SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

______________________________

FORM 10-K
______________________________

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934: For the
fiscal year ended April 24, 1999

[] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-24385

SCHOOL SPECIALTY, INC.
(Exact name of Registrant as specified in its charter)

Delaware 39-0971239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1000 North Bluemound Drive
Appleton, Wisconsin 54914
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (920) 734-2756

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value
(Title of class)

Indicate by check mark whether the Registrant (1)
has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter
period that the Registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No []

Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock
held by nonaffiliates of the Registrant was
approximately $275,666,000 as of July 1, 1999. As of
July 1, 1999, there were 17,433,426 of the Registrant's
shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III is incorporated by reference from the
Proxy Statement for the Annual Meeting of Stockholders
to be held on September 2, 1999.

PART I

Item 1. Business

Unless the context requires otherwise, all
references to "School Specialty," "we" or "our" refers
to School Specialty, Inc. and its subsidiaries. Our
fiscal year ends on the last Saturday in April in each
year. In this Annual Report on Form 10-K ("Annual
Report"), we refer to fiscal years by reference to the
calendar year in which they end (e.g. the fiscal year
ended April 24, 1999 is referred to as "fiscal 1999").*

Overview

We are the largest marketer of non-textbook
educational supplies and furniture to schools for pre-
kindergarten through twelfth grade. We offer more than
60,000 items through an innovative two-pronged
marketing approach that targets both school
administrators and individual teachers. Our broad
product range enables us to provide our customers with
one source for virtually all of their non-textbook
school supplies and furniture needs.

We have grown significantly in recent years
through both acquisitions and internal growth. In
order to expand our geographic presence and product
range, we have acquired 20 companies since May 1996.
In August 1998, we purchased Beckley-Cardy, our largest
traditional and specialty school supply competitor.
For the fiscal year ended April 24, 1999, our revenues
were $521.7 million and our operating income excluding
non-recurring acquisition and restructuring costs of
$5.3 million was $35.3 million, a 79% increase over
fiscal 1998.

Our "top down" marketing approach targets school
administrators at the state, regional and local levels
using our 250 sales representatives and our School
Specialty and Beckley-Cardy general supply and
furniture catalogs. Our "bottom up" approach seeks to
reach individual teachers and curriculum specialists
primarily through the mailing of our
ClassroomDirect.com general supply catalog (previously
known as Re-Print) and our seven different specialty
catalogs. In January 1999, we mailed over 10 million
catalogs to more than three million teachers and
curriculum specialists. Approximately 100 employees
assist in the sale, marketing and merchandising of our
specialty products. We are also exploring various ways
in which we can use the Internet to market and sell our
products. As the first phase of our Internet
initiative, we launched a fully integrated e-commerce
website under the name "ClassroomDirect.com" which
offers over 13,000 items for sale. The second phase of
our Internet initiative will be launched in fiscal
2000. Called "JuneBox.com," this site will eventually
offer one-stop shopping for all of School Specialty's
products on-line and will also provide a community
forum and content aimed at educators.

School Specialty was incorporated as a wholly
owned subsidiary by U.S. Office Products in Delaware in
February 1998 to hold its Educational Supplies and
Products Division. School Specialty, Inc., a Wisconsin
corporation ("Old School") formed in October 1959, was
acquired by U.S. Office Products in May 1996. On June
9, 1998, U.S. Office Products entirely spun off School
Specialty, whereby U.S. Office Products' shareholders
received one share of our stock for every nine shares
of U.S. Office Products stock held. As a result of the
spin-off, U.S. Office Products retained no further
ownership of School Specialty. At the same time as
this distribution, School Specialty sold 2,375,000
shares of Common Stock in an initial public offering
and a concurrent offering to several of its officers
and directors. On April 16, 1999, School Specialty
sold 2,400,000 shares of Common Stock in a secondary
public offering, and sold an additional

- ----------------------------
* Childcraft is a registered trademark of Childcraft Education Corp.
School Specialty and Education Access are registered trademarks of
School Specialty. Sportime is a registered trademark of Sportime, LLC.
Gresswell is a common law trademark of School Specialty. All other
trademarks, service marks and trade names referred

151,410 shares on May 17, 1999 to cover over-allotments.
Our Common Stock is listed on the Nasdaq National Market
under the symbol "SCHS." Our principal offices are located
at 1000 North Bluemound Drive, Appleton, Wisconsin 54914,
and our telephone number is (920) 734-2756. Our world
wide general website address is www.schoolspecialty.com.
Information contained in any of our websites is not
deemed to be a part of this Annual Report.

Industry Overview

The school supply market consists of the sale of
non-textbook school supplies, furniture and equipment
to school districts, individual schools, teachers and
curriculum specialists who purchase products for school
and classroom use. The National School Supply
Equipment Association estimates that annual sales of
non-textbook educational supplies and equipment to the
school supply market are approximately $6.1 billion.
Of this amount, over $3.6 billion is sold through
institutional channels and the remaining $2.5 billion
is sold through retail channels.

According to the U.S. Department of Education,
there are approximately 16,000 school districts,
108,000 public and private elementary and secondary
schools and 3.1 million teachers in the United States.
School supply procurement decisions are made at the
school district level by administrators and curriculum
specialists, at the school level by principals and at
the classroom level by teachers. Some school supplies
are purchased directly from manufacturers while others
are purchased through marketing firms such as us. We
estimate that there are over 3,400 marketers of non-
textbook school supplies and equipment, the majority of
which are family or employee owned businesses that
operate in a single geographic region and have annual
revenues under $20 million. We believe that the
increasing demand for single source suppliers, prompt
order fulfillment and competitive prices, and the
related need for suppliers to invest in automated
inventory and electronic ordering systems, is
accelerating the trend toward consolidation in our
industry.

The demand for school supplies is driven primarily
by the level of the student population and, to a lesser
extent, expenditures per student. Student population
is a function of demographics, while expenditures per
student are also affected by government budgets and the
prevailing political and social attitudes towards
education. According to U.S. Department of Education
estimates, student enrollment in kindergarten through
twelfth grade public and private schools began growing
in 1986, reaching a record level of nearly 53 million
students in 1998. Current projections by the U.S.
Department of Education indicate that student
enrollment will continue to grow to nearly 55 million
within three years. The U.S. Department of Education
also projects that expenditures per student in public
elementary and secondary schools will continue to rise.
Expenditures of $272 billion in 1997 are projected to
increase to $341 billion by the year 2001. These
projected increases in expenditures include a projected
increase in total per student spending from $5,961 per
student in 1997 to $7,179 by the year 2001. We believe
that the current political and social environment is
favorable for education spending.

Our Recent Acquisitions

Beckley-Cardy. In August 1998, we acquired the
National School Supply Company ("National School
Supply"), including its subsidiary Beckley-Cardy, Inc.
("Beckley-Cardy"). Prior to our acquisition of Beckley-
Cardy, it was the second largest general education
supply marketer in the industry. We paid $78.1 million
in cash for National School Supply and refinanced $56.6
million of its debt with borrowings under our Senior
Credit Facility. National School Supply had revenues
for the fiscal year ended March 31, 1998 of
approximately $176 million.

Sportime. In February 1999, we acquired Sportime,
LLC ("Sportime") from ProTeam.com (formerly known as
Genesis Direct, Inc.). Sportime is a leading specialty
company focusing on physical education, athletic and
recreational products. Sportime offers several
targeted catalogs from its early

childhood offerings to a catalog focused on physically
challenged children. We paid $23 million in cash for Sportime,
which we financed through borrowings under our Senior Credit
Facility. Sportime had revenues for 1998 of approximately
$33 million.

Hammond & Stephens. In June 1998, we acquired the
business of Hammond & Stephens, Co. ("Hammond &
Stephens"), a leading publisher of school forms, such
as grade books, record books, teacher planners, student
assignment books, school year calendars, awards and
similar materials. We paid $16.5 million in cash for
Hammond & Stephens, which we financed through
borrowings under our Senior Credit Facility. Hammond &
Stephens had revenues for the fiscal year ended October
31, 1997 of approximately $9.1 million.

SmartStuff. In March 1999, we acquired SmartStuff
Development Corporation ("SmartStuff"). SmartStuff is
the developer of FoolProof software, a program with an
installed customer base of 1.5 million. FoolProof is
a desktop software security program which limits access
by children to selected programs and applications on
desktop computers. We paid $8.2 million for
SmartStuff, of which $3.7 million was paid in cash and
$4.5 million in shares of Common Stock (an aggregate of
204,778 shares were issued). The cash portion of the
purchase price was financed through borrowings under
our Senior Credit Facility. SmartStuff had revenues
for 1998 of approximately $4.2 million.

Holsinger. In April 1999, we acquired Holsinger
Inc. ("Holsinger"). Holsinger has been selling school
furnishings in northern California since 1948. We paid
$1.7 million for Holsinger, of which $750,000 was paid
in cash and $950,000 in shares of Common Stock (an
aggregate of 45,849 shares were issued). The cash
portion of the purchase price was financed through
borrowings under our Senior Credit Facility. During
1998, Holsinger had revenues of approximately $10.9
million.

Our Internet Initiative

Because more schools and teachers are connecting
to the Internet, we intend to aggressively pursue sales
opportunities through this rapidly growing channel. By
establishing an early presence on the Internet, we
believe we can gain a significant competitive advantage
and valuable brand recognition. Our goal is to become
the leading marketer of school supplies and furniture
over the Internet. This may also permit us to expand
our customer base over time to include individuals and
other non-traditional customers.

In January 1999, we launched the first phase of
our Internet initiative with the opening of our fully
integrated e-commerce website ClassroomDirect.com. The
site offers access to over 13,000 stock keeping units
with digital pictures of most items. Although
currently teacher focused, the site could be adapted to
a more consumer based format. The increasing demand by
school administrators and teachers for more information
in making supply decisions, the lack of a wide variety
of educational products in stores and the growing
importance of convenience make the Internet a viable,
low cost channel for the marketing of education
supplies.

The second phase of our Internet initiative, which
we will launch in fiscal 2000 under the name
JuneBox.com, offers an education portal on the
Internet. This portal will be structured as an
education mall offering our products for sale and also
provide a community forum and content aimed at
educators. We believe that by providing education
related content and information, this portal will place
us at the education community's decision point for
supply and content which will strengthen our brands.
We intend to enter into strategic alliances with a
number of content providers to help develop and
maintain the new website and portal with the goal to
become the Internet headquarters for teachers, product
specialists and others with an interest in education.
Prospective content providers could include media,
search engine and Internet service providers and other
Internet related companies. This site will

eventually offer one-stop shopping for all of School Specialty's
products on-line and will also provide a community
forum educators can visit to find teaching tips, lesson
plan help, product reviews and updates on current
events affecting the education market.

In connection with our Internet initiative, we
have recently acquired SmartStuff. SmartStuff is
expected to introduce Internet browser security and
filtering software products for the education market.
We intend to market our brands and Internet services to
SmartStuff's existing and future customer base by
including links to our website and portal and other
promotional materials in SmartStuff product upgrades
and new products.

Our Strengths

We attribute our strong competitive position to
the following key strengths:

Leading Market Position. We have developed our
leading market position over our 40 year history by
emphasizing high quality products, superior order
fulfillment and exceptional customer service. We
believe that our large size and brand recognition have
resulted in significant buying power, economies of
scale and customer loyalty.

Broad Product Line. Our strategy is to provide a
full range of high quality products to meet the
complete supply needs of schools for pre-kindergarten
through twelfth grade. With over 60,000 stock keeping
units ranging from classroom supplies and furniture to
playground equipment, we provide customers with one
source for virtually all of their non-textbook school
supply and furniture needs. Our specialty brands
enrich our general product offering and create
opportunities to cross merchandise our specialty
products to our traditional customers. Specialty
brands include the following:

Brand Products

Childcraft Early childhood
Sax Arts and Crafts Art supplies
Frey Scientific Science
Sportime Physical education
Brodhead Garrett Industrial arts
Gresswell Library
Hammond & Stephens School forms
SmartStuff Software

Innovative Two-Pronged Marketing Approach. School
supply procurement decisions are made at the district
and school levels by administrators, and at the
classroom level by curriculum specialists and teachers.
We market to both of these groups, addressing
administrative decision makers with a "top down"
approach through our 250 person sales force and the
School Specialty and Beckley-Cardy general supply and
furniture catalogs, and targeting teachers and
curriculum specialists with a "bottom up" approach
primarily through the mailing of over 10 million
ClassroomDirect.com general supply catalogs and our
seven different specialty catalogs each year. We
utilize our customer database across our family of
catalogs to maximize their effectiveness and increase
our marketing reach. We believe our new
ClassroomDirect.com Internet site offers additional
marketing opportunities.

Stable Industry. Because the market for
educational supplies is driven primarily by
demographics and government spending, we believe that
our industry is less exposed to economic cycles than
many others.

Ability to Complete and Integrate Acquisitions.
We have successfully completed the acquisition of 20
companies since May 1996. We have established a
12-month integration process in which a transition team
is assigned to:

* sell or discontinue incompatible business units,

* reduce the number of stock keeping units,

* eliminate redundant expenses,

* integrate the acquired entity's management
information systems, and

* exploit buying power.

To date, our integration efforts have focused on
acquired traditional companies and certain
administrative functions at our specialty divisions.
We believe that through these processes, we can rapidly
improve the operating margins of the businesses we
acquire.

Use of Technology. We believe that our use of
information technology systems allows us to turn
inventory more quickly than our competitors, offer
customers more convenient and cost effective ways of
ordering products and more precisely focus our sales
and marketing campaigns.

Experienced and Incentivised Management. Our
management team provides depth and continuity of
experience. In addition, management's interests are
aligned with those of our stockholders, as many members
of management own shares of our Common Stock and/or
have been granted options to purchase such Common
Stock.

Our Growth Strategy

We use the following strategies to grow and
enhance our position as the leading marketer of non-
textbook educational supplies and furniture:

Aggressively Pursue Acquisitions. We believe that
there are many attractive acquisition opportunities in
our highly fragmented industry. As a public company,
we have greater access to capital for acquisitions than
many of our competitors. We will continue to pursue
opportunities that enhance our geographic presence or
which complement our specialty product offerings.

Increase Sales of Specialty and Proprietary
Products. We believe we can increase our margins by
selling more specialty products and products for which
we are the only supplier. Specialty products accounted
for approximately 37% of our revenues for the fiscal
year ended April 24, 1999, compared to approximately
20% for the year ended December 31, 1994.

Expand Existing Traditional Business. We believe
that we can also increase the revenues of our
traditional business by adding sales representatives in
geographic markets in which we are underrepresented and
by cross merchandising our specialty products to our
traditional customers.

Improve Profitability. We improved our operating
margin (as measured by our operating income before non-
recurring acquisition and restructuring costs divided
by our revenues) from 3.8% in 1994 to 6.8% for the
fiscal year ended April 24, 1999. We believe that we
can further improve our operating margins by
eliminating redundant expenses of acquired businesses,
leveraging our overhead costs, increasing our
purchasing power and improving the efficiency of our
warehousing and distribution.

Pursue Internet Initiative. Because more schools
and teachers are connecting to the Internet, we intend
to aggressively pursue sales opportunities through this
rapidly growing channel. By establishing an early
presence on the Internet, we believe we can gain a
significant competitive advantage and valuable brand
recognition. Our goal is to become the leading
marketer of school supplies and furniture over the
Internet. This may also permit us to expand our
customer base over time to include individuals and
other non-traditional customers. We believe this
strategy can be effective both as an offensive tool,
enhancing revenue at a low incremental cost, and as a
defensive one, by preventing other existing and
prospective Internet competitors from establishing
themselves in this market. The establishment of early
brand recognition will facilitate the establishment of
our educational portal as the key education related
website.

Our Product Lines

We market two broad categories of products:
general school supplies and specialty products geared
towards specific educational disciplines. Our general
school supply products are offered to school
administrators by our sales force through our School
Specialty and Beckley-Cardy catalogs and to teachers
and curriculum specialists through direct mailings of
our ClassroomDirect.com catalog. Our specialty
products are offered to teachers and curriculum
specialists through direct mailings of our seven
specialty catalogs. Our specialty products enrich our
general supply product offering and create
opportunities to cross merchandise our specialty
products to our traditional customers. With over
60,000 stock keeping units ranging from classroom
supplies and furniture to playground equipment, we
provide customers with one source for virtually all of
their non-textbook school supply and furniture needs.

Our general school supply product lines can be
described as follows:

School Specialty/Beckley-Cardy. Through the
School Specialty and Beckley-Cardy catalogs, which are
targeted to administrative decision makers, we offer a
comprehensive selection of classroom supplies,
instructional materials, educational games, art
supplies, school forms (such as reports, planners and
academic calendars), educational software, physical
education equipment, audio-visual equipment, school
furniture and indoor and outdoor equipment. Over the
next year, we expect to integrate these two general
catalogs. We believe we are the largest school
furniture resale source in the United States. We have
been granted exclusive franchises for certain furniture
lines in specific territories and we enjoy significant
purchasing power in open furniture lines.

ClassroomDirect.com. ClassroomDirect.com offers
its customers substantially the same products as those
offered through the School Specialty catalog but
focuses on reaching teachers and curriculum specialists
directly through its mail-order catalogs and new fully
integrated Internet e-commerce website. The new
Internet site targets the traditional catalog market
and other consumers interested in educational products,
such as home school families, churches and parents.

Our specialty brands offer product lines for
specific educational disciplines, as follows:

Childcraft. Childcraft markets early childhood
education products and materials. Childcraft also
markets over 1,000 proprietary or exclusive products
manufactured by its Bird-in-Hand Woodworks subsidiary,
including wood classroom furniture and equipment such
as library shelving, cubbies, easels, desks and play
vehicles.

Sax Arts and Crafts. Sax Arts and Crafts is a
leading marketer of art supplies and art instruction
materials, including paints, brushes, paper, ceramics,
art metals and glass, leather and wood crafts. Sax
Arts and Crafts offers customers a toll free "Art Savvy
Hotline" staffed with 17 professional artists to
respond to customer questions.

Frey Scientific. Frey Scientific is a leading
marketer of laboratory supplies, equipment and
furniture for science classrooms. Frey Scientific
offers value added focus in the biology, chemistry,
physics and earth science areas.

Sportime. Sportime is a leading marketer of
physical education, athletic and recreational products.
Sportime's catalog product offering includes catalogs
from early childhood through middle school as well as
targeted products for physically challenged children.

Brodhead Garrett. Brodhead Garrett is the
nation's oldest marketer of industrial arts/technical
materials to classrooms. Brodhead Garrett's product
line includes such various items as drill presses, sand
paper, lathes and robotic controlled arms.

Gresswell. Gresswell markets library-related
products in the U.K., including furniture, and media
display and storage. Gresswell's dedicated sales and
design team helps customers plan, design and install
library projects using computer assisted design
equipment.

Hammond & Stephens. Hammond & Stephens is a
leading publisher of school forms, including student
assignment books, record books, grade books, teacher
planners and other printed forms for kindergarten
through twelfth grade.

SmartStuff. SmartStuff is the developer of
FoolProof software, a desktop software security
program which limits access by children to selected
programs and applications on desktop computers.
SmartStuff is expected to introduce Internet browser
security and filtering software products for the
education market.

Our merchandising managers, many of whom have
prior experience in education, continually review and
update the product lines for each operating division.
The merchandising managers convene customer focus
groups and advisory panels to determine whether current
offerings are well-received and to anticipate future
demand. The merchandising managers also travel to
product fairs and conventions seeking out new product
lines. This annual review process results in an
organic reshaping and expansion of the educational
materials we offer.

Our Sales and Marketing

Our Two-Pronged Approach. As previously
discussed, we believe we have developed a substantially
different sales and marketing model from that of
traditional school supply and school furnishings
distribution companies in the United States. Our
strategy is to use two separate marketing approaches
("top down" and "bottom up") to reach all the
prospective purchasers in the school system.

Traditional Business. As part of the integration
of Beckley-Cardy into our School Specialty traditional
supply business, we restructured our traditional sales
and marketing operations from a decentralized regional
system to a more centralized national structure. Our
national marketing model has 250 sales representatives
operating within 15 regions supported by regional
managers and two regional customer service and sales
support call centers. The reorganization reallocated
sales territories, selectively reduced the combined
sales and management force and reduced the number of
regional customer service/sales support locations from
12 to four in fiscal 1999 with two more to close in
fiscal 2000. We believe our new national structure
significantly improves our effectiveness through better
sales management, resulting in higher regional
penetration, and achieves significant cost savings
through the reduction in number of distribution and
call centers.

We have a broad customer base and no single
customer accounted for more than 2% of sales during
fiscal 1999, 1998 and 1997. Schools typically purchase
school supplies and furniture based on an

established relationship with relatively few suppliers. We
establish and maintain our relationship with our
traditional customers by assigning accounts within a
specific geographic territory to a local area sales
representative who is supported by a centrally located
customer service team. Our customer service
representatives call on existing traditional customers
frequently to ascertain and fulfill their school supply
needs. The representatives maintain contact with these
customers throughout the order cycle and assist in
processing orders.

Our primary compensation program for sales
representatives is based on commissions as a percentage
of gross profit on sales. For new and transitioning
sales representatives, we offer salary and expense
reimbursement until the representative is moved to a
full commission compensation structure.

Specialty Business. We generally use direct mail
catalogs to reach our broader customer base. We
distribute seven major specialty catalogs, one for each
of our Childcraft, Sax Arts and Crafts, Frey
Scientific, Sportime, Brodhead Garrett, Gresswell and
Hammond & Stephens lines. For each product line, a
major catalog containing all product offerings is
distributed toward the end of the calendar year so that
it is available for school buyers at the beginning of
the year. During the year, various catalog supplements
are distributed to coincide with the peak school buying
season in June through September and following the
start of school in the fall. Our SmartStuff brand uses
a combination of marketing brochures, outside field
sales and telemarketing to reach its customer base.

Pricing. Pricing for our general and specialty
product offerings varies by product and market channel.
We generally offer a negotiated discount from catalog
prices for supplies from our School Specialty and
Beckley-Cardy catalogs and respond to quote and bid
requests for furniture and equipment. In addition,
local sales representatives work with our corporate
sales force and school supply buyers to achieve an
acceptable pricing structure based upon the mix of
products being purchased. The pricing structure of
specialty products offered through direct marketing is
generally not subject to negotiation.

Distribution

We distribute products through our distribution
centers and place customer orders directly with our
suppliers. Furniture is generally shipped directly
from the manufacturer to the customer.

We have adopted a plan to rationalize our
distribution systems following the Beckley-Cardy
acquisition. Under this plan, we will close five of
our 13 regional distribution centers and centrally
manage the remaining eight. We have already closed two
regional distribution centers and expect to close the
remaining three by December 31, 1999. We believe this
restructuring will improve our distribution efficiency
and generate significant cost savings.

Our Purchasing and Inventory Management

We manage our inventory by continually reviewing
daily inventory levels compared to a running 90-day
inventory for the previous year, adjusted for incoming
orders. We constantly refine the focus of inventory
products through our automated inventory management
system to pursue the optimum level of scope and depth
of product offered. Inventory forecasts are made daily
for all stock keeping units by assessing anticipated
demand by adjusting historical demand levels to account
for current order activity and available stock as well
as the expected lead time from the supplier. The
forecast allows inventory purchases to respond quickly
to high seasonal demand while keeping off-season
inventory to a minimum. The information systems for
all of our distribution centers are connected to allow
transfer of inventory between facilities to fill
regional demand. In addition, all orders can be
redirected to the distribution center which is the
primary stocking location for a product. Our inventory
management results in

inventory turnover that management believes is higher
than average industry turnover rates and reduces the level
of discontinued, excess and obsolete inventory compared to
businesses that we have acquired.

We believe our large size enhances our purchasing
power with suppliers resulting in lower product costs
than most of our competitors. Further, we believe that
this purchasing power leverage will increase with
additional acquisitions which, in turn, should improve
our operating margins.

We believe that the primary determinants of
customer satisfaction in the educational supply
industry are the completeness and accuracy of shipments
received and the timeliness of delivery. We continue
to invest in sophisticated computer systems to automate
the order taking, inventory allocation and management,
and order shipment processes. As a result, we have
been able to provide superior order fulfillment to our
customers. In addition, we have developed our Order
Management System, which allows schools to customize
their orders and enter them electronically and provides
historical usage reports to schools useful for their
budgeting process. While this system currently only
accounts for approximately 6% of our traditional supply
sales, we believe it will become more significant as
schools upgrade their technology and use of computers.
During the academic year, we seek to fill orders within
24 hours of receipt of the order at a 95% fill rate and
a 99.5% order accuracy rate. During the summer months,
we shift to a production environment and schedule
shipments to coincide with the start of the school
year. During the summer months our objectives are to
meet a 100% fill rate at a 99.5% order accuracy rate.
Our average order fill rate for June, July and August
1998 exceeded 97%. We define "fill rate" as the
percentage of line items in a customer's order that are
initially shipped to the customer in response to the
order by the requested ship date.

During the peak shipping season between June 1 and
September 30, each of our distribution centers
contracts with local common carriers to deliver our
product to schools and school warehouses.
ClassroomDirect.com and Sax Arts and Crafts rely on
carriers such as Roadway Package Service, United Parcel
Service and the U.S. Postal Service for distribution to
customers.

Our Information Systems

We believe that through the utilization of
technology in areas such as (1) purchasing and
inventory management, (2) customer order fulfillment
and (3) database management, we are able to turn
inventory more quickly than competitors, offer
customers more convenient and cost effective ways of
ordering products and more precisely focus our sales
and marketing campaigns.

We use two principal information systems. In the
traditional and certain specialty businesses, we use a
specialized distribution software package used
primarily by office products and paper marketers. This
software package is referred to as the Software for
Distributors System (the "SFD system"). This software
offers a fully integrated process from sales order
entry through customer invoicing, and inventory
requirements planning through accounts payable. Our
system provides information through daily automatic
posting to the general ledger and integrated inventory
control. We have made numerous enhancements to this
process that allow greater flexibility in addressing
the seasonal requirements of the industry and meeting
specific customer needs.

The remaining specialty divisions use either the
SFD system or a mail order and catalog system provided
by Smith-Gardner & Associates. The Mail-Order and
Catalog System ("MACS") meets the unique needs of the
direct marketing approach with extensive list
management and tracking of multiple marketing efforts.
The system provides complete and integrated order
processing, inventory control, warehouse management and
financial applications.

Although we have two principal information
systems, both the SFD system and MACS integrate general
ledger, purchasing and inventory management functions.
The software and hardware allow for continued
incremental growth as well as the opportunity to
integrate new client-server and other technologies into
the information systems. For information on Year 2000
compliance of our information systems, see "Item
7-Management's Discussion and Analysis of Financial
Condition and Results of Operations-Year 2000."

Our Competition

We operate in a highly competitive environment.
The market is especially competitive on a regional
basis, but we believe our heaviest competition is
coming from alternate channel competitors such as
office product contract stationers and superstores.
Their primary advantages over us are size, location,
greater financial resources and buying power. Their
primary disadvantage is that their product mix covers
only 15% to 20% of the school's needs (measured by
volume). In addition, our competitors do not offer
special order fulfillment software, which we believe is
increasingly important to adequately service school
needs. We believe we compete favorably with these
companies on the basis of service and product offering.

Our Employees

As of July 1, 1999, we had approximately 2,100
full-time employees. To meet the seasonal demands of
our customers, we employ many seasonal employees during
the late spring and summer seasons. Historically, we
have been able to meet our requirements for seasonal
employment. As of July 1, 1999, approximately 40 of
our employees were members of the Teamsters Labor Union
at our Sax Arts and Crafts' New Berlin, Wisconsin
facility. We consider our relations with our employees
to be very good.

Forward-Looking Statements

Statements in this Annual Report which are not
strictly historical are "forward-looking" statements.
In accordance with the Private Securities Litigation
Reform Act of 1995, we can obtain a "safe-harbor" for
forward-looking statements by identifying those
statements and by accompanying those statements with
cautionary statements which identify factors that could
cause actual results to differ materially from those in
the forward-looking statements. Accordingly, the
following information contains or may contain forward-
looking statements: (1) information included or
incorporated by reference in this Annual Report,
including, without limitation, statements made under
Item 1, Business and Item 7, Management's Discussion
and Analysis of Financial Condition and Results of
Operations, including, without limitation, statements
with respect to growth plans and projected sales,
revenues, earnings and costs, (2) information included
or incorporated by reference in our future filings with
the Securities and Exchange Commission including,
without limitation, statements with respect to growth
plans and projected sales, revenues, earnings and costs
and (3) information contained in written material,
releases and oral statements issued by, or on behalf
of, School Specialty including, without limitation,
statements with respect to growth plans and projected
sales, revenues, earnings and costs. Our actual
results may differ materially from those contained in
the forward-looking statements identified above.
Factors which may cause such a difference to occur
include, but are not limited to, the following:

Potential Tax Liability from Spin-Offs. We became
a public company on June 9, 1998 when U.S. Office
Products distributed all of our shares and the shares
of three other companies to its shareholders and we
sold additional shares of our stock in a public
offering. These distributions (known as the "spin-
offs") were intended to be tax-free to both U.S. Office
Products and its shareholders. As part of the spin-
offs, we and the other three companies whose shares
were distributed each agreed with U.S. Office Products
that if any of us took any action or failed to act in a
way that materially caused the distributions to be
taxable, then U.S. Office

Products could require any of us to pay to it the full amount
of the tax losses it suffered as a result of the distributions.
We and the three other spin-off companies also agreed that if
the distributions became taxable for any other reason, we
would each pay to U.S. Office Products a portion of its
tax losses based on the relative aggregate value of
each company's common stock immediately after the
distributions. We estimate that our portion of any
such tax losses under this agreement would be
approximately 14.4%. We also agreed with the other
three spin-off companies that if one or more of us
materially caused the distributions to be taxable and
any of the other companies were required to pay tax
losses under the agreement to U.S. Office Products,
then the company or companies that materially caused
the distributions to be taxable would reimburse the
other companies for such payments. As a result of
these agreements, we could be required to pay:

* all of the tax losses of U.S. Office Products if
we cause the distributions to be taxable,

* our portion of the tax losses of U.S. Office
Products even if neither we nor any of the other three
companies cause the distributions to be taxable, or

* all of the tax losses of U.S. Office Products even
if we did not cause the distributions to be taxable and
one or more of the other companies did (while such
other companies would be required to reimburse us for
such payment, we cannot be sure that we will receive
such reimbursement).

Exposure to Risks Related to Other Liabilities of
U.S. Office Products. As part of the distributions, we
and the other three spin-off companies each agreed with
U.S. Office Products to pay a portion of the securities
law and general liabilities of U.S. Office Products
arising prior to the distributions and, if any of the
spin-off companies fails to pay its portion, to pay a
portion of the unpaid amount. These shared liabilities
do not include any liability that relates specifically
to a particular spin-off company or to the continuing
businesses of U.S. Office Products after the
distributions. The portion of the shared liabilities
payable by each spin-off company is based on the
average of each company's revenues for fiscal 1998
relative to those of U.S. Office Products and each
company's operating income for fiscal 1998 relative to
that of U.S. Office Products. We estimate that our
portion of any such liabilities under this agreement
would be approximately 9.8%, but the maximum aggregate
amount we can be required to pay for all shared
liabilities is limited by the agreement to $1.75
million (including as a result of defaults by the other
spin-off companies). U.S. Office Products has been
named as a defendant in various class action lawsuits
relating to the distributions that allege, among other
things, violations of the federal securities laws. As
a result of these agreements, we may be required to pay
up to $1.75 million to U.S. Office Products for shared
liabilities even though they are unrelated to our
business and operations, we have no control over such
liabilities and one or more of the other spin-off
companies may be primarily responsible for such
liabilities.

Limited Independent Operating History. Prior to
the spin-off in June 1998, we operated as a wholly
owned subsidiary of U.S. Office Products and many of
our general, administrative and financial functions
(including legal, accounting, purchasing, management
information services and borrowings) were handled by
U.S. Office Products. Since the spin-off, we have
operated independently of U.S. Office Products and have
been independently responsible for managing and
financing all aspects of our business and operations.
Our expenses are likely to be higher than when we were
a subsidiary of U.S. Office Products and we may
experience difficulties with respect to general,
administrative and financial functions that we did not
experience as part of U.S. Office Products. Because
some of the financial information included in this
Annual Report relates to periods during which we were a
subsidiary of U.S. Office Products, it does not
necessarily reflect what our results of operations and
financial condition

would have been it we were
independent during those periods and it may not be a
good indication of what our future results of
operations and financial condition will be.

Risk of Rapid Growth and Dependence Upon
Acquisitions for Future Growth. Our business has grown
significantly through acquisitions in recent years.
Since May 1996, we have acquired 20 companies. Future
growth in our revenues and earnings depends
substantially on our ability to continue to acquire and
successfully integrate and operate school supply
companies. We cannot guarantee that we will be able to
identify and acquire businesses at all or on reasonable
terms. In addition, we cannot be sure that we will be
able to operate the businesses that we acquire
profitably or that our management and financial
controls, personnel, computer systems and other
corporate support systems will be adequate to manage
the increased size and scope of our operations as a
result of acquisitions. Managing and integrating
acquired businesses may result in substantial costs,
delays or other operating or financial problems that
could materially and adversely affect our financial
condition and results of operations. These include:

* the diversion of management's attention and other
resources away from our existing businesses,

* significant charges and expenses relating to
employee severance, restructuring and transaction costs
and other unexpected events or liabilities,

* the inability to retain, hire or train qualified
personnel for the acquired businesses, and

* the amortization of goodwill and other acquired
intangible assets.

We intend to pay for acquisitions in whole or in
part using our shares, and in some cases this may
dilute our earnings per share. Our ability and
willingness to use our shares will depend upon their
market price and the willingness of sellers to accept
our shares. In addition, our ability to issue shares
may be limited by Section 355(e) of the Internal
Revenue Code of 1986. Under that Section, U.S. Office
Products will incur tax liability for the distribution
of our shares if 50% or more, by vote or value, of the
capital stock of either U.S. Office Products or School
Specialty is acquired by one or more persons acting
pursuant to a plan or series of related transactions
that includes the spin-off. There is a presumption
that any acquisition occurring within two years after
the spin-off is pursuant to a plan that includes the
spin-off. However, the presumption may be overcome by
establishing that the spin-off and such acquisition are
not part of a plan or series of related transactions.
As noted above, we will be liable for all the tax
liabilities of U.S. Office Products if our actions
cause the spin-off to be taxable and will be liable for
all or a portion of such liabilities even if our
actions did not cause the spin-off to be taxable.

Inability to Use the Pooling-of-Interests Method
of Accounting; Material Amount of Goodwill. Under
generally accepted accounting principles, we must be
independent for at least two years before we can use
the pooling-of-interests method of accounting for share
acquisitions, which would avoid the creation and
subsequent amortization of goodwill. Because we were a
wholly owned subsidiary of U.S. Office Products until
the completion of the spin-off on June 9, 1998, we will
not be eligible to use pooling-of-interest accounting
until June 9, 2000. We must use purchase accounting
for any acquisitions prior to that date, which may
continue to result in the creation of goodwill.

Approximately $201.2 million, or 46%, of our total
assets as of April 24, 1999 represents intangible
assets, the significant majority of which is goodwill.
Goodwill is the amount by which the costs of an
acquisition accounted for using the purchase method
exceeds the fair value of the net assets we acquire.
We are required to record goodwill as an intangible
asset on our balance sheet and to amortize it over a
period of years. We generally amortize goodwill for
each acquisition on a straight line method

over a period of 40 years, which means that in each year
during the 40-year period 1/40th of the goodwill is
taken off our balance sheet and recorded in our income
statement as a non-cash expense (which reduces our net
income). Even though it reduces our net income for
accounting purposes, amortization of goodwill may not
be deductible for tax purposes. In addition, we are
required to periodically evaluate whether we can
recover our remaining goodwill from the undiscounted
future cash flows that we expect to receive from the
operations of the acquired companies. If these
undiscounted future cash flows are less than the
carrying value of the associated goodwill, the goodwill
is impaired and we must reduce the carrying value of
the goodwill to equal the discounted future cash flows
and take the amount of the reduction as a charge
against our income. Reductions in our net income
caused by the amortization or write down of goodwill
could materially adversely affect our results of
operations and financial condition.

Dependence on Growth of Student Population and
School Expenditures. Our growth strategy and
profitability also depend on growth in the student
population and expenditures per student in public and
private elementary and secondary schools. The level of
student enrollment is largely a function of
demographics, while expenditures per student are also
affected by government budgets and the prevailing
political and social attitudes towards education. Any
significant and sustained decline in student enrollment
and/or expenditures per student could have a material
adverse effect on our business, financial condition and
results of operations.

Seasonality of Our Business. Our educational
supply businesses are highly seasonal. Because most of
our customers want their school supplies delivered
before or shortly after the commencement of the school
year in September, we make most of our sales from May
to October. As a result, we usually earn more than
100% of our annual net income in the first six months
of our fiscal year and operate at a loss in our third
fiscal quarter. This seasonality causes our operating
results to vary considerably from quarter to quarter.

Dependence on Key Suppliers and Service Providers.
We depend upon a limited number of suppliers for some
of our products, especially furniture. We also depend
upon a limited number of service providers for the
delivery of our products. If these suppliers or
service providers are unable to provide the products or
services that we require or materially increase their
costs (especially during our peak season of June
through September), this could impair our ability to
deliver our products on a timely and profitable basis
and could have a material adverse effect on our
business, financial condition and results of
operations. We were, for example, adversely affected
by the United Parcel Service strike during August 1997
due to the perception that we were unable to ship
products. As we seek to reduce the number of our
suppliers and to minimize duplicative lines as part of
our business strategy, we are likely to increase our
dependence on remaining vendors.

Reliance on Key Personnel. Our business depends
to a large extent on the abilities and continued
efforts of current executive officers and senior
management, including Daniel P. Spalding, our Chief
Executive Officer. We are also likely to depend
heavily on the executive officers and senior management
of businesses that we acquire in the future. If any of
these people become unable or unwilling to continue in
his or her present role, or if we are unable to attract
and retain other qualified employees, our business
could be adversely affected. Although we have
employment contracts with most executive officers, we
do not have employment agreements with our senior
management. We do not have and do not intend to obtain
key man life insurance covering any of our executive
officers or other members of senior management.

Competition. The market for school supplies is
highly competitive and fragmented. We estimate that
over 3,400 companies market educational materials to
schools for pre-kindergarten through twelfth grade as a
primary focus of their business. We also face
increasing competition from alternate channel
marketers, including superstores and office product
contract stationers, that have not traditionally focused

on marketing school supplies. These
competitors are likely to continue to expand their
product lines and interest in school supplies. Some of
these competitors have greater financial resources and
buying power than we do. We believe that the
educational supplies market will consolidate over the
next several years, which is likely to increase
competition in our markets and in our search for
attractive acquisition candidates.

Dependence on Our Systems; Our Year 2000 Issues.
We believe that one of our competitive advantages is
our information systems, including our proprietary
PC-based customer Order Management System. We have
integrated the operations of almost all of our
divisions and subsidiaries and their information
systems are linked to host systems located at our
headquarters in Appleton, Wisconsin and at two other
locations. If any of these links disrupted or become
unavailable, this could materially and adversely affect
our business, results of operations and financial
condition.

Several of our recently-acquired divisions and/or
subsidiaries as well as Gresswell (our foreign
subsidiary) use predecessor information systems. With
the exception of Gresswell, we intend to convert the
information systems of these businesses to one of our
host systems as soon as practicable. However, none of
these businesses has a backup computer system or backup
extra communication lines. Even though we have taken
precautions to protect ourselves from events that could
interrupt the operations of these businesses and intend
to do so for other businesses we acquire in the future,
we cannot be sure that a fire, flood or other natural
disaster affecting their systems would not disable the
system or prevent the system from communicating with
our other businesses. The occurrence of any of these
events could have a material adverse effect on our
results of operations and financial condition.

The Year 2000 issue exists because many computer
systems and applications, including those embedded in
equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year.
As a result, the systems and applications may not
properly recognize the Year 2000 or process data which
includes it, potentially causing data miscalculations
or inaccuracies or operational malfunctions or
failures. Because any disruption to our computerized
order processing and inventory systems could materially
and adversely affect our operations, we have
established a centrally managed, company wide plan to
identify, evaluate and address Year 2000 issues.
Although most of our mission critical systems, network
elements and products were verified for Year 2000
compliance as of the end of June 1999, we may still be
susceptible to Year 2000-related problems. In
addition, if our suppliers, service providers and/or
customers fail to resolve their Year 2000 issues in an
effective and timely manner, our business could be
significantly and adversely affected. We believe that
some of our school customers have not yet addressed or
resolved their Year 2000 issues.

Absence of Dividends. We do not expect to pay
cash dividends on our Common Stock in the foreseeable
future. In addition, our ability to pay dividends may
be restricted from time to time by the financial
covenants contained in our credit agreements and debt
instruments. Our current Senior Credit Facility
contains restrictions on, and in some circumstances may
prevent, our payment of dividends.

Leverage. As of April 24, 1999, we had $172.5
million of bank debt outstanding. In addition, our
leverage could increase over time. Our Senior Credit
Facility permits us to incur additional debt under
certain circumstances and we expect to borrow under our
Senior Credit Facility for general corporate purposes,
including working capital and for acquisitions.

Our ability to meet our debt service obligations
depends on our future performance. Our future
performance is influenced by general economic
conditions and by financial, business and other factors
affecting our operations, many of which are beyond our
control. If we are unable to service our debt, we may
have to:

* delay our acquisition program,

* sell our equity securities,

* sell our assets, or

* restructure and refinance our debt.

We cannot give our stockholders any assurance
that, if we are unable to service our debt, we will be
able to sell our equity securities, sell assets or
restructure and refinance our debt. Our substantial
debt could have important consequences to our
stockholders. For example, it could:

* make it more difficult for us to obtain additional
financing in the future for our acquisitions and
operations,

* require us to dedicate a substantial portion of
our cash flows from operations to the repayment of our
debt and the interest associated with our debt,

* limit our operating flexibility due to financial
and other restrictive covenants, including restrictions
on incurring additional debt, creating liens on our
property and paying dividends,

* subject us to risks that interest rates and our
interest expense will increase,

* place us at a competitive disadvantage compared to
our competitors that have less debt, and

* make us more vulnerable in the event of a downturn in our business.

Item 2. Properties

Our corporate headquarters are located at 1000
North Bluemound Drive, Appleton, Wisconsin, a combined
office and warehouse facility of approximately 120,000
square feet. Our lease on the Appleton headquarters
expires on December 31, 2001, although we are currently
negotiating with the owners of the facility (consisting
of the father and uncle of our Chief Executive Officer,
Daniel P. Spalding, and one other unrelated party) to
purchase the property during the second quarter of
fiscal 2000. See "Item 13-Certain Relationships and
Related Transactions" for more information. We lease
or own the following additional principal distribution
facilities:

Approximate
Square Owned/
Locations Footage Leased Lease Expiration

Agawam, Massachusetts 163,300 Owned* -
Atlanta Georgia 76,913 Leased January 6, 2002
Birmingham, Alabama 180,365 Leased November 30, 2006
Bowling Green, Kentucky 42,000 Leased June 30, 2001
Carson City, Nevada 80,000 Owned -
Fremont, Nebraska 95,000 Leased June 30, 2003
Fresno, California 18,480 Leased December 31, 2001
Hoddesdon, England 47,500 Leased September 24, 2006
Lancaster, Pennsylvania 72,947 Leased December 31, 2002
Lancaster, Pennsylvania 165,750 Leased February 28, 2009
Lufkin, Texas 140,000 Owned* -

Mansfield, Ohio 323,000 Owned* -
New Berlin, Wisconsin 97,500 Leased March 31, 2002
Oklahoma City, Oklahoma 37,340 Leased July 16, 2001
Portland, Oregon 30,456 Leased May 31, 2001
Salina, Kansas 123,000 Owned* -
Union City, California 14,494 Leased April 7, 2000
Ontario, California 16,786 Leased October 14, 2000
__________

* We are currently considering a sale and leaseback
transaction involving certain of our owned
distribution centers and other properties. See "Item
7-Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and
Capital Resources."

The Lancaster, Pennsylvania facility is used for
manufacturing and the Fremont, Nebraska facility is
used for production of school forms.

We believe that our properties are adequate to
support our operations for the foreseeable future. We
regularly review the consolidation of our facilities.

Item 3. Legal Proceedings

We are, from time to time, a party to legal
proceedings arising in the normal course of business.
Our management believes that none of these legal
proceedings will materially or adversely affect our
financial position, results of operations or cash
flows.

Item 4. Submission of Matters to a Vote of Security Holders

There was no matter submitted during the quarter
ended April 24, 1999 to a vote of our security holders.

EXECUTIVE OFFICERS OF THE REGISTRANT

As of July 19, 1999, the record date of our 1999
Annual Meeting of Stockholders, the following persons
served as executive officers of School Specialty:

Name and Age
of Officer Office

Daniel P. Spalding Mr. Spalding became Chairman of the Board and
Age 44 Chief Executive Officer of School Specialty in
February 1998. From 1996 to February 1998, Mr.
Spalding served as President of the Educational
Supplies and Products Division of U.S. Office
Products. From 1988 to 1996, he served as
President, Chief Executive Officer and a
director of Old School. Prior to 1988, Mr.
Spalding was an officer of JanSport, a
manufacturer of sports apparel and backpacking
equipment. Mr. Spalding was a co-founder of
JanSport and served as President and Chief
Executive Officer from 1977 to 1984. Mr.
Spalding has been a director of the National
School Supply and Equipment Association since
1992 and completed his term as the association's
Chairman in November 1997.

David J. Vander Zanden Mr. Vander Zanden became the President and Chief
Age 44 Operating Officer of School Specialty in March
1998. From 1992 to March 1998, he served as
President of Ariens Company, a manufacturer of
outdoor lawn and garden equipment. Mr. Vander
Zanden has served as a director of School
Specialty since completion of the spin-off from
U.S. Office Products in June 1998.

Donald J. Noskowiak Mr. Noskowiak has served as Chief Financial
Age 41 Officer of School Specialty since 1997. In
February 1998, Mr. Noskowiak became an Executive
Vice President of School Specialty. He was Vice
President, Treasurer and Principal Financial
Officer of Old School from 1994 until 1997.
From 1992 to 1994, he was the Corporate
Controller of Old School.

Douglas Moskonas Mr. Moskonas has served as Executive Vice
Age 54 President of School Specialty for School
Specialty Divisions since completion of the spin-
off from U.S. Office Products in June 1998. Mr.
Moskonas joined Old School in 1993 as Vice
President of Sales for the Valley Division. He
served as General Manager for the Valley
Division from 1994 to 1996 and was appointed
President of School Specialty Divisions in 1997.
Prior to joining School Specialty, Mr. Moskonas
served as Vice President of Sales for Emmons-
Napp Office Products from 1979 to 1993.

Melvin D. Hilbrown Mr. Hilbrown has served as Executive Vice
Age 51 President of School Specialty and Managing
Director for Gresswell since completion of the
spin-off from U.S. Office Products in June 1998.
Mr. Hilbrown joined School Specialty as Managing
Director of Gresswell with School Specialty's
acquisition of Don Gresswell, Ltd. in 1997. He
had been Managing Director of Gresswell since 1989.

Richard H. Nagel Mr. Nagel has served as Executive Vice President
Age 58 of School Specialty for Sax Arts and Crafts
since completion of the spin-off from U.S.
Office Products in June 1998. Mr. Nagel joined
School Specialty with the acquisition of Sax
Arts and Crafts in 1997. Mr. Nagel had been
with Sax Arts and Crafts since 1975 when he was
hired as Assistant General Manager. He was
named Vice President/General Manager of Sax Arts
and Crafts in 1984 and President of Sax Arts and
Crafts in 1990.

Donald Ray Pate, Jr. Mr. Pate has served as Executive Vice President
Age 36 of School Specialty for ClassroomDirect.com
since completion of the spin-off from U.S.
Office Products in June 1998. Mr. Pate joined
School Specialty with the acquisition of
Re-Print in 1996, having served as President of
Re-Print since he acquired it in 1988.

Ronald E. Suchodolski Mr. Suchodolski has served as Executive Vice
Age 53 President of School Specialty for Childcraft
since completion of the spin-off from U.S.
Office Products in June 1998. Mr. Suchodolski
joined School Specialty with the acquisition of
Childcraft in 1997. Mr. Suchodolski was Vice
President of Childcraft in 1995 and 1996 and was
Director of Childcraft's School Division from
1984 to 1989. From 1989 to 1993, Mr.
Suchodolski was President of the Judy/Instructo
Division of Paramount, and from 1993 to 1995,
Mr. Suchodolski served as Senior Vice President
of Sales and Marketing for Paramount
Publishing's Supplementary Materials Division.

Michael J. Killoren Mr. Killoren has served as Vice President and
Age 42 Chief Information Officer of School Specialty
since March 1999. Mr. Killoren was Chief
Operating Officer of School Specialty
Distribution from 1997 to 1999 and Vice
President Operations from 1992 to 1997.

Brian E. Chapin Mr. Chapin has served as Executive Vice
Age 47 President of School Specialty for SmartStuff
since School Specialty acquired SmartStuff in
March 1999. Mr. Chapin served as President of
SmartStuff since he founded it in 1993.

Peter S. Savitz Mr. Savitz has served as Executive Vice
Age 50 President of School Specialty for Sportime since
School Specialty acquired Sportime in February
1999. Mr. Savitz has been with Sportime since
1972.

Garett H. D. Reid Mr. Reid has served as Executive Vice President
Age 59 of School Specialty for Frey Scientific since
School Specialty acquired National School Supply
Company (Beckley-Cardy) in August 1998. Mr.
Reid served as Vice President of Marketing and
Sales in Science & Media with the Beckley-Cardy
Group since 1989.

Roger D. Pannier Mr. Pannier has served as Executive Vice
Age 48 President of School Specialty for Hammond &
Stephens since School Specialty acquired Hammond
& Stephens in June 1998. Mr. Pannier was
Chairman from 1993 to 1998 and President from
1989 to 1993 and joined Hammond & Stephens as
Controller in 1979.

Daniel P. Spalding and Michael J. Killoren are cousins.

The term of office of each executive officer is
from one annual meeting of the Board of Directors until
the next annual meeting of the Board of Directors or
until a successor for each is selected.

There are no arrangements or understandings
between any of our executive officers and any other
person (not an officer or director of School Specialty
acting as such) pursuant to which any of our executive
officers were selected as an officer of School
Specialty.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Market Information

Our Common Stock has traded under the symbol
"SCHS" on the Nasdaq National Market since June 10,
1998. There was no market for the Common Stock prior
to that date. The table below sets forth the reported
high and low closing sale prices for shares of the
Common Stock on the Nasdaq National Market during the
indicated quarters.

Fiscal quarter ended High Low

July 25, 1998 $17.8750 $14.3750
October 24, 1998 17.0000 10.6250
January 23, 1999 25.0625 13.8750
April 24, 1999 25.8750 17.7500

Holders

As of July 1, 1999, there were 3,514 record holders of the Common Stock.

Historical Dividends

We have not declared or paid any cash dividends on
our Common Stock to date. We currently intend to
retain our future earnings, if any, to finance the
growth, development and expansion of our business.
Accordingly, we do not expect to pay cash dividends on
our Common Stock in the foreseeable future. In
addition, our ability to pay dividends may be
restricted or prohibited from time to time by financial
covenants in our credit agreements and debt
instruments. Our current Senior Credit Facility
contains restrictions on, and in some circumstances may
prevent, our payment of dividends.

Recent Sales of Unregistered Securities

During the fiscal year ended April 24, 1999, we
issued the following equity securities in transactions
that were not registered under the Securities Act of
1933, as amended (the "Securities Act"):

On March 29, 1999, we issued 204,778 shares of
Common Stock in connection with the acquisition of
SmartStuff. Out of the $8.2 million we paid for
SmartStuff, $3.7 million was paid in cash and $4.5
million in shares of Common Stock. The shares of the
Common Stock were issued without registration under the
Securities Act in reliance on Section 4(2) thereunder.

On April 20, 1999, we issued 45,849 shares of
Common Stock in connection with the acquisition of
Holsinger. Out of the $1.7 million we paid for
Holsinger, $750,000 was paid in cash and $950,000 was
paid in shares of Common Stock. The shares of the
Common Stock were issued without registration under the
Securities Act in reliance on Section 4(2) thereunder.

Item 6. Selected Financial Data

SELECTED HISTORICAL FINANCIAL DATA
(in thousands, except per share data) (1)

Four
Months
Fiscal Year Ended Ended Fiscal Year Ended
April 24, April 25, April 26, April 30, December 31,
1992(2) 1998(2) 1997(2) 1996(2) 1995(2) 1994(2)

Statement of Income Data:

Revenues $521,704 $310,455 $191,746 $ 28,616 $150,482 $119,510
Cost of revenues 341,783 202,870 126,862 18,591 98,233 82,951
Gross profit $179,921 $107,585 $ 64,884 $ 10,025 $ 52,249 $ 36,559
Selling, general
and administrative
expenses 144,659 87,846 53,177 11,917 47,393 32,080
Non-recurring
acquisition costs - - 1,792 1,122 - -
Restructuring costs 5,274 3,491 194 - 2,532 -
Operating income
(loss) $ 29,988 $ 16,248 $ 9,721 $ (3,014) $ 2,324 $ 4,479
Interest expense (net) 12,601 5,373 4,197 1,455 5,536 3,007
Other (income)
expense (228) 156 (196) 67 (18) (86)
Income (loss)
before provision
for (benefit from)
income taxes $ 17,615 $ 10,719 $ 5,720 $ (4,536) $ (3,194) $ 1,558
Provision for
(benefit from)
income taxes (3) 8,719 5,480 (2,412) 139 173 218
Net income (loss) $ 8,896 $ 5,239 $ 8,132 $ (4,675) $ (3,367) $ 1,340
Net income (loss)
per share:
Basic $ 0.61 $ 0.40 $ 0.81 $ (0.54) $ (0.51) $ 0.26
Diluted 0.60 0.39 0.80 (0.53) (0.50) 0.26
Weighted average
shares outstanding:
Basic 14,690 13,284 10,003 8,611 6,562 5,062
Diluted 14,840 13,547 10,196 8,789 6,669 5,078

April 24, April 25, April 26, April 30, December 31,
1999 1998 1997 1996 1995 1994
Balance Sheet Data:
Working capital
(deficit) $117,194 $ 47,791 $ 14,491 $ (3,663) $ (1,052) $ 3,512
Total assets 437,708 223,729 87,685 54,573 54,040 44,267
Long-term debt 161,691 63,014 33,792 15,031 15,294 11,675
Total debt 173,285 83,302 60,746 40,918 39,783 32,276
Stockholders'
equity (defecit) 202,687 106,466 16,329 (4,267) (620) 1,827
__________

(1) The historical financial information of School
Specialty, Inc., a Wisconsin corporation, and The
Re-Print Corp., both of which were acquired by U.S.
Office Products in business combinations accounted
for under the pooling-of-interests method in May
1996 and July 1996, respectively, have been combined
on a historical cost basis in accordance with
generally accepted accounting principles ("GAAP") to
present this financial data as if the two companies
had always been members of the same operating group.
All business acquisitions since July 1996 have been
accounted for under the purchase method. The
financial information of the businesses acquired in
business combinations accounted for under the
purchase method is included from the dates of their
respective acquisitions.

(2) Certain reclassifications have been made to the
historical financial data for the fiscal years ended
December 31, 1994 and 1995, the four months ended
April 30, 1996, and the fiscal years ended April 26,
1997 and April 25, 1998 to conform with the fiscal
1999 presentation. These reclassifications had no
effect on net income or net income per share.

(3) Results for the fiscal year ended April 26,
1997 include a benefit from income taxes of $2.4
million primarily arising from the reversal of a
$5.3 million valuation allowance in the quarter
ended April 26, 1997. The

valuation allowance had been established in 1995 to
offset the tax benef it from net operating loss
carryforwards included in our deferred tax assets, because
at the time it was not likely that such tax benefit would
be realized. The valuation allowance was reversed subsequent
to our being acquired by U.S. Office Products, because
it was deemed "more likely than not," based on
improved results, that such tax benefit would be realized.

Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations

You should read this Management's Discussion and
Analysis of Financial Condition and Results of
Operations together with the consolidated financial
statements and related notes, included elsewhere in
this Annual Report.

Overview

We have grown significantly in recent years both
through acquisitions and internal growth. In order to
expand our geographic presence and product range, we
have acquired 20 companies since May 1996. In August
1998, we purchased Beckley-Cardy, our largest
traditional and specialty school supply competitor.

Revenues have increased from $119.5 million for
the fiscal year ended December 31, 1994 to $521.7
million for the fiscal year ended April 24, 1999. This
increase resulted primarily from 21 acquisitions, 20 of
which occurred from fiscal 1997 through fiscal 1999, as
well as internally generated growth. Our revenues for
the fiscal year ended April 24, 1999 were $521.7
million and our operating income before non-recurring
acquisition and restructuring costs was $35.3 million,
which represented compound annual increases of 40% and
60%, respectively, compared to our historical results
for the year ended December 31, 1994. While
acquisitions have the effect of increasing overall
revenues, there may be short-term reductions in the
revenues of the acquired businesses due to
rationalization of product line and sales force
integrations and reductions.

Our gross profit margin has improved in recent
years primarily due to acquisitions and increased
buying power. We have acquired many specialty
businesses, which tend to have higher gross margins
than our traditional business. In addition, our
acquisitions of both specialty and traditional
businesses have increased our buying power and we have
used this to reduce the cost of the products we
purchase. Acquisitions of traditional businesses may
have a negative impact on our gross margin, although
over time we should benefit from increased purchasing
power leverage. We believe that we can continue to
improve our gross margins by acquiring specialty
businesses and by leveraging increased purchasing
power.

Our operating margins have also improved
significantly over the last several years. This
improvement reflects our recent acquisitions of
specialty companies which have higher operating margins
than our traditional businesses. In addition, through
the integration of acquired businesses, we have been
able to further improve our operating margins by
eliminating redundant expenses, leveraging overhead
costs and improving purchasing power. While we have
already achieved significant operating margin
improvements from the acquisitions we have made to
date, we believe there are still opportunities to
eliminate redundant expenses. In addition, because our
business is seasonal, the timing of our acquisitions
may affect the comparability of our operating margins
in the short term. In particular, we have historically
made many of our acquisitions during our peak selling
period (the first two quarters of

our fiscal year) when operating margins are at their highest.
Because they have been accounted for using the purchase
method of accounting, these acquisitions have caused our
operating margins for the year in which the
acquisitions occurred to be higher than they would have
been if the results of the acquired businesses had been
included for the full year.

The benefit from income taxes in fiscal 1997 of
$2.4 million reflects the reversal of a $5.3 million
deferred tax valuation allowance in the fourth quarter.
Our effective tax rate is higher than the federal
statutory tax rate of 35% due primarily to non-
deductible goodwill amortization and state taxes. Our
effective tax rate for future periods may fluctuate
based on the size and structure of acquisitions and the
tax deductible nature of acquired goodwill. See
"-Consolidated Historical Results of Operations."

Our business and working capital needs are highly
seasonal with peak sales levels occurring from May
through October. During this period, we receive, ship
and bill the majority of our orders so that schools and
teachers receive their merchandise by the start of each
school year. Our inventory levels increase in April
through July in anticipation of the peak shipping
season. The majority of cash receipts are collected
from September through December. As a result, we
usually earn more than 100% of our annual net income in
the first six months of our fiscal year and operate at
a loss in our third fiscal quarter.

Until June 9, 2000, we will be limited to using
the purchase method of accounting for acquisitions.
Under the purchase method of accounting, the costs of
an acquisition over the fair value of the net assets
acquired is goodwill, which is recorded as an
intangible asset on the balance sheet and amortized
over a period of years. We generally amortize goodwill
on a straight-line basis over a period of 40 years. In
addition to the purchase price, the costs of an
acquisition generally include expenses relating to the
acquisition of the acquired company, including
investment banking, legal and accounting fees and
severance and facility closing costs.

As part of the process of integrating
acquisitions, we also incur costs relating to the
restructuring of various aspects of our operations,
such as the consolidation of warehouse facilities,
customer service centers and sales operations. These
costs typically include: costs to exit the facility,
such as rent under remaining lease terms, occupancy,
relocation costs and facility restoration; employee
costs, such as severance; and asset impairment costs.
If these costs relate solely to the operations of the
acquired company and are anticipated at the time of the
acquisition, they are capitalized as part of the
acquisition costs. If these costs relate to our
existing operations, even if they result from an
acquisition, such costs are recorded as restructuring
charges in the year they are incurred and have the
effect of reducing net income for that year. We expect
to incur restructuring costs from time to time in the
future as we continue to acquire and integrate
companies. Although we believe that the restructuring
charges we have taken to date are adequate, we cannot
predict the magnitude or timing of restructuring
charges that we may take in the future.

School Specialty was incorporated as a wholly
owned subsidiary by U.S. Office Products in Delaware in
February 1998 to hold its Educational Supplies and
Products Division. Old School, a Wisconsin corporation
formed in October 1959, was acquired by U.S. Office
Products in May 1996. The Re-Print Corp., the
predecessor to ClassroomDirect.com, LLC, our wholly
owned subsidiary, has been in operation since 1921 and
was acquired by U.S. Office Products in July 1996. Our
consolidated financial statements give retroactive
effect to these two business combinations under the
pooling-of-interests method (Old School and The
Re-Print Corp. are referred to as the "Pooled
Companies") and include the results of companies
acquired in business combinations accounted for under
the purchase method from their respective dates of
acquisition. Prior to their respective dates of
acquisition by U.S. Office Products, the Pooled
Companies reported results on years ending on December
31. Effective for fiscal 1997, the Pooled Companies
changed their year-ends from December 31 to a fiscal
year which ends on the last Saturday in April.

Results of Operations

The following table sets forth certain information
as a percentage of revenues on an historical basis
concerning our results of operations for the fiscal
years ended April 24, 1999 ("fiscal 1999"), April 25,
1998 ("fiscal 1998") and April 26, 1997 ("fiscal 1997").

Fiscal Year Ended
April 24, April 25, April 26,
1999 1998 1997

Revenues 100.0% 100.0% 100.0%
Cost of revenues 65.5 65.3 66.2
Gross profit 34.5 34.7 33.8
Selling, general and
administrative expenses 27.7 28.3 27.7
Non-recurring acquisition
costs - - 0.9
Restructuring costs 1.0 1.1 0.1
Operating income 5.8 5.3 5.1
Interest expense, net 2.4 1.8 2.2
Other (income) expense - 0.1 (0.1)
Income before provision for
(benefit from)
income taxes 3.4 3.4 3.0
Provision for (benefit from)
income taxes 1.7 1.8 (1.3)
Net income (loss) 1.7% 1.6% 4.3%

Consolidated Historical Results of Operations

Year Ended April 24, 1999 Compared to Year Ended April 25, 1998

Consolidated revenues increased 68%, from $310.5
million for fiscal 1998 to $521.7 million for fiscal
1999. This increase was due primarily to the inclusion
in fiscal 1999 of (1) the revenues of five businesses
acquired during fiscal 1999 from their respective dates
of acquisition and (2) all of the fiscal 1999 revenues
of eight businesses acquired in fiscal l998 (whose
revenues were included in fiscal 1998 only from the
date of acquisition). Consolidated revenues also
increased due to sales to new accounts, increased sales
to existing customers and higher pricing on certain
products in response to increased product costs.

Gross profit increased 67.2%, from $107.6 million
in fiscal 1998 to $179.9 million in fiscal 1999
primarily due to the acquisitions referred to above.
Gross margins (gross profit as a percentage of
revenues) declined slightly from 34.7% for fiscal 1998
to 34.5% for fiscal 1999. Gross margins were reduced
by the acquisition of Beckley-Cardy in the second
quarter of fiscal 1999 (which had a lower gross margin
than our existing businesses) and an increase in lower
margin bid revenues in our traditional businesses.
These reductions in gross margins were almost entirely
offset by the positive impact of increased sales of
higher margin specialty products and lower product
costs due to higher vendor purchase rebates, which
reflected our increased buying power.

Selling, general and administrative expenses
include selling expenses (the most significant
component of which is sales wages and commissions),
catalog costs, occupancy costs, delivery costs, general
administrative overhead (which includes information
systems and customer service) and accounting, legal,
human resources and purchasing expenses. Selling,
general and administrative expenses (including
depreciation and amortization) increased 64.7%, from
$87.8 million in fiscal 1998 to $144.7 million in
fiscal 1999 due primarily to the acquisitions referred
to above. As a percentage of revenues, these expenses
declined 0.60% from 28.3% for fiscal 1998 to 27.7% for
fiscal 1999. The decrease in selling, general and
administrative expenses as a percentage of revenues was
the result of cost

savings attributable to the integration of companies acquired
during fiscal 1998 and the consolidation of our warehousing
under the restructuring plan discussed below. These savings
as a percentage of revenues were offset by increases
attributable to the acquisition of Beckley-Cardy in the
second quarter of fiscal 1999 (which had higher
selling, general and administrative expenses as a
percentage of revenues than our existing businesses)
and higher depreciation and amortization expenses due
to the acquisitions referred to above.

We use grants of employee stock options to provide
an incentive to employees by increasing their ownership
interests in our shares. This helps to align their
interests with the interests of our stockholders. In
connection with the spin-off from U.S. Office Products
in June 1998, various replacement options were issued
at the prior exercise price adjusted for the spin-off
in accordance with Accounting Principles Board ("APB")
Opinion No. 25. If we had recorded compensation
expense based upon the fair market value of the stock
options on the dates of grant under the methodology
prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 123, our net income for the
fiscal year ended April 24, 1999 would have been
reduced by approximately $10.6 million or 120%.

Restructuring charges during fiscal 1999 included
(1) a non-cash restructuring charge of $1.1 million in
the first quarter of fiscal 1999, consisting of
compensation expense attributed to the U.S. Office
Products stock option tender offer and the sale of
shares of Common Stock to certain officers and
directors, net of underwriting discounts and (2) a $4.2
million restructuring charge in the second quarter of
fiscal 1999 relating to our plan to consolidate our
existing warehousing, customer service and sales
operations following the acquisition of Beckley-Cardy.
Under this restructuring plan, we intend to reduce our
distribution centers from 13 to eight and our customer
service centers from seven to two during the period
from October 1998 through December 1999. The $4.2
million charge consists of $2.1 million for employee
severance and termination benefits, $1.3 million for
lease termination and facility shut-down costs and $0.8
million for write down of fixed assets and inventories.
On an after-tax basis, these restructuring charges
reduced net income for fiscal 1999 by $3.2 million.

Interest expense, net of interest income,
increased 134.5%, from $5.4 million, or 1.8% of
revenues, for fiscal 1998 to $12.6 million, or 2.4% of
revenues, for fiscal 1999 primarily due to the increase
in debt attributable to the acquisition of five
businesses since April 24, 1998, partially offset by
the reduction in debt from applying the net proceeds
from our secondary public offering of Common Stock, our
initial public offering of Common Stock and concurrent
offering to certain officers and directors and the
forgiveness of debt from U.S. Office Products in
connection with the spin-off.

Provision for income taxes increased 59.1% from
$5.5 million for fiscal 1998 to $8.7 million for fiscal
1999, reflecting effective income tax rates of 49.5%
for fiscal 1999 and 51.1% for fiscal 1998. The higher
effective tax rate, compared to the federal statutory
rate of 35%, is primarily due to state income taxes and
nondeductible goodwill amortization.

Year Ended April 25, 1998 Compared to Year Ended April 26, 1997

Consolidated revenues increased 61.9%, from $191.7
million for fiscal 1997 to $310.5 million for fiscal
1998. This increase was primarily due to the inclusion
of revenues from the eight companies acquired in
business combinations accounted for under the purchase
method during fiscal 1998 (the "Fiscal 1998 Purchased
Companies") from their respective dates of acquisition
and revenues from the six companies acquired during
fiscal 1997 in business combinations accounted for
under the purchase method (the "Fiscal 1997 Purchased
Companies" and together with the Fiscal 1998 Purchased
Companies, the "Purchased Companies") for the entire
period. Revenues also increased due to sales to new
accounts, increased sales to existing customers and
higher pricing on certain products in response to

increased product costs. Product cost is the most
significant element in cost of revenues. Inbound
freight, occupancy and delivery charges are also
included in cost of revenues.

Gross profit increased 65.8%, from $64.9 million,
or 33.8% of revenues, for fiscal 1997 to $107.6
million, or 34.7% of revenues, for fiscal 1998. The
increase in gross profit as a percentage of revenues
was due primarily to an increase in revenues from
higher margin products, primarily as a result of the
purchase acquisitions of three companies selling higher
margin specialty product lines during fiscal 1998, and
as a result of improved purchasing power and rebate
programs negotiated with vendors. These factors were
partially offset by an increase in the cost of revenues
as a result of the increased freight costs caused by
the United Parcel Service strike in the summer of 1997
and an increase in the portion of revenues represented
by lower margin bid revenues.

Selling, general and administrative expenses
(including depreciation and amortization) increased
65.2%, from $53.2 million, or 27.7% of revenues, for
fiscal 1997 to $87.8 million, or 28.3% of revenues, for
fiscal 1998. The increase in selling, general and
administrative expenses as a percentage of revenues was
due primarily to the purchase acquisition of three
specialty companies during fiscal 1998, which typically
have higher operating expenses as a percentage of
revenue, partially offset by the efficiencies generated
from the elimination of certain redundant
administrative functions, including purchasing,
accounting, finance and information systems, of the
Fiscal 1997 Purchased Companies and the consolidation
of two warehouses into one regional facility in the
Northeastern U.S. during the third quarter of fiscal
1997. We have established a 12-month integration
process for acquisitions in which a transition team is
assigned to (1) sell or discontinue incompatible
business units, (2) reduce the number of stock keeping
units, (3) eliminate redundant administrative
functions, (4) integrate the acquired entity's
management information systems and (5) improve buying
power. However, the length of time it takes us to
fully implement our strategy for assimilating an
acquired company can vary depending on the nature of
the company acquired and the season in which it is
acquired.

We use grants of employee stock options to provide
an incentive to employees by increasing their ownership
interests in our shares. This helps to align their
interests with the interests of our stockholders. In
connection with the spin-off from U.S. Office Products
in June 1998, various replacement options were issued
at the prior exercise price adjusted for the spin-off
in accordance with APB Opinion No. 25. If we had
recorded compensation expense based upon the fair
market value of the stock options on the dates of grant
under the methodology prescribed by SFAS No. 123, our
net income for the fiscal year ended April 25, 1998
would have been reduced by approximately $0.8 million
or 15.3%.

In the fourth quarter of fiscal 1998, we recorded
approximately $2.5 million of nonrecurring costs,
primarily consisting of a write-down of deferred
catalog costs, employee severance and asset impairment
costs, and $1 million of the transaction costs
allocated to us under the distribution agreement
entered into with U.S. Office Products and the other
spin-off companies. We incurred non-recurring
acquisition costs of $1.8 million in fiscal 1997, in
conjunction with the acquisition of the Pooled
Companies. These non-recurring acquisition costs
included accounting, legal, investment-banking fees,
real estate and environmental assessments and
appraisals and various regulatory fees. We are
required by GAAP to expense all acquisition costs (both
those paid by us and those paid by the sellers of the
acquired companies) related to business combinations
accounted for under the pooling-of-interests method of
accounting. In accordance with GAAP, we will be unable
to use the pooling-of-interests method to account for
acquisitions for a period of two years from June 9,
1998. During this period, we will not reflect any non-
recurring acquisition costs in our results of
operations, as all costs incurred of this nature would
be related to acquisitions accounted for under the
purchase method and would, therefore, be capitalized as
a portion of the purchase consideration.

From the time U.S. Office Products acquired the
Pooled Companies, we were allocated interest based upon
our average outstanding payable balance with U.S.
Office Products at U.S. Office Products' weighted
average interest rate during such period. Interest
expense, net of interest income, increased 28.0%, from
$4.2 million for fiscal 1997 to $5.4 million for fiscal
1998. The increase was due primarily to higher amounts
payable to U.S. Office Products incurred as a result of
the acquisition of the eight companies acquired in
fiscal 1998.

Provision for income taxes increased from a tax
benefit of $2.4 million for fiscal 1997 to a tax
expense of $5.5 million for fiscal 1998. The high
effective income tax rate of 51.1% for fiscal 1998,
compared to the federal statutory rate of 35%, was
primarily due to state income taxes, non-deductible
goodwill amortization and U.S. Office Products' share
of distribution costs. In 1995, we recorded a
valuation allowance of $5.3 million on a deferred tax
asset resulting from the net operating loss
carryforwards created during 1995. The valuation
allowance had been established by one of the Pooled
Companies prior to its acquisition by U.S. Office
Products to offset the tax benefit from such loss
carryforwards, because at the time it was not likely
that such tax benefit would be realized. The benefit
from income taxes in fiscal 1997 of $2.4 million arose
primarily from the reversal of the $5.3 million
deferred tax asset valuation allowance in the fourth
quarter. The valuation allowance was reversed
subsequent to U.S. Office Products acquiring us,
because it was deemed "more likely than not," based on
improved results, that the tax benefit from such
operating loss carryforwards would be realized.

Liquidity and Capital Resources

At April 24, 1999, we had working capital of
$117.2 million. Our capitalization at April 24, 1999
was $375.2 million and consisted of bank debt of $172.5
million and stockholders' equity of $202.7 million.

We currently have a five year secured $350 million
revolving Senior Credit Facility with NationsBank, N.A.
The Senior Credit Facility has a $100 million term loan
payable quarterly over five years commencing in January
1999 and revolving loans which mature on September 30,
2003. The amount outstanding as of April 24, 1999
under the Senior Credit Facility was approximately
$172.5 million, consisting of $75 million outstanding
under the revolving loan portion of the facility and
$97.5 million outstanding under the term loan portion
of the facility. Borrowings under the Senior Credit
Facility are usually significantly higher during our
first and second quarters to meet the working capital
needs of our peak selling season. On October 28, 1998,
we entered into an interest rate swap agreement with
the Bank of New York covering $50 million of the
outstanding Senior Credit Facility. The agreement
fixes the 30 day LIBOR interest rate at 4.37% per annum
(floating LIBOR on April 24, 1999 was 4.91%) on the $50
million notional amount and has a three year term that
may be canceled by the Bank of New York on the second
anniversary. As of April 24, 1999, the effective
interest rate on borrowings under our Senior Credit
Facility was approximately 7.9%. In fiscal 1999, we
borrowed under the Senior Credit facility to fund five
acquisitions and for seasonal working capital and
capital expenditures.

On April 16, 1999, we sold 2,400,000 shares of
Common Stock in a public offering for $40.6 million in
net proceeds. On May 17, 1999, we sold an additional
151,410 shares of Common Stock to cover over-allotments
for $2.6 million in net proceeds. The total net
proceeds to us of $43.2 million were used to reduce
indebtedness outstanding under our Senior Credit
Facility. We intend to make certain immaterial changes
to certain financial and other covenants under the
Senior Credit Facility.

On June 9, 1998, we sold 2,125,000 shares of
Common Stock in a public offering for $30.6 million in
net proceeds. In addition, we sold 250,000 shares of
Common Stock in a concurrent offering directly to
Daniel P. Spalding, our Chairman of the Board and Chief
Executive Officer, David J. Vander

Zanden, our President and Chief Operating Officer, and
Donald Ray Pate, Jr., our Executive Vice President for
ClassroomDirect.com (formerly named Re-Print), at a
price of $14.415 per share for aggregate consideration
of $3.6 million. In connection with the offerings, we
incurred approximately $1.5 million of expenses. The
total net proceeds to us from the offerings were $32.7
million. The net proceeds were used to reduce
indebtedness outstanding under our Senior Credit
Facility.

During fiscal 1999, net cash provided by operating
activities was $27.6 million. This net cash provided
by operating activities during the period is indicative
of the high seasonal nature of the business, with sales
occurring in the first and second quarter of the fiscal
year and cash receipts in the second and third
quarters. Net cash used in investing activities was
$127.2 million, including $122.3 million for
acquisitions and $4.9 million for additions to property
and equipment and other. Net cash provided by
financing activities was $109.4 million. Borrowing
under the Senior Credit Facility included (1) $0.8
million used to fund the cash portion of the purchase
price of the Holsinger acquisition, (2) $3.7 million
used to fund the purchase price of the SmartStuff
acquisition, (3) $23 million used to fund the purchase
price of the Sportime acquisition, (4) $16.5 million
used to fund the cash portion of the purchase price of
the Hammond & Stephens acquisition, (5) $134.7 million
used to fund the Beckley-Cardy acquisition consisting
of $78.1 million for the purchase price and $56.6
million for debt repayment, (6) $83.3 million used to
repay the U.S. Office Products debt in connection with
the spin-off and (7) $67.8 million used for short-term
funding of seasonal working capital and the purchase of
property and equipment. The $32.7 million net proceeds
from our initial public offering and concurrent
offering to certain officers and directors and $40.6
million of the net proceeds from our public offering in
April 1999 was used to repay a portion of the $302.7
million borrowed under the Senior Credit Facility.
U.S. Office Products contributed capital of $8.1
million as required under the distribution agreement
entered into with us in connection with the spin-off.

During fiscal 1998, net cash provided by operating
activities was $3.7 million. Net cash used in
investing activities was $99.7 million, including $95.7
million for acquisitions and $4.0 million for additions
to property and equipment and other. Net cash provided
by financing activities was $96 million, including
$95.7 million provided by U.S. Office Products to fund
the cash portion of the purchase price and the
repayment of debt assumed with the acquisition of the
Fiscal 1998 Purchased Companies, $81.3 million of which
was considered a contribution of capital by U.S. Office
Products, partially offset by $8.4 million used to
repay indebtedness.

During fiscal 1997, net cash provided by operating
activities was $918,000. Net cash used in investing
activities was $16.7 million, including $7.7 million
for acquisitions, $7.2 million for additions to
property and equipment and $1.8 million to pay non-
recurring acquisition costs. Net cash provided by
financing activities was $15.8 million, including $59.9
million provided by U.S. Office Products to fund the
cash portion of the purchase price and the repayment of
debt associated with the Fiscal 1997 Purchased
Companies and the payment of debt of the Pooled
Companies, partially offset by $46.9 million used for
the net repayment of indebtedness, primarily at the
Fiscal 1997 Purchased Companies.

Our anticipated capital expenditures for the next
twelve months is approximately $10 million. The
largest items include software development for our
Internet initiative, computer hardware and software and
warehouse equipment.

We are currently considering, and have hired a
nationally known commercial real estate agent to
market, a sale and leaseback transaction involving four
distribution facilities in Ohio, Massachusetts, Kansas
and Texas. We are currently seeking bids on these
properties for such a transaction. We may sell all or
any number of these facilities or could substitute
other properties we own in this transaction. We
believe that the current fair market value for these
distribution facilities is approximately $21 million
with net proceeds to us of approximately $20.3 million
which would be used to repay outstanding indebtedness

under our Senior Credit Facility or for general
corporate purposes, including working capital and for
acquisitions. If we determine to proceed with this
transaction, we expect that it will close in the second
quarter of fiscal 2000.

Fluctuations in Quarterly Results of Operations

Our business is subject to seasonal influences.
Our historical revenues and profitability have been
dramatically higher in the first two quarters of our
fiscal year (May-October) primarily due to increased
shipments to customers coinciding with the start of
each school year.

Quarterly results also may be materially affected
by the timing of acquisitions, the timing and magnitude
of costs related to such acquisitions, variations in
our costs for the products sold, the mix of products
sold and general economic conditions. Moreover, the
operating margins of companies we acquired may differ
substantially from our own, which could contribute to
further fluctuation in quarterly operating results.
Therefore, results for any quarter are not indicative
of the results that we may achieve for any subsequent
fiscal quarter or for a full fiscal year.

The following table sets forth certain unaudited
consolidated quarterly financial data for fiscal 1999
and 1998 (in thousands). We derived this data from
unaudited consolidated financial statements that, in
the opinion of our management, reflect all adjustments,
consisting only of normal recurring accruals, necessary
for a fair presentation of such quarterly information.
Revenues and profitability are significantly higher in
the months of May through October, with the most
significant portion of revenue and profit occurring in
the months of July through September.

Year Ended April 24, 1999
First Second Third Fourth Total

Revenues $126,657 $212,316 $85,359 $97,372 $521,704
Gross profit 44,042 70,761 28,093 37,025 179,921
Operating income
(loss) 13,326 18,674 (2,383) 371 29,988
Net income (loss) 6,563 7,430 (3,298) (1,799) 8,896
Per share amounts:
Basic .45 .51 (.23) (.12) .61
Diluted .44 .51 (.23) (.12) .60

Year Ended April 25, 1998
First Second Third Fourth Total

Revenues $87,029 $111,460 $49,391 $62,575 $310,455
Gross profit 30,337 37,225 16,213 23,810 107,585
Operating income
(loss) 11,872 12,155 (4,048) (3,731) 16,248
Net income (loss) 5,804 5,965 (2,934) (3,596) 5,239
Per share amounts:
Basic 0.49 0.49 (0.20) (0.24) 0.40
Diluted 0.48 0.47 (0.20) (0.24) 0.39

Inflation

We do not believe that inflation has had a
material impact on our results of operations during the
fiscal years ended April 24, 1999, April 25, 1998 and
April 26, 1997.

Recent Accounting Pronouncements

Reporting Comprehensive Income. In June 1997, the
Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes

standards for the reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a
full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial
statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier
periods provided for comparative purposes is required.
We adopted SFAS No 130 in fiscal 1999. Implementation
of this disclosure standard did not affect our
financial position or results of operations.

Disclosures About Segments. In June 1997, FASB
issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business
enterprises report information about operating segments
in annual financial statements and requires that those
enterprises report selected information about operating
segments in interim financial reports issued to
shareholders. It also establishes standards for
related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is
effective for financial statements for fiscal years
beginning after December 15, 1997 and is presented in
this Annual Report. Financial statement disclosures
for prior periods are required to be restated.
Implementation of this disclosure standard did not
affect our financial position or results of operations.

Accounting for the Costs of Computer Software. In
March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1
requires computer software costs associated with
internal use software to be expensed as incurred until
certain capitalization criteria are met. We adopted
SOP 98-1 during fiscal 1999. Adoption of SOP 98-1 did
not have a material impact on our financial position or
results of operations.

Accounting for Derivative Instruments and Hedging
Activities. In June 1998, FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging
Activities." This statement, which is required to be
adopted for annual periods beginning after June 15,
2000, establishes standards for recognition and
measurement of derivatives and hedging activities. We
will implement this statement in fiscal 2002 as
required. The adoption of SFAS No. 133 is not expected
to have a material effect on our financial position or
results of operations.

Year 2000

The Year 2000 issue exists because many computer
systems and applications, including those embedded in
equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year.
As a result, the systems and applications may not
properly recognize the Year 2000 or process data which
include it, potentially causing data miscalculations or
inaccuracies or operational malfunctions or failures.
Because any disruption to our computerized order
processing and inventory systems could materially and
adversely affect our operations, we have established a
centrally managed, company wide plan to identify,
evaluate and address Year 2000 issues. Although most
of our mission critical systems, network elements and
products were verified for Year 2000 compliance as of
the end of June 1999, we may still be susceptible to
Year 2000-related problems. In addition, if our
suppliers, service providers and/or customers fail to
resolve their Year 2000 issues in an effective and
timely manner, our business could be significantly and
adversely affected. We believe that some of our school
customers have not yet addressed or resolved their Year
2000 issues.

We currently estimate that we will incur expenses
of approximately $100,000 through calendar 1999 in
connection with our anticipated Year 2000 efforts, in
addition to approximately $20,000 in expenses incurred
through April 24, 1999 for matters historically
identified as Year 2000-related. The

timing of expenses may vary and is not necessarily indicative of
readiness efforts or progress to date. We also expect
to incur certain capital improvement costs (totaling
approximately $300,000) to support this project. Such
capital costs are being incurred sooner than originally
planned, but, for the most part, would have been
required in the normal course of business. We expect
to fund our Year 2000 efforts through operating cash
flows. We will use our Senior Credit Facility for
capital improvements related to the effort.

As part of our Year 2000 initiative, we are
evaluating scenarios that may occur as a result of the
century change and are in the process of developing
contingency and business continuity plans tailored for
Year 2000-related occurrences. As noted earlier, we
are highly reliant on our computer order processing and
inventory systems to fill orders, bill the customer and
collect payments. A loss of either of these systems
would cause long delays in filling and shipping
products, billing the customer and collecting accounts
receivable. The highly seasonal nature of our business
does not allow for any delay in shipping products to
customers. Although the seasonal nature of our
business would heighten any problems encountered, the
timing of the majority of our sales, shipping, billing
and collection efforts for fiscal 1999 will be complete
prior to the Year 2000. We expect that any unforeseen
problems related to Year 2000 issues would be
identified within the months of January and February
2000, which is our slowest period. We have identified
that we may experience certain inconveniences or
inefficiencies as a result of a supplier's failure to
remediate its Year 2000 issue. We believe, however,
that most of our business will proceed without any
significant interruption.

Item 7A. Quantitative and Qualitative Disclosure About
Market Risk

Our financial instruments include cash, accounts
receivable, accounts payable and long-term debt.
Market risks relating to our operations result
primarily from changes in interest rates. Our
borrowings are primarily dependent upon LIBOR rates.
The estimated fair value of long-term debt approximates
its carrying value at April 24, 1999.

We do not hold or issue derivative financial
instruments for trading purposes. To manage interest
rate risk on the variable rate borrowings under the
revolving portion of our Senior Credit Facility, we
entered into an interest rate swap agreement during
fiscal 1999. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -
Liquidity and Capital Resources." This interest rate
swap agreement has the effect of locking in, for a
specified period, the base interest rate we will pay on
the $50 million notional principal amount established
in the swap. As a result, while this hedging
arrangement is structured to reduce our exposure to
interest rate increases, it also limits the benefit we
might otherwise have received from any interest rate
decreases. This swap is usually cash settled monthly,
with interest expense adjusted for amounts paid or
received. Effects of this swap have been minor for the
year ending April 24, 1999.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors
of School Specialty, Inc.

In our opinion, the consolidated financial
statements listed in the index appearing under Item
14(a)(1) present fairly, in all material respects, the
financial position of School Specialty, Inc. and its
subsidiaries at April 24, 1999 and April 25, 1998, and
the results of their operations and their cash flows
for each of the three years in the period ended April
24, 1999, in conformity with generally accepted
accounting principles. In addition, in our opinion,
the financial statement schedule listed in the index
appearing under Item 14(a)(2) presents fairly, in all
material respects, the information set forth therein
when read in conjunction with the related consolidated
financial statements. These financial statements and
the financial statement schedule are the responsibility
of the Company's management; our responsibility is to
express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits of these statements in
accordance with generally accepted auditing standards
which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used
and significant estimates made by management, and
evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Minneapolis, Minnesota
May 28, 1999

FINANCIAL STATEMENTS

SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)

April 24, April 25,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 9,779 $ -
Accounts receivable, less allowance for doubtful
accounts of $2,234 and $716, respectively 74,781 38,719
Inventories 78,783 49,307
Prepaid expenses and other current assets 27,044 13,503
Total current assets 190,387 101,529

Property and equipment, net 42,305 22,587
Intangible assets, net 201,206 99,613
Deferred income tax asset 3,810 -
Total assets $437,708 $223,729

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term payable to U.S. Office Products $ - $20,277
Current portion - long term debt 11,594 11
Accounts payable 37,050 23,788
Accrued compensation 8,410 4,458
Accrued income taxes 4,193 -
Accrued restructuring 2,752 472
Other accrued liabilities 9,194 4,732
Total current liabilities 73,193 53,738

Long-term debt 161,691 315
Long-term payable to U.S. Office Products - 62,699
Other 137 511
Total liabilities 235,021 117,263

Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.001 par value per share,
1,000,000 shares authorized;
none outstanding - -
Common Stock, $0.001 par value per share,
150,000,000 shares authorized
and 17,229,197 issued and outstanding 17 -
Capital paid-in excess of par value 192,196 -
Divisional equity - 104,883
Accumulated other comprehensive income (5) -
Retained earnings 10,479 1,583
Total stockholders' equity 202,687 106,466
Total liabilities and stockholders' equity $437,708 $223,729

See accompanying notes to consolidated financial statements.

SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)

For the Fiscal Year Ended
April 24, April 25, April 26,
1999 1998 1997

Revenues $ 521,704 $ 310,455 $ 191,746
Cost of revenues 341,783 202,870 126,862
Gross profit 179,921 107,585 64,884
Selling, general and
administrative expenses 144,659 87,846 53,177
Restructuring costs 4,200 2,491 194
Strategic restructuring costs 1,074 1,000 -
Non-recurring acquisition costs - - 1,792
Operating income 29,988 16,248 9,721
Other (income) expense:
Interest expense 12,735 5,505 4,197
Interest income (134) (132) -
Other (228) 156 (196)
Income before provision for
(benefit from)
income taxes 17,615 10,719 5,720
Provision for (benefit from)
income taxes 8,719 5,480 (2,412)
Net income $ 8,896 $ 5,239 $ 8,132

Weighted average shares outstanding:
Basic 14,690 13,284 10,003
Diluted 14,840 13,547 10,196

Net income per share:
Basic $ 0.61 $ 0.40 $ 0.81
Diluted $ 0.60 $ 0.39 $ 0.80

See accompanying notes to consolidated financial statements.

SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT)
EQUITY
(In Thousands)

Capital Accumulated Total
Paid-in Other Retained Stockholders Total
Common Stock Excess Divisional Comprehensive (Deficit) (Deficit) Comprehensive
Shares Dollars Par value Equity Income (Loss) Earnings Equity Income (Loss)

Balance at April
30, 1996 - $ - $ - $ 7,487 $ - $ (11,754) $ (4,267)
Transactions of
Pooled Companies:
Exercise of
warrants and
stock options - - - 1,979 - - 1,979
Retirement of
treasury stock - - - 34 - (34) -
Issuances of U.S.
Office Products
common stock in
conjunction with
acquitions - - - 10,485 - - 10,485
Net income - - - - - 8,132 8,132 8,132
Total comprehensive
income 8,132
Balance at April
26, 1997 - - - 19,985 - (3,656) 16,329
Issuances of U.S.
Office Products
common stock in
conjunction with
acqutions - - - 3,566 - - 3,566
Capital
contribution
by U.S. Office
Products - - - 81,332 - - 81,332
Net income - - - - - 5,239 5,239 5,239
Total
comprehensive income 5,239
Balance at April
25, 1998 - - - 104,883 - 1,583 106,466
Shares distributed
in spin-off
from U.S Office
Products 12,204 12 104,867 (104,883) 4 - -
Capital
contribution by
U.S. Office
Products - - 7,217 - - - 7,217
Compensation
charge for
options tendered
in strategic
restructuring - - 803 - - - 803 -
Compensation expense
from School
Specialty, Inc.
stock purchase - - 271 - - - 271
Issuances of
common stock
in conjunction
with acquitions 250 - 5,487 - - - 5,487
Issuances of
common stock 4,775 5 73,551 - - - 73,556
Cumulative
translation
adjustment - - - - (9) - (9) (9)
Net income - - - - - 8,896 8,896 8,896
Total comprehensive
income $ 8,887
Balance at April
24, 1999 17,229 $ 17 $192,196 $ - $ (5) $10,479 $202,687

See accompanying notes to consolidated financial statements.

SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)

For the Fiscal Year Ended
April 24, April 25, April 26,
1999 1998 1997

Cash flows from operating activities:
Net income $ 8,896 $ 5,239 $ 8,132
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and
amortization expense 9,604 4,561 2,106
Non-recurring acquisition costs - - 1,792
Restructuring costs 5,274 2,491 194
Amortization of loan fees 527 - -
Other 235 78 115
Changes in current assets and
liabilities (net of assets acquired
and liabilities assumed in
business combinations accounted
for under the purchase method):
Accounts receivable 13,583 (3,586) 1,277
Inventory 1,374 (6,666) 2,737
Prepaid expenses and other
current assets (2,354) (717) (2,361)
Accounts payable (12,591) 5,256 (6,969)
Accrued liabilities 3,075 (2,932) (6,105)
Net cash provided by
operating activities 27,623 3,724 918
Cash flows from investing activities:
Cash paid in acquisitions,
net of cash received (122,337) (95,670) (7,734)
Additions to property and equipment (4,872) (3,558) (7,216)
Payments of non-recurring
acquisition costs - - (1,792)
Other (27) (514) -
Net cash used in
investing activities (127,236) (99,742) (16,742)
Cash flows from financing activities:
Payments of long-term debt (241,145) (6,270) (16,962)
Payments of short-term debt (20,277) (2,102) (29,908)
Advances from (payments to)
U.S. Office Products (62,699) 23,058 59,919
Capital contribution by
U.S. Office Products 7,217 81,332 -
Proceeds from issuance of
common stock 73,556 - 1,979
Proceeds from issuance of
long-term debt 355,700 - 750
Capitalized loan fees (2,960) - -
Net cash provided by
financing activities 109,392 96,018 15,778
Net increase (decrease) in
cash and cash equivalents 9,779 - (46)
Cash and cash equivalents at
beginning of period - - 46
Cash and cash equivalents
at end of period $ 9,779 $ - $ -
Supplemental disclosures of
cash flow information:
Interest paid $ 11,151 $ 35 $ 456
Income taxes paid (refunded) $ 5,123 $ 1,148 $ (132)

SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS-(Continued)
(In Thousands)

The Company issued common stock and cash in
connection with certain business combinations accounted
for under the purchase method in the fiscal years ended
April 24, 1999, April 25, 1998 and April 26, 1997. The
fair values of the assets and liabilities of the
acquired companies at the dates of the acquisitions are
presented as follows:

For the Fiscal Year Ended
April 24, April 25, April 26,
1999 1998 1997

Accounts receivable $ 49,645 $ 17,900 $ 5,381
Inventories 30,850 18,180 6,922
Prepaid expenses and
other current assets 11,142 2,431 2,371
Property and equipment 21,033 6,379 1,155
Intangible assets 103,455 80,359 14,248
Other assets 3,775 346 29
Short-term debt (832) (1,850) (4,283)
Accounts payable (25,853) (9,400) (4,012)
Accrued liabilities (7,564) (9,089) (1,846)
Long-term debt (57,599) (6,020) (1,746)
Other liabilities (228) - -
Net assets acquired $127,824 $ 99,236 $ 18,219

The acquisitions were
funded as follows:
Common stock $ 5,487 $ - $ -
U.S. Office Products common stock - 3,566 10,485
Cash paid, net of cash acquired 122,337 95,670 7,734
Total $127,824 $ 99,236 $ 18,219

Noncash transactions:

During fiscal 1999, the Company issued 12,204 shares
of Company Common Stock to the shareholders of U.S.
Office Products Company under the School Specialty,
Inc. Distribution.

See accompanying notes to consolidated financial statements.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

NOTE 1-BACKGROUND

School Specialty, Inc. (the "Company") is a
Delaware corporation which was a wholly-owned
subsidiary of U.S. Office Products Company ("U.S.
Office Products") until June 9, 1998. On June 9, 1998,
U.S. Office Products spun-off its Educational Supplies
and Products Division (the "Education Division") as an
independent publicly owned company. This transaction
was effected through the distribution of shares of the
Company to U.S. Office Products' shareholders (the
"Distribution"). Prior to the Distribution, U.S. Office
Products contributed its equity interests in certain
wholly-owned subsidiaries associated with the Education
Division to the Company. U.S. Office Products and the
Company entered into a number of agreements to
facilitate the Distribution and the transition of the
Company to an independent business enterprise.
Additionally, concurrently with the Distribution, the
Company sold 2,125 shares in an initial public offering
(the "IPO"). Following the IPO, management purchased
250 shares.

The Education Division was created by U.S. Office
Products in May 1996 in connection with the acquisition
of School Specialty, Inc., a Wisconsin corporation
("Old School"). This business combination and the
acquisition in July 1996 of The Re-Print Corp.
("Re-Print") were accounted for under the
pooling-of-interests method (Old School and Re-Print
are herein referred to as the "Pooled Companies"). As a
result of these business combinations being accounted
for under the pooling-of-interests method, the results
of the Company prior to the completion of such business
combinations represent the combined results of the
Pooled Companies operating as separate autonomous
entities.

NOTE 2-BASIS OF PRESENTATION

The accompanying consolidated financial statements
and related notes to consolidated financial statements
include the accounts of School Specialty, Inc. and the
companies acquired in business combinations accounted
for under the purchase method from their respective
dates of acquisition and give retroactive effect to the
results of the Pooled Companies for all periods
presented. For the periods prior to the Distribution,
the consolidated financial statements reflect the
assets, liabilities, divisional equity, revenues and
expenses that were directly related to the Company as
it was operated within U.S. Office Products. In cases
involving assets and liabilities not specifically
identifiable to any particular business of U.S. Office
Products, only those assets and liabilities that were
transferred to the Company were included in the
Company's separate consolidated balance sheet. The
Company's consolidated statement of income includes all
of the related costs of doing business, including an
allocation of certain general corporate expenses of
U.S. Office Products which were not directly related to
these businesses including certain corporate
executives' salaries, accounting and legal fees,
departmental costs for accounting, finance, legal,
purchasing, marketing, human resources as well as other
general overhead costs. These allocations were based on
a variety of factors, dependent upon the nature of the
costs being allocated, including revenues, number and
size of acquisitions and number of employees.
Management believes these allocations were made on a
reasonable basis.

The consolidated statement of income does not
include an allocation of interest expense on all debt
allocated to the Company. See Note 9 for further
discussion of interest expense.

NOTE 3-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.

Definition of Fiscal Year

As used in these consolidated financial statements
and related notes to consolidated financial statements,
"fiscal 1999", "fiscal 1998" and "fiscal 1997" refer to
the Company's fiscal years ended April 24, 1999, April
25, 1998 and April 26, 1997, respectively.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousnads, Except Per Share Amounts)

Principles of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions
and accounts are eliminated in consolidation.

Cash and Cash Equivalents

The Company considers temporary cash investments
with original maturities of three months or less from
the date of purchase to be cash equivalents.

Concentration of Credit Risk

Financial instruments which potentially subject
the Company to concentrations of credit risk consist
primarily of trade accounts receivable. Receivables
arising from sales to customers are not collateralized
and, as a result, management continually monitors the
financial condition of its customers to reduce the risk
of loss.

Inventories

Inventories are stated at the lower of cost or
market with cost determined on a first-in, first-out
(FIFO) basis and consist primarily of products held for
sale.

Property and Equipment

Property and equipment is stated at cost.
Additions and improvements are capitalized. Maintenance
and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the
straight-line method over the estimated useful lives of
the respective assets. The estimated useful lives range
from 25 to 40 years for buildings and its components
and 3 to 15 years for furniture, fixtures and
equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful
life or its lease terms.

Intangible Assets

Intangible assets consist primarily of goodwill,
which represents the excess of cost over the fair value
of net assets acquired in business combinations
accounted for under the purchase method and non-compete
agreements. Substantially all goodwill is amortized on
a straight line basis over an estimated useful life of
40 years, except for goodwill associated with a
software subsidiary which is being amortized over 15
years. Identifiable intangible assets include
trademarks and software and are being amortized over
their estimated useful lives ranging from one to
fifteen years.

Management periodically evaluates the
recoverability of goodwill, which would be adjusted for
a permanent decline in value, if any, by comparing
anticipated undiscounted future cash flows from
operations to net book value. If the operation is
determined to be unable to recover the carrying amount
if its assets, then intangible assets are written down
first, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined
based on discounted cash flows or appraised values,
depending upon the nature of the assets. Based upon
its most recent assessment, the Company does not
believe an impairment of long-lived assets exists at
April 24, 1999.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial
instruments including cash and cash equivalents,
accounts receivable accounts payable, and long-term
debt approximate fair value.

Income Taxes

Income taxes, during the period subsequent to the
Distribution, have been computed utilizing the asset
and liability approach which requires the recognition
of deferred tax assets and liabilities for the tax
consequences of temporary differences

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying
amounts and the tax basis of existing assets and
liabilities.

As a division of U.S. Office Products, the Company
did not file separate federal income tax returns but
rather was included in the federal income tax returns
filed by U.S. Office Products and its subsidiaries from
the respective dates that the entities within the
Company were acquired by U.S. Office Products. For
purposes of the consolidated financial statements, the
Company's allocated share of U.S. Office Products'
income tax provision was based on the "separate return"
method. Certain companies acquired in
pooling-of-interests transactions elected to be taxed
as Subchapter S corporations, and accordingly, no
federal income taxes were recorded by those companies
for periods prior to their acquisition by U.S. Office
Products.

Revenue Recognition

Revenue is recognized upon the delivery of
products or upon the completion of services provided to
customers as no additional obligations to the customers
exist. Returns of the Company's product are considered
immaterial.

Cost of Revenues

Vendor rebates are recorded as a reduction in the
cost of inventory and recognized as a reduction in cost
of revenues when such inventory is sold.

Advertising Costs

The Company expenses advertising costs when the
advertisement occurs. Advertising costs are included in
the consolidated statement of income as a component of
selling, general and administrative expenses.

Deferred Catalog Costs

Deferred catalog costs are amortized in amounts
proportionate to revenues over the life of the catalog,
which is typically one to two years. Amortization
expense related to deferred catalog costs is included
in the consolidated statement of income as a component
of selling, general and administrative expenses. Such
amortization expense for the year ended April 24, 1999,
April 25, 1998 and April 26, 1997 and was $10,408,
$6,934, and $3,621, respectively.

Research and Development Costs

Research and development costs are charged to
operations in the year incurred. Research and
development costs are included in the consolidated
statement of income as a component of selling, general
and administrative expenses.

Internally Developed Software

During fiscal 1999 the Company adopted the
American Institute of Certified Public Accountants
("AICPA") Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 requires
computer software costs associated with internal use
software to be expensed as incurred until certain
capitalization criteria are met.

Non-Recurring Acquisition Costs

Non-recurring acquisition costs represent
acquisition costs incurred by the Company in business
combinations accounted for under the
pooling-of-interests method. These costs include
accounting, legal, and investment banking fees, real
estate and environmental assessments and appraisals,
and various regulatory fees. Generally accepted
accounting principles require the Company to expense
all acquisition costs (both those paid by the Company
and those paid by the sellers of the acquired
companies) related to business combinations accounted
for under the pooling-of-interests method.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Restructuring Costs

The Company records the costs of consolidating
existing Company facilities into acquired operations,
including the external costs and liabilities to close
redundant Company facilities and severance and
relocation costs related to the Company's employees in
accordance with Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in
Restructuring)".

Strategic Restructuring Costs

Strategic restructuring costs represent the
Company's portion of the costs incurred by U.S. Office
Products as a result of U.S. Office Products'
comprehensive restructuring.

New Accounting Pronouncement

In June 1998, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging
Activities". This statement, which is required to be
adopted for annual periods beginning after June 15,
2000, establishes standards for recognition and
measurement of derivatives and hedging activities. The
Company will implement this statement in fiscal year
2002 as required. The adoption of SFAS No. 133 is not
expected to have a material effect on the Company's
financial position or results of operations.

Distribution Ratio

On June 9, 1998, the Company issued approximately
12.2 million shares of its common stock to U.S. Office
Products, which then distributed such shares to its
shareholders in the ratio of one share of Company
common stock for every nine shares of U.S. Office
Products common stock held by each shareholder. The
share data reflected in the accompanying financial
statements for the periods prior to the Distribution
represents the historical share data for U.S. Office
Products for the period or as of the date indicated,
retroactively adjusted to give effect to the one for
nine distribution ratio.

Reclassifications

Certain prior period amounts have been
reclassified to conform to the current year
presentation.

NOTE 4-BUSINESS COMBINATIONS

Purchase Method

In fiscal 1999, the Company made five acquisitions
accounted for under the purchase method for an
aggregate purchase price of $127,824, consisting of
$122,337 of cash and 250 shares of common stock with a
market value of $5,487. The total assets related to
these five acquisitions were $219,900, including
goodwill of $103,455. The results of these acquisitions
have been included in the Company's results from their
respective dates of acquisition.

In fiscal 1998, the Company made eight
acquisitions accounted for under the purchase method
for an aggregate purchase price of $99,236, consisting
of $95,670 of cash and U.S. Office Products common
stock with a market value of $3,566. The total assets
related to these eight acquisitions were $125,595,
including goodwill of $80,359. The results of these
acquisitions have been included in the Company's
results from their respective dates of acquisition.

In fiscal 1997, the Company made six acquisitions
accounted for under the purchase method for an
aggregate purchase price of $18,219, consisting of
$7,734 of cash and U.S. Office Products common stock
with a market value of $10,485. The total assets
related to these six acquisitions were $30,106,
including goodwill of $14,248. The results of these
acquisitions have been included in the Company's
results from their respective dates of acquisition.

The following presents the unaudited pro forma
results of operations of the Company for the fiscal
years ended April 24, 1999 and April 25, 1998 and
includes the Company's consolidated financial
statements and the results of the companies

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

acquired in fiscal 1999 and fiscal 1998 purchase acquisitions
as if all such purchase acquisitions had been made at the
beginning of fiscal 1998. The results presented below
include certain pro forma adjustments to reflect the
amortization of intangible assets and the inclusion of
a federal income tax provision on all earnings:

For the Fiscal Year Ended
April 24, April 25,
1999 1998

Revenues $617,404 $614,041
Net income 10,248 5,997

Net income per share:
Basic $ 0.58 $ 0.33
Diluted $ 0.58 $ 0.32

The unaudited pro forma results of operations are
prepared for comparative purposes only and do not
necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning
of fiscal 1998 or the results which may occur in the
future.

Pooling-of-Interests Method

In fiscal 1997, the Company issued 4,258 shares of
U.S. Office Products common stock to acquire the Pooled
Companies. The Pooled Companies and the number of
shares issued are as follows:
Number of
Company Name Shares Issued

School Specialty, Inc. 2,308
Re-Print 1,950
Total shares issued 4,258

The Company's consolidated financial statements
give retroactive effect to the acquisitions of the
Pooled Companies for all periods presented.

The following presents the separate results, in
each of the periods presented, of the Company
(excluding the results of Pooled Companies prior to the
dates on which they were acquired), and the Pooled
Companies up to the dates on which they were acquired:

Pooled
Company Companies Combined
For the year ended April 26, 1997
Revenues $181,420 $ 10,326 $191,746
Net income 7,791 341 8,132

NOTE 5-RESTRUCTURING COSTS

During the fourth quarter of fiscal 1998, the
Company incurred restructuring costs of $2,491. These
costs represent the expected external costs and
liabilities to close redundant facilities and severance
costs. This restructuring plan was completed at the end
of fiscal year 1999.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

During the second quarter of fiscal 1999, the
Company incurred restructuring costs of $4,200. These
costs result from the consolidation of existing
warehousing, customer service and sales operations
following a significant fiscal 1999 acquisition. Under
this restructuring plan, the Company expects to
eliminate approximately 240 jobs. The following table
sets forth the Company's accrued restructuring costs
for the periods ended April 26, 1997, April 25, 1998
and April 24, 1999:

Facility Severance Other Asset
Closure and and Write-downs
Consolidation Terminations and Costs Total

Balance at April 26, 1997 $ - $ - $ 151 $ 151
Additions 728 214 1,549 2,491
Utilizations (728) - (1,442) (2,170)
Balance at April 25, 1998 - 214 258 472
Additions 1,300 2,100 800 4,200
Utilizations (225) (1,247) (448) (1,920)
Balance at April 24, 1999 $ 1,075 $ 1,067 $ 610 $ 2,752

NOTE 6-PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

April 24, April 25,
1999 1998

Deferred catalog costs $13,203 $ 7,206
Deferred income taxes 8,371 1,886
Notes receivable 1,513 1,558
Other 3,957 2,853
Total prepaid expenses and other current assets $27,044 $13,503

Deferred catalog costs represent costs which have
been paid to produce Company catalogs which will be
used in future periods. These deferred catalog costs
will be expensed in the periods the catalogs are used.

NOTE 7-PROPERTY AND EQUIPMENT

Property and equipment consists of the following:
April 24, April 25,
1999 1998

Land $ 1,921 $ 1,144
Projects in progress 1,607 34
Buildings 24,024 10,064
Furniture and fixtures 12,283 6,725
Warehouse equipment 10,053 7,052
Leasehold improvements 4,368 3,341
54,256 28,360
Less: Accumulated depreciation (11,951) (5,773)
Net property and equipment $42,305 $22,587

Depreciation expense for the fiscal years ended
April 24, 1999, April 25, 1998 and April 26, 1997 was
$4,948, $2,500 and $1,540, respectively.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

NOTE 8-INTANGIBLE ASSETS

Intangible assets consist of the following:

April 24, April 25,
1999 1998

Goodwill $198,264 $102,487
Trademarks 3,669 -
Software 4,347 -
Other 4,824 2,487
211,104 104,974
Less: Accumulated amortization (9,898) (5,361)
Net intangible assets $201,206 $ 99,613

Amortization expense for the fiscal years ended
April 24, 1999, April 25, 1998 and April 26, 1997 was
$4,656, $2,061, and $566, respectively.

NOTE 9-CREDIT FACILITIES

Long-Term Debt

Long-term debt consists of the following:
April 24, April 25,
1999 1998

Senior credit facility $172,500 $ -
Other - 310
Capital lease obligations 785 16
173,285 326
Less: Current maturities of long-term debt (11,594) (11)
Total long-term debt $161,691 $ 315

On September 30, 1998, the Company entered into a
five year secured $350,000 senior credit facility (the
"Credit Facility") with a syndicate of financial
institutions, led by NationsBank, N.A. as Agent,
consisting of a $250,000 revolving loan and a $100,000
term loan. Interest on borrowings under the Credit
Facility accrued through the third quarter of fiscal
1999 at a rate of, at the Company's option, either (i)
LIBOR plus 2.375% or (ii) the lender's base rate plus a
margin of 0.75%, plus a fee of 0.475% on the unborrowed
amount under the revolving term loan. Subsequent to
the third quarter of fiscal 1999, interest will accrue
at a rate of, at the Company's option, either (i) LIBOR
plus an applicable margin of up to 2.000%, or (ii) the
lender's base rate plus an applicable margin of up to
0.750%, plus a fee of up to 0.475% on the unborrowed
amount under the revolving loan. The Credit Facility
is secured by substantially all of the assets of the
Company and contains terms and covenants typical of
facilities of such size. The Company was in compliance
with these covenants at April 24, 1999. At April 24,
1999 the balance outstanding under the Credit Facility
was $172,500, including $75,000 and $97,500
outstanding under the revolving and term loans,
respectively, and included eight eurodollar contracts,
expiring within 25 days, totaling $172,500 at an
average interest rate of 6.69% (excluding the effects
of the interest rate swap agreement disclosed below).
The effective interest rate under the Credit Facility
for fiscal 1999 was 7.91%, which includes loan fee and
loan discount amortization.

On October 28, 1998 the Company entered into an
interest rate swap agreement with the Bank of New York
covering $50,000 of the outstanding borrowings under
the Credit Facility. The agreement fixes the 30 day
LIBOR interest rate at 4.37% per annum on the $50,000
notional amount and has a three year term that may be
canceled by the Bank of New York on the second
anniversary. The floating LIBOR interest rate at April
24, 1999 was 4.91%.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Maturities of Long-Term Debt

Maturities on long-term debt, including capital
lease obligations, are as follows:

2000 $11,594
2001 15,284
2002 18,840
2003 30,067
2004 97,500
Total maturities of long-term debt $173,285

Payable to U.S. Office Products

On June 9, 1998, per the distribution agreement,
the Company borrowed $83,300 from its line of credit to
repay the remaining short -and long-term payable
amounts due U.S. Office Products.

The long-term payable at April 25, 1998 and April
26, 1997 to U.S. Office Products primarily represented
payments made by U.S. Office Products on behalf of the
Company and a reasonable allocation by U.S. Office
Products of certain general corporate expenses. An
analysis of the activity in this account is as follows:

Balance at April 26, 1997 $33,226
Payments of long-term debt of acquired companies 822
Funding of acquisitions and payment of acquisition costs 20,706
Allocated corporate expenses 7,145
Normal operating costs paid by U.S. Office Products 800
Balance at April 25, 1998 62,699
Repayment of long-term debt (62,699)
Balance at April 24, 1999 $ -

The average outstanding long-term payable to U.S.
Office Products during the fiscal years ended April 24,
1999 and April 25, 1998 was $6,871 and $52,207,
respectively.

Interest was allocated to the Company based upon
the Company's average outstanding payable (short-term
and long-term) balance with U.S. Office Products at
U.S. Office Products' weighted average interest rate
during such period. The Company's financial statements
include allocations of interest expense from U.S.
Office Products totaling $158, $5,414 and $3,839 during
the fiscal years ended April 24, 1999, April 25, 1998
and April 26, 1997, respectively.

NOTE 10-INCOME TAXES

The provision for income taxes consists of:

For the Fiscal Year Ended
April 24, April 25, April 26,
1999 1998 1997
Income taxes currently payable:
Federal $ 6,511 $ 3,646 $ 71
State 1,740 907 99
8,251 4,553 170
Deferred income tax expense (benefit) 468 927 (2,582)
Total provision for (benefit from)
income taxes $ 8,719 $ 5,480 $(2,412)

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Deferred taxes are comprised of the following:
April 24, April 25,
1999 1998
Current deferred tax assets:
Inventory $ 4,008 $ 743
Allowance for doubtful accounts 858 164
Net operating loss carryforward 1,574 851
Accrued liabilities 820 128
Accrued restructuring 1,111 -
Total current deferred tax assets 8,371 1,886

Long-term deferred tax assets (liabilities):
Net operating loss carryforward 4,694 -
Property and equipment (476) (591)
Intangible assets (408) 80
Total long-term deferred tax assets (liabilities) 3,810 (511)
Net deferred tax assets $ 12,181 $ 1,375

At April 30, 1996, the valuation allowance had
been recorded, related to deferred tax assets of a
Pooled Company, including net operating loss
carryforwards. Based upon the improved profitability of
this Pooled Company during fiscal 1997, the valuation
allowance was reversed, resulting in a benefit from
income taxes.

The Company has net operating loss carryforwards
of approximately $15,669, on a consolidated basis,
which expire during fiscal years 2010-2018. The
carryforwards are also subject to an annual limitation
pursuant to IRS Code Section 382 of approximately
$3,900.

The Company's effective income tax rate varied
from the U.S. federal statutory tax rate as follows:

For the Fiscal Year Ended
April 24, April 25, April 26,
1999 1998 1997
U.S. federal statutory rate 35.0% 34.0% 35.0%
State income taxes, net of federal
income tax benefit 5.2 6.6 1.0
Reversal of valuation allowance - - (84.8)
Nondeductible goodwill 6.5 6.0 1.6
Nondeductible acquisition costs - 3.3 5.0
Other 2.8 1.2 -
Effective income tax rate 49.5 % 51.1% (42.2)%

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

NOTE 11-LEASE COMMITMENTS

The Company leases various types of retail,
warehouse and office facilities and equipment,
furniture and fixtures under noncancelable lease
agreements which expire at various dates. Future
minimum lease payments under noncancelable capital and
operating leases are as follows:
Capital Operating
Leases Leases
2000 $ 451 $4,186
2001 244 3,743
2002 31 2,923
2003 23 1,863
2004 23 1,466
Thereafter 115 3,981
Total minimum lease payments 887 $18,162
Less: Amounts representing interest 102
Present value of net minimum lease payments $ 785

Rent expense for the fiscal years ended April 24, 1999,
April 25, 1998 and April 26, 1997 was $4,498, $3,389
and $1,817, respectively.

NOTE 12-COMMITMENTS AND CONTINGENCIES

Litigation

Under the terms of the agreement entered into
between the Company and U.S. Office Products in
connection with a strategic restructuring plan, the
Company is obligated, subject to a maximum obligation
of $1.75 million, to indemnify U.S. Office Products for
certain liabilities incurred by U.S. Office Products
prior to the Distribution, including liabilities under
federal securities laws (the "Indemnification
Obligation"). This Indemnification Obligation is
reduced by any insurance proceeds actually recovered in
respect of the Indemnification Obligation and is shared
on a pro rata basis with the other three divisions of
U.S. Office Products which were spun-off from U.S.
Office Products in connection with the U.S. Office
Products comprehensive restructuring.

U.S. Office Products has been named a defendant in
various class action lawsuits. These lawsuits
generally allege violations of federal securities laws
by U.S. Office Products and other named defendants
during the months preceding the Strategic Restructuring
Plan. The Company has not received any notice or claim
from U.S. Office Products alleging that these lawsuits
are within the scope of the Indemnification Obligation,
but he Company believes that certain liabilities and
costs associated with these lawsuits (up to a maximum
of $1.75 million) are likely to be subject to the
Company's Indemnification Obligation. Nevertheless,
the Company does not presently anticipate that the
Indemnification Obligation will have a material adverse
effect on the Company. Thus, due to the preliminary
nature of this action, it is not possible at this time
to assess the outcome of the claims. In accordance
with SFAS No. 5, "Accounting for Contingencies", no
provision has been recorded in the accompanying
financial statements.

The Company is, from time to time, a party to
litigation arising in the normal course of its
business. Management believes that none of this
litigation will have a material adverse effect on the
financial position, results of operations or cash flows
of the Company.

Postemployment Benefits

The Company has entered into employment agreements
with several employees that would result in payments to
these employees upon a change of control or certain
other events. No amounts have been accrued at April 24,
1999 or April 25, 1998 related to these agreements, as
no change of control has occurred.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Distribution

At the date of the Distribution, School Specialty,
U.S. Office Products and the other spin-off companies
entered into a distribution agreement, tax allocation
agreement, and an employee benefits agreement and the
spin-off companies entered into a tax indemnification
agreement and may enter into other agreements,
including agreements relating to referral of customers
to one another. These agreements provide, among other
things, for U.S. Office Products and School Specialty
to indemnify each other from tax and other liabilities
relating to their respective businesses prior to and
following the Distribution. Certain of the obligations
of School Specialty and the other spin-off companies to
indemnify U.S. Office Products are joint and several.
Therefore, if one of the other spin-off companies fails
to satisfy its indemnification obligations to U.S.
Office Products when such a loss occurs, School
Specialty may be required to reimburse U.S. Office
Products for all or a portion of the losses that
otherwise would have been allocated to other spin-off
companies. In addition, the agreements allocate
liabilities, including general corporate and securities
liabilities of U.S. Office Products not specifically
related to the school supplies business, between U.S.
Office Products and the Company and the other spin-off
companies. The terms of the agreements that will govern
the relationship between School Specialty and U.S.
Office Products were established by U.S. Office
Products in consultation with School Specialty's
management prior to the Distribution while School
Specialty was a wholly-owned subsidiary of U.S. Office
Products.

NOTE 13-EMPLOYEE BENEFIT PLANS

On June 9, 1998, the Company implemented the
School Specialty, Inc. 401(k) Plan (the "Company 401(k)
Plan") which allows employee contributions in
accordance with Section 401(k) of the Internal Revenue
Code. The Company matches a portion of employee
contributions and all full-time employees are eligible
to participate in the Company 401(k) Plan after 90 days
of service. In fiscal 1999 the Company's matching
contribution expense was $416. Prior to June 9, 1998
the Company participated in the U.S. Office Products
401(k) Retirement Plan (the "401(k) Plan"), which was
similar to the plan adopted by the Company.

Certain subsidiaries of the Company have, or had
prior to implementation of the Company 401(k) Plan,
qualified defined contribution benefit plans, which
allow for voluntary pre-tax contributions by the
employees. The subsidiaries paid all general and
administrative expenses of the plans and in some cases
made matching contributions on behalf of the employees.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

NOTE 14-STOCKHOLDERS' EQUITY

Earnings Per Share

In February 1997, the FASB issued SFAS No. 128,
"Earnings Per Share". SFAS No. 128 establishes
standards for computing and presenting earnings per
share ("EPS"). SFAS No. 128 requires the dual
presentation of basic and diluted EPS on the face of
the consolidated statement of income. Basic EPS
excludes dilution and is computed by dividing income
available to common shareholders by the weighted
average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to
issue common stock were exercised or converted into
common stock. The Company adopted SFAS No. 128 during
fiscal 1998 and has restated all prior period EPS data.
The following information presents the Company's
computations of basic and diluted EPS for the periods
presented in the consolidated statement of income.

Income Shares Per Share
(Numerator) (Denominator) Amount
Fiscal 1999:
Basic EPS $ 8,896 14,690 $ 0.61
Effect of dilutive employee
stock options - 150
Diluted EPS $ 8,896 14,840 $ 0.60

Fiscal 1998:
Basic EPS $ 5,239 13,284 $ 0.40
Effect of dilutive employee
stock options - 263
Diluted EPS $ 5,239 13,547 $ 0.39

Fiscal 1997:
Basic EPS $ 8,132 10,003 $ 0.81
Effect of dilutive employee
stock options - 193
Diluted EPS $ 8,132 10,196 $ 0.80

The Company had additional employee stock options
outstanding during the periods presented that were not
included in the computation of diluted EPS because they
were anti-dilutive.

Capital Contribution by U.S. Office Products

During fiscal 1999 and fiscal 1998, U.S. Office
Products contributed $7,217 and $81,332, respectively,
of capital to the Company. The contribution reflects
the forgiveness of intercompany debt by U.S. Office
Products, as it was agreed that the Company would be
allocated only $80,000 of debt plus the amount of any
additional debt incurred after January 12, 1998 in
connection with the acquisition of entities that became
subsidiaries of the Company. The total debt allocated
to the Company at the time of the Distribution was
$83,300.

Stock Offerings

On June 15, 1998 the Company issued 2,125 shares
in conjunction with its IPO. In an offering concurrent
with the IPO, management acquired 250 shares. The
total net proceeds to the Company from the offerings
was $32,736.

On April 16, 1999 the Company issued 2,400 shares
in conjunction with a secondary public offering
receiving net proceeds of $40,820. On May 17, 1999 the
underwriters of the Company's secondary offering
exercised their over allotment option for 151 shares of
Company stock at $17.25 per share for net proceeds of
$2,412.

Employee Stock Plans

On June 10, 1998 the Board of Directors approved
the School Specialty, Inc. 1998 Stock Incentive Plan
(the "Plan"). The purpose of the Plan is to provide
officers, key employees and consultants with additional
incentives by increasing their

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

ownership interests in
the Company. The maximum number of options to purchase
common stock granted in any fiscal year under the Plan,
is equal to 20% of the Company's outstanding common
stock. Prior to the approval of the Plan, the Company
had stock options outstanding under the U.S. Office
Products 1994 Long-Term Compensation Plan. The Company
replaced the options to purchase shares of common stock
of U.S. Office Products held by employees with options
issued under the Plan to purchase shares of common
stock of the Company. In order to keep the option
holders in the same economic position immediately
before and after the Distribution, the number of U.S.
Office Products options held by Company personnel was
multiplied by 0.903 and the exercise price of those
options was divided by 0.903 for purposes of the
replacement options. The vesting provisions and option
period of the original grants were not changed. All
option data reflected below has been retroactively
restated to reflect the effects of the Distribution.

The Company accounts for options issued in
accordance with APB Opinion No. 25. Accordingly,
because the exercise prices of the options have equaled
the market price on the date of grant, no compensation
expense has been recognized for the options granted.
Had compensation cost for the Company's stock options
been recognized based upon the fair value of the stock
options on the grant date under the methodology
prescribed by SFAS 123, the Company's net income and
net income per share would have been impacted as
indicated in the following table.

For the Fiscal Year Ended
April 24, April 25, April 26,
1999 1998 1997
Net income (loss):
As reported $8,896 $5,239 $8,132
Pro Forma (1,737) 4,436 7,383

Net income (loss) per share:
As reported:
Basic $ 0.61 $ 0.40 $ 0.81
Diluted $ 0.60 $ 0.39 $ 0.80

Pro Forma:
Basic $(0.12) $ 0.33 $ 0.74
Diluted $(0.12) $ 0.33 $ 0.72

The fair value of options granted (which is
amortized to expense over the option vesting period
in determining the pro forma impact) is estimated on
the date of grant using the Black-Scholes option
pricing model with the following weighted average
assumptions:
For the Fiscal Year Ended
April 25, April 24, April 26,
1999 1998 1997

Expected life of option 7 years 7 years 7 years
Risk free interest rate 5.50% 6.35% 6.66%
Expected volatility of stock 59.00% 44.10% 44.00%

The weighted-average fair value of options granted
was $10.23, $9.75 and $15.31 for fiscal 1999, 1998, and
1997, respectively.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

A summary of option transactions follows:

Options Outstanding Options Exercisable
Weighted- Weighted-
Average Average
Exercise Exercise
Option Price Options Price
Balance at April 30, 1996
Granted 225 $27.03
Canceled (14) 28.37
Balance at April 26, 1997 211 26.93

Granted 257 18.01
Canceled (26) 25.45
Balance at April 25, 1998 442 21.83 46 $27.14

Granted 2,031 15.86
Exercised (82) 20.62
Canceled (25) 26.49
Balance at April 24, 1999 2,366 $16.70 118 $23.39

The following table summarizes information about
stock options outstanding at April 24, 1999:

Options Outstanding Options Exercisable

Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Exercise Price Options Life Price Options Price

$15.50 - $22.18 2,231 9.11 $16.05 50 $18.01
$24.38 - $29.43 135 7.16 27.39 68 27.39
2,366 9.00 $16.70 118 $23.39

Options granted to employees are generally
exercisable beginning one year from the date of grant
in cumulative yearly amounts of 25% of the shares under
option and generally expire ten years from the date of
grant. Options granted to directors of the Company
vest over a three year period, 20% after the first
year, 50% (cumulative) after year two and 100%
(cumulative) after the third year.

As of the date of Distribution, Jonathan J.
Ledecky, a member of the Company's Board of Directors
and formerly the Chairman and Chief Executive Officer
of U.S. Office Products, received 914,079 shares under
an option grant with an exercise price of $15.50. This
grant represented 7.5% of the outstanding company stock
as of the date of Distribution.

Immediately following the effective date of the
registration statements filed in connection with the
IPO and the Distribution, the Company's Board of
Directors granted 850,083 options covering 7% of the
outstanding shares of the Company's common stock, to
certain executive management personnel (excluding the
7.5% granted to Mr. Ledecky). The options granted were
granted under the Plan and have a per share exercise of
$15.50 and are exercisable in full on June 10, 1999.

Total options available for grant under the Plan are
equal to 20% of the outstanding shares of the Company's
common stock.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

NOTE 15---SEGMENT INFORMATION

The Company's business activities are organized
around its two principal business segments, Traditional
and Specialty school Business. Both internal and
external reporting conform to this organizational
structure with no significant differences in accounting
policies applied. The Company evaluates the
performance of its segments and allocates resources to
them based on revenue growth and profitability. While
the two segments serve a similar customer base, notable
differences exist in products, gross margin and revenue
growth rate. Products distributed within the
Traditional business segment include classroom
supplies, instructional materials, educational games,
art supplies, school forms, educational software,
school furniture, and indoor and outdoor equipment.
Products distributed within the Specialty business
segment target specific educational disciplines, such
as art, industrial arts, physical education, sciences,
library and early childhood. The following table
presents segment information:

1999 1998 1997
Revenues:
Traditional $329,325 $201,770 $157,130
Specialty 192,379 108,685 34,616
Total $521,704 $310,455 $191,746

Operating Profit and Pretax Profit: (a)
Traditional $19,849 $10,348 $9,185
Specialty 18,127 11,054 3,966
Total 37,976 21,402 13,151
General Corporate Expense 2,714 1,663 1,444
One Time Charges 5,274 3,491 1,986
Interest Expense and Other 12,373 5,529 4,001
Income Before Taxes $17,615 $10,719 $ 5,720

Identifiable Assets (at year end):
Traditional $249,225 $121,475 $ 66,287
Specialty 165,275 98,252 16,329
Total 414,500 219,727 82,616
Corporate Assets 23,163 4,002 5,069
Total $437,663 $223,729 $87,685

Depreciation and Amortization:
Traditional $ 5,937 $ 2,433 $ 1,558
Specialty 2,879 1,814 296
Total 8,816 4,247 1,854
Corporate 788 314 252
Total $ 9,604 $ 4,561 $ 2,106

Expenditures for Property and Equipment:
Traditional $ 1,923 $ 2,847 $ 5,819
Specialty 2,327 447 746
Total 4,250 3,294 6,565
Corporate 622 264 651
Total $ 4,872 $ 3,558 $ 7,216

(a) Operating profit is defined as operating income before nonrecurring
acquisition and restructuring costs.

SCHOOL SPECIALTY , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

NOTE 16-QUARTERLY FINANCIAL DATA (UNAUDITED)

The following presents certain unaudited quarterly
financial data for fiscal 1999 and fiscal 1998:

Fiscal Year Ended April 24, 1999
First Second Third Fourth Total

Revenues $126,657 $212,316 $ 85,359 $97,372 $521,704
Gross profit 44,042 70,761 28,093 37,025 179,921
Operating income (loss) 13,326 18,674 (2,383) 371 29,988
Net income (loss) 6,563 7,430 (3,298) (1,799) 8,896
Per share amounts:
Basic $ 0.45 $ 0.51 $ (0.23) $(0.12) $ 0.61
Diluted $ 0.44 $ 0.51 $ (0.23) $(0.12) $ 0.60

Fiscal Year Ended April 25, 1998
First Second Third Fourth Total

Revenues $87,029 $111,460 $ 49,391 $62,575 $310,455
Gross profit 30,337 37,225 16,213 23,810 107,585
Operating income (loss) 11,872 12,155 (4,048) (3,731) 16,248
Net income (loss) 5,804 5,965 (2,934) (3,596) 5,239
Per share amounts:
Basic $ 0.49 $ 0.49 $ (0.20) $(0.24) $ 0.40
Diluted $ 0.48 $ 0.47 $ (0.20) $(0.24) $ 0.39

The summation of quarterly net income per share may not
equate to the calculation for the full fiscal year as
quarterly calculations are performed on a discrete
basis.

NOTE 17-SUBSEQUENT EVENTS

On May 17, 1999 the Company purchased Audio
Graphics Systems for $1,089 of cash and $1,088 of stock
for a total purchase price of $2,177.

On May 17, 1999 the underwriters of the Company's
secondary offering exercised their over allotment
option for 151,410 shares of Company stock at $17.25
per share for net proceeds of $2,412.

Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

(a) Executive Officers. Reference is made to
"Executive Officers of the Registrant" in
Part I hereof.

(b) Directors. The information required by this
Item is set forth in our Proxy Statement for
the Annual Meeting of Stockholders to be held
on September 2, 1999 under the caption
"Election of Directors," which information is
incorporated by reference herein.

(c) Section 16 Compliance. The information
required by this Item is set forth in our
Proxy Statement for the Annual Meeting of
Stockholders to be held on September 2, 1999
under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance," which
information is incorporated by reference
herein.

Item 11. Executive Compensation

The information required by this Item is set forth
in our Proxy Statement for the Annual Meeting of
Stockholders to be held on September 2, 1999 under the
captions "Executive Compensation," "Employment
Contracts and Related Matters," "Director Compensation
and Other Arrangements," "Compensation Committee
Report," "Compensation Committee Interlocks and Insider
Participation," and "Performance Graph," which
information is incorporated by reference herein.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is set forth
in our Proxy Statement for the Annual Meeting of
Stockholders to be held on September 2, 1999 under the
caption "Security Ownership of Management and Certain
Beneficial Owners," which information is incorporated
by reference herein.

Item 13. Certain Relationships and Related Transactions

The information required by this Item is set forth
in our Proxy Statement for the Annual Meeting of
Stockholders to be held on September 2, 1999 under the
captions "Certain Relationships and Related
Transactions" and "Director Compensation and Other
Arrangements."

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1) Financial Statements.

Consolidated Financial Statements

Report of Independent Public Accountants

Consolidated Balance Sheet as of April 24, 1999 and April 25, 1998

Consolidated Statement of Operations for the fiscal years
ended April 24, 1999, April 25, 1998 and April 26, 1997

Consolidated Statement of Stockholders'
Equity (Deficit) for the fiscal years ended
April 24, 1999, April 25, 1998 and April 26, 1997

Consolidated Statement of Cash Flows for the fiscal years
ended April 24, 1999, April 25, 1998 and April 26, 1997

Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedule.

Schedule for the fiscal years ended April 24, 1999, April 25, 1998
and April 26, 1997: Schedule II - Valuation and Qualifying Accounts.

(a)(3) Exhibits.

See (c) below.

(b) Reports on Form 8-K.

During the last quarter of the fiscal year covered
by this report, we filed a Current Report on Form
8-K on February 24, 1999 reporting Items 2 and 7
of such Form with respect to our acquisition of
Sportime, LLC on February 9, 1999. We filed a
Current Report on Form 8-K/A on April 26, 1999 to
include the financial statements listed in Item 7
relating to this acquisition.

See the Exhibit Index, which is incorporated by reference herein.

(d) Financial Statements Excluded from Annual Report to Shareholders.

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized,
in the City of Appleton, State of Wisconsin, on July 12, 1999.

SCHOOL SPECIALTY, INC.

By: /s/ Daniel P. Spalding
-------------------------------------
Daniel P. Spalding, Chief Executive
Officer

Each person whose signature appears below hereby
constitutes and appoints Daniel P. Spalding and Donald
J. Noskowiak, and each of them, as his or her true and
lawful attorney-in-fact and agent, with full power of
substitution, to sign on his or her behalf individually
and in the capacity stated below and to perform any
acts necessary to be done in order to file any and all
amendments to this Annual Report on Form 10-K, and to
file the same, with all exhibits thereto and all other
documents in connection therewith and each of the
undersigned does hereby ratify and confirm all that
said attorney-in-fact and agent, or his substitutes,
shall do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by
the following persons in the capacities and on the
dates indicated below.

Name Title Date

/s/ Daniel P. Spalding Chief Executive Officer (Principal July 12, 1999
- ---------------------- Executive Officer) and Dircetor
Daniel P. Spalding

/s/ Donald J. Noskowiak Chief Financial Officer (Principal July 12, 1999
- ----------------------- Financial and Accounting Officer)
Donald J. Noskowiak

/s/ David J. Vander Zanden President, Chief Operating Officer July 12, 1999
- -------------------------- and Director
David J. Vander Zanden

/s/ Jonathan J. Ledecky Director July 12, 1999
- -----------------------
Jonathan J. Ledecky

/s/ Rochelle Lamm Wallach Director July 12, 1999
- -------------------------
Rochelle Lamm Wallach

/s/ Leo C. McKenna Director July 12, 1999
- -------------------
Leo C. McKenna

/s/ Jerome M. Pool Director July 12, 1999
- ------------------
Jerome M. Pool

INDEX TO EXHIBITS

Exhibit
Number Document Description

3.1 Restated Certificate of Incorporation. 1
3.2 Amended and Restated Bylaws. 1
4.1 Form of Stock Certificate. 1
10.1 Distribution Agreement among U.S. Office Products Company,
Workflow Management, Inc., Aztec Consulting, Inc., Navigant
International, Inc. and School Specialty, Inc. 2
10.2 Tax Allocation Agreement among U.S. Office Products Company,
Workflow Management, Inc., Aztec Technology Partners, Inc.,
Navigant International, Inc. and School Specialty, Inc. 1
10.3 Tax Indemnification Agreement among Workflow Management, Inc.,
Aztec Technology Partners, Inc., Navigant International, Inc.
and School Specialty, Inc. 2
10.4 Employee Benefits Agreement among Workflow Management, Inc.,
Aztec Technology Partners, Inc., Navigant International, Inc. and
School Specialty, Inc. 2
10.5 Employment Agreement dated April 29, 1996 between Daniel P. Spalding
and School Specialty, Inc. 3
10.6 Employment Agreement dated July 26, 1996 between Donald Ray Pate, Jr.
and The Re-Print Corp. 3
10.7(a) Employment Agreement dated June 27, 1997 between Richard H. Nagel
and Sax Arts and Crafts, Inc. 3
10.7(b) Covenant Not to Compete Agreement dated June 27, 1997 between
Richard H. Nagel and Sax Arts and Crafts, Inc. 7
10.8 Employment Agreement between David Vander Zanden and School
Specialty, Inc. 4
10.9 Employment Agreement between School Specialty, Inc. and
Jonathan J. Ledecky. 4
10.10 Amended Services Agreement dated as of June 8, 1998 between
U.S. Office Products and Jonathan J. Ledecky. 5
10.11 Amended and Restated 1998 Stock Incentive Plan. 6
10.12 Amended and Restated Credit Agreement dated as of September 30, 1998
among School Specialty, Inc., certain subsidiaries and affiliates of
School Specialty, Inc., the lenders named therein and Nationsbank,
N.A., Bank One, Wisconsin and U.S. Bank National Association. 6

Exhibit
Number Document Description

21.1 Subsidiaries of School Specialty, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
99.1 Schedule II - Valuation and Qualifying Accounts.

_____________________________

1 Incorporated by reference to School Specialty's Pre-
Effective Amendment No. 3 to the Registration
Statement on Form S-1 filed with the SEC on June 4,
1998; Registration No. 333-47509.

2 Incorporated by reference to School Specialty's Pre-
Effective Amendment No. 2 to the Registration
Statement on Form S-1 filed with the SEC on May 18,
1998; Registration No. 333-47509.

3 Incorporated by reference to School Specialty's Pre-
Effective Amendment No. 1 to the Registration
Statement on Form S-1 filed with the SEC on May 6,
1998; Registration No. 333-46537.

4 Incorporated by reference to School Specialty's
Annual Report on Form 10-K filed with the SEC on
July 24, 1998.

5 Incorporated by reference to School Specialty's Pre-
Effective Amendment No. 4 to the Registration
Statement on Form S-1 filed with the SEC on June 9,
1998; Registration No. 333-47509.

6 Incorporated by reference to School Specialty's Form
10-Q for the period ended January 23, 1999, as filed
with the SEC on March 1, 1999.

7 Incorporated by reference to School Specialty's
Registration Statement on Form S-1 filed with the
SEC on March 1, 1999; Registration No. 333-73103.