additional 1,000,000 shares of its common stock under this plan, which was announced publicly on May 19, 1999. as described in footnote 2 below.
(2)In April 2004 the Board of Directors authorized the Companyus to purchase up to an additional 500,000 shares of itsour common stock under thisa repurchase plan. Pursuant to the plan, the Companywe may purchase sucha total of 2,500,000 shares of the Company’sour common stock until 2,500,000 shares have been repurchased.
(3)There is no expiration date for the repurchase plan.
Item 5OTHER INFORMATION
None.

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Item 6EXHIBITS
(a) Exhibits
31.1Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

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EDUCATIONAL DEVELOPMENT CORPORATION
31.2Certification of Controller and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.
32.1Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EDUCATIONAL DEVELOPMENT CORPORATION
(Registrant)
Date January 12, 2007By     /s/ Randall W. White
     Randall W. White
     President

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EDUCATIONAL DEVELOPMENT CORPORATION
EXHIBIT INDEX
Exhibit No.Description
   
31.1 Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.
   
31.2 Certification of Controller and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.
   
32.1 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

1714

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EDUCATIONAL DEVELOPMENT CORPORATION
(Registrant)
Date: July 23, 2007By     /s/ Randall W. White
     Randall W. White
     President

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EXHIBIT INDEX
Exhibit No.Description
31.1Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.
31.2Certification of Controller and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.
32.1Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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