<PAGE>

EXHIBIT 99.1

                       PEOPLES EDUCATIONAL HOLDINGS, INC.
                                 AND SUBSIDIARY

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 2003

<PAGE>
                                                                               .
                                                                               .
                                                                               .

                          INDEX TO FINANCIAL STATEMENTS

                       PEOPLES EDUCATIONAL HOLDINGS, INC.
                                 AND SUBSIDIARY

                                    CONTENTS

<TABLE>
<S>                                                                  <C>
INDEPENDENT AUDITOR'S REPORT                                                F-3

FINANCIAL STATEMENTS

   Consolidated balance sheets as of December 31, 2003
      and 2002                                                        F-4 - F-5

   Consolidated statements of income for the years
      ended December 31, 2003 and 2002                                      F-6

   Consolidated statements of changes in stockholders'
      equity for the years ended December 31, 2003 and 2002                 F-7

   Consolidated statements of cash flows for the years
      ended December 31, 2003 and 2002                                      F-8

   Notes to consolidated financial statements                        F-9 - F-17
</TABLE>

                                      F-2

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Peoples Educational Holdings, Inc.
Saddle Brook, New Jersey

We have audited the accompanying consolidated balance sheets of Peoples
Educational Holdings, Inc. and Subsidiary as of December 31, 2003 and 2002, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Educational
Holdings, Inc. and Subsidiary as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.

/s/ McGLADREY & PULLEN, LLP
----------------------------------
McGLADREY & PULLEN, LLP

Minneapolis, Minnesota
February 13, 2004

                                      F-3

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
ASSETS (NOTE 3)                                                         2003         2002
---------------------------------------------------------------------------------------------
<S>                                                                 <C>           <C>
Current Assets
Cash and Cash Equivalents                                           $   426,629   $   312,470
   Accounts Receivable Net of Allowance for Doubtful Accounts
        of $40,000 in 2003 and $51,000 in 2002 and Allowance
        for Returns                                                   1,760,593     1,124,874
   Inventory                                                          1,101,841       984,669
   Advance Royalties                                                    157,054       290,196
   Prepaid Catalog Expenses and Other Current Assets                    201,902       111,534
   Deferred Income Taxes (Note 5)                                       154,000       132,000
                                                                    -----------   -----------
       TOTAL CURRENT ASSETS                                           3,802,019     2,955,743
                                                                    -----------   -----------

Equipment - At Cost, Less Accumulated Depreciation
     of $657,000 in 2003 and $469,000 in 2002 (Note 6)                  690,860       500,698
                                                                    -----------   -----------

Other Assets
   Deferred Prepublication Costs (Note 2)                             6,960,585     4,596,460
   Deposits and
   Other                                                                 78,523        44,384
                                                                    -----------   -----------
       TOTAL OTHER ASSETS                                             7,039,108     4,640,844
                                                                    -----------   -----------
       TOTAL ASSETS                                                 $11,531,987   $ 8,097,285
                                                                    ===========   ===========
</TABLE>

     See Notes to Consolidated Financial Statements.

                                      F-4

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY                                      2003         2002
-----------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>
Current Liabilities
   Current Maturities of Long Term Debt                               $    86,998   $    78,953
   Accounts Payable                                                     3,209,138     1,840,135
   Accrued Expenses                                                       801,633       527,297
   Income Taxes Payable                                                    95,874        33,965
                                                                      -----------   -----------
        TOTAL CURRENT LIABILITIES                                       4,193,643     2,480,350
                                                                      -----------   -----------

Long Term Debt, less current maturities (Notes 3 and 6)                   120,545       807,544

Subordinated Convertible Note Payable to Stockholder (Note 3)                   -     1,000,000

Accrued Royalty Payable                                                         -        61,000

Deferred Income Taxes (Note 5)                                             77,000         5,000

Commitments (Note 6)

Stockholders' Equity (Notes 7 and 8)
   Common Stock, $0.02 par value; authorized 8,500,000 shares;
     issued and outstanding 3,809,198 in 2003; 3,216,933 in 2002           76,184        64,338
   Additional Paid In Capital                                           4,796,829     2,787,690
   Retained Earnings                                                    2,267,786     1,049,513
                                                                      -----------   -----------
                                                                        7,140,799     3,901,541

   Less: Note Receivable from issuance of stock                                 -      (158,150)
                                                                      -----------   -----------
        TOTAL STOCKHOLDERS' EQUITY                                      7,140,799     3,743,391
                                                                      -----------   -----------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                    $11,531,987   $ 8,097,285
                                                                      ===========   ===========
</TABLE>

                                      F-5

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
                                                               2003            2002
                                                           ------------    ------------
<S>                                                        <C>             <C>
Net Revenue (Note 4)                                       $ 27,814,648    $ 18,825,224
                                                           ------------    ------------

Cost of Revenue
   Direct Costs                                              13,049,452       9,846,294
   Prepublication Cost Amortization                           2,244,664       1,212,366
                                                           ------------    ------------
     Total                                                   15,294,116      11,058,660
                                                           ------------    ------------

     GROSS PROFIT                                            12,520,532       7,766,564

Selling, General and Administrative Expenses                 10,441,265       6,739,359
                                                           ------------    ------------
     INCOME FROM OPERATIONS                                   2,079,267       1,027,205

Nonoperating Expense
   Interest                                                    (109,709)        (96,235)
   Other                                                         (8,285)         (6,788)
                                                           ------------    ------------
     INCOME BEFORE INCOME TAXES                               1,961,273         924,182

Federal and State Income Taxes (Note 5)                         743,000         349,000
                                                           ------------    ------------
     NET INCOME                                            $  1,218,273    $    575,182
                                                           ============    ============

Net Income per Common Share
   Basic:                                                  $       0.35    $       0.18
   Diluted:                                                $       0.34    $       0.17
                                                           ============    ============

Weighted-average Number of Common Shares Outstanding
   Basic:                                                     3,519,677       3,216,933
   Diluted:                                                   3,620,662       3,302,742
                                                           ============    ============
</TABLE>

     See Notes to Consolidated Financial Statements.

                                      F-6

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
                                                             Additional
                                               Common         Paid-In        Retained        Notes
                                                Stock         Capital        Earnings      Receivable      Total
                                             -----------    -----------    -----------     ----------   -----------
<S>                                          <C>            <C>            <C>             <C>          <C>
Balance, December 31, 2001                   $    64,338    $ 2,780,190    $   474,331     $(150,650)   $ 3,168,209

Interest on Notes Receivable
   from issuance of Stock                              -          7,500              -        (7,500)             -

Net Income                                             -               -       575,182             -        575,182

Balance, December 31, 2002                        64,338      2,787,690      1,049,513      (158,150)     3,743,391

Interest on Notes Receivable
   from issuance of Stock                              -          2,821              -        (2,821)             -

Payment on Notes Receivable (Note 8)                   -              -              -       160,971        160,971

Exercise of Stock Options (Note 8)                   799         56,516              -             -         57,315

Repurchase of Common Stock                          (224)       (38,928)             -             -        (39,152)

Conversion of Notes Payable and Accrued
   Interest into Common Stock (Note 3)             5,715        994,285              -             -      1,000,000

Sale of Common Stock                               5,556        994,445              -             -      1,000,001

Net Income                                             -              -      1,218,273             -      1,218,273
                                             -----------    -----------    -----------      --------    -----------
Balance, December 31, 2003                   $    76,184    $ 4,796,829    $ 2,267,786      $      -    $ 7,140,799
                                             ===========    ===========    ===========      ========    ===========
</TABLE>

                                      F-7

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                                         2003             2002
                                                                                     -----------      -----------
<S>                                                                                  <C>              <C>
Cash Flows From Operating Activities
Net Income                                                                           $ 1,218,273      $   575,182
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
     Depreciation                                                                        187,273          159,864
     Amortization of Prepublication Costs                                              2,244,664        1,212,366
     Deferred Income Taxes                                                                50,000           28,000
Changes in Assets and Liabilities
     Accounts Receivable                                                                (635,719)        (137,271)
     Inventory                                                                          (117,172)         441,734
     Prepaid Catalog Expense and Other Current Assets                                    (90,368)         (62,206)
     Advance Royalties                                                                   133,142          310,078
     Deposits and Other                                                                  (34,139)           4,844
     Accounts Payable and Accrued Expenses                                             1,643,340          365,148
     Accrued Royalty Payable                                                             (61,000)               -
     Income Taxes Payable                                                                 61,909          (81,000)
                                                                                     -----------      -----------
        Net Cash Provided by Operating Activities                                      4,600,203        2,816,739
                                                                                     -----------      -----------

Cash Flows From Investing Activities
     Purchases of Equipment                                                             (377,437)        (210,236)
     Expenditures for Prepublication Costs                                            (4,608,789)      (3,405,974)
                                                                                     -----------      -----------
        Net Cash Used in Investing Activities                                         (4,986,226)      (3,616,210)
                                                                                     -----------      -----------

Cash Flows From Financing Activities
     Net Payments Under Line of Credit                                                  (600,000)        (800,000)
     Proceeds from Exercise of Stock Options                                              57,315                -
     Payments Received on Notes Receivable from Stock Issuance                           160,971                -
     Proceeds from Issuance of Debt and Capital Leases                                         -        1,169,373
     Proceeds from the Sale of Common Stock                                            1,000,001                -
     Repurchase of Common Stock                                                          (39,152)               -
     Principal Payments on Long Term Debt                                                (78,954)         (41,972)
                                                                                     -----------      -----------
        Net Cash Provided by Financing Activities                                        500,181          327,401
                                                                                     -----------      -----------

        Net Increase (Decrease) in Cash and Cash Equivalents                             114,159         (472,070)

Cash and Cash Equivalents
     Beginning of Period                                                                 312,470          784,540
                                                                                     -----------      -----------
     End of Period                                                                   $   426,629      $   312,470
                                                                                     ===========      ===========

Supplemental Cash Flow Information
     Cash Payments for:
        Interest                                                                     $   109,709      $    96,237
        Income Taxes                                                                     670,869          402,000
                                                                                     ===========      ===========
Supplemental Schedule of Noncash Investing and Financing Activities
   Conversion of Note Payable and Accrued Interest to Common Stock                   $ 1,000,000      $         -
                                                                                     ===========      ===========
</TABLE>

                                      F-8

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS: Peoples Educational Holdings, Inc. (PEH), through its wholly
owned subsidiary, The Peoples Publishing Group, Inc. (PPG), publishes and
markets its own supplementary educational textbooks and materials for K through
12 schools, materials that are predominantly state-specific and standards-based,
focused on state-required tests, and predominantly softcover. PPG also
distributes college textbooks and supplements to the high school advanced
placement market. Marketing channels include direct and commission sales
representatives, telemarketing, direct mail, and catalogs. PPG and PEH are
together referred to herein as the Company.

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of PEH and its wholly owned subsidiary, PPG. All significant
intercompany accounts and transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all short-term debt securities purchased with an original maturity of
three months or less to be cash equivalents.

The Company maintains its cash in bank accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.

REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE: The Company recognizes revenue upon
shipment and estimates returns if the right of return exists. The allowances for
returns as of December 31, 2003 and 2002, were $595,083 and $488,923,
respectively. These allowances are recorded as a reduction of accounts
receivable. The Company recognizes shipping and handling revenues as part of
revenue, and shipping and handling expenses as part of cost of revenues on the
statements of income.

The Company provides credit to its customers determined on a
customer-by-customer basis. Trade receivables are carried at original invoice
amount less an estimate made for the doubtful receivables based on a review of
all outstanding amounts on a monthly basis. Management determines the allowance
for doubtful accounts after reviewing individual customer accounts as well as
considering both historical and expected credit loss experience. Trade
receivables are written off when deemed uncollectible. Recoveries of trade
receivables previously written off are recorded when received.

MAJOR SUPPLIERS: For 2003 and 2002, approximately 36% and 52% of total product
line revenues respectively were generated from college books and products
purchased from two major college book publishers. The Company has exclusive
distribution agreements with these two publishers. The loss of either of these
distribution agreements would have a material adverse effect on the Company's
revenues and net income.

INVENTORY: Inventory is stated at the lower of cost or market, which is
determined using the first-in, first-out method. Inventory consists entirely of
finished goods. Inventory on the consolidated balance sheet is reflected net of
reserves for write-downs or non-salability of $187,000 and $117,000 in 2003 and
2002, respectively.

                                      F-9

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEFERRED PREPUBLICATION COSTS: Prepublication costs of new books consist
primarily of freelance page make-up, outside editorial, design, layout, art,
photo services, mechanicals, film, plate preparation charges, advanced royalties
(beginning in 2001), and photo and text permissions. Prepublication costs are
amortized over three years (the estimated minimum lives of the related
publications) using the straight-line method from the date of initial
publication.

ADVANCE ROYALTIES: Advance royalties, through the second quarter of 2001, were
recorded as an asset when paid, incurred, or otherwise acquired and are expensed
when earned by the authors.

PREPAID CATALOGS AND MARKETING EXPENSE: The cost of catalogs which have not been
completed or delivered to customers is carried as a prepaid expense until the
actual date of completion and mailing. Catalog expense is recognized in the
consolidated statements of income in the period in which the catalogs are mailed
or distributed. Marketing expense, excluding catalog expense, was $922,133 and
$502,598 for 2003 and 2002, respectively.

SOFTWARE DEVELOPMENT COSTS: The Company capitalizes internal and external costs
incurred to develop or enhance its internal use software during the application
development stage if it is probable that such development or modifications will
result in additional functionality. The Company capitalized $49,523 of such
costs during the year ended December 31, 2002, and is amortizing these costs
over an expected useful life of five years on a straight-line basis.

DEPRECIATION: Equipment is recorded at cost. Depreciation is provided over the
equipment's estimated useful lives of five to seven years using the
straight-line method. Maintenance and repairs are charged to expense as
incurred, and major renewals or improvements are capitalized. On sale or
retirement of property and equipment, the related costs and accumulated
depreciation are removed from the accounts, and any gain or loss is included in
the results of current operations.

ACCOUNTING FOR LONG-LIVED ASSETS: Long-lived assets, such as equipment, deferred
prepublication costs, advance royalties, and other assets with finite lives, are
evaluated for impairment whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
is accomplished by comparing their carrying value with the estimated future net
undiscounted cash flows expected to result from the use of the assets, including
cash flows from disposition. Should the sum of the expected future net cash
flows be less than the carrying value, the Company would recognize an impairment
loss at that date. An impairment loss would be measured by comparing the amount
by which the carrying value exceeds fair value (estimated discounted future cash
flows or appraisal of assets) of the long-lived assets. To date, management has
determined that no impairment of long-lived assets exists.

INCOME TAXES: The Company accounts for deferred taxes on an asset and liability
method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss or tax credit carryforwards, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis.

                                      F-10

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Deferred taxes are based on enacted tax laws and rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts more likely than not to be realized. Income tax expense is the tax
payable or refundable for the year plus or minus the change during the year in
deferred tax assets and liabilities.

BASIC AND DILUTED NET INCOME PER SHARE: Basic per share amounts are computed,
generally, by dividing net income by the weighted-average number of common
shares outstanding. Diluted per share amounts assume the conversion, exercise,
or issuance of all potential common stock instruments unless their effect is
antidilutive, thereby increasing the income per common share. During 2003 and
2002, convertible debt as described in Note 3 and options as reflected in Note 8
were included in the computation of weighted-average diluted shares outstanding
in the quarters in which their effect was dilutive.

STOCK-BASED COMPENSATION: The Company grants options to its employees under its
1998 Stock Option Plan as described in Note 8. As permitted by accounting
principles generally accepted in the United States of America, these grants are
accounted for following APB Opinion No. 25 and related interpretations.
Accordingly, compensation cost has been recognized for those grants whose
exercise price is less than the fair market value of the stock on the date of
grant. There was no compensation expense recorded for employee grants for the
years ended December 31, 2003 and 2002.

Had compensation cost for the options been determined based on the fair values
at the grant date consistent with the provisions of FASB Statement No. 123, the
Company's net income and net income per basic and diluted common share would
have been as indicated below:

<TABLE>
<CAPTION>
                                                                           Years Ended December 31
                                                                        ------------------------------
                                                                             2003              2002
                                                                        -------------      -----------
<S>                                                                     <C>                <C>
Net Income, as reported                                                 $   1,218,273      $   575,182
     Deduct total stock-based employee compensation expense
        determined under the fair value-based method for all awards          (152,989)         (94,321)
                                                                        -------------      -----------
   Net Income, proforma                                                 $   1,065,284      $   480,861
                                                                        =============      ===========
Basic net income per common share:
   As reported                                                          $        0.35      $      0.18
   Pro forma                                                                     0.30             0.15
Diluted net income per common share:
   As reported                                                                   0.34             0.17
   Pro forma                                                                     0.29             0.15
</TABLE>

The above pro forma effects on net income and net income per basic and diluted
common share are not likely to be representative of the effects on reported net
income or net income per common share for future years because options vest over
several years and additional awards generally are made each year.

                                      F-11

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial statements include the
following financial instruments and methods and assumptions used in estimating
their fair values: for cash and cash equivalents, the carrying amount is fair
value, and for trade accounts receivable, accounts payable, and line-of-credit
debt, the carrying amounts approximate their fair values due to either the
short-term nature of these instruments or the variable nature of the interest
rate. No separate comparison of fair values versus carrying values is presented
for the aforementioned financial instruments since their fair values are not
significantly different than their balance sheet carrying amounts. In addition,
the aggregate fair values of all financial instruments would not represent the
underlying value of the Company.

USE OF ESTIMATES: In preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America,
management is required 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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

NOTE 2. DEFERRED PREPUBLICATION COSTS The activities in deferred prepublication
costs for the years ended December 31, 2003 and 2002, are as follows:

<TABLE>
<CAPTION>
                                                    2003             2002
                                                -----------      -----------
<S>                                             <C>              <C>
Prepublishing costs, net, beginning of year     $ 4,596,460      $ 2,402,852
Prepublication cost additions                     4,608,789        3,405,974
Amortization expense                             (2,244,664)      (1,212,366)
                                                -----------      -----------
Prepublishing costs, net, end of year           $ 6,960,585      $ 4,596,460
                                                ===========      ===========
</TABLE>

The future amortization expense of deferred prepublication costs is estimated to
be as follows:

<TABLE>
<S>                                <C>
For the year ending December 31
2004                               $ 2,824,000
2005                                 2,497,000
2006                                 1,363,000
2007                                   277,000
</TABLE>

NOTE 3. LINES OF CREDIT AND LONG-TERM DEBT

LINES OF CREDIT AND LONG-TERM DEBT: On February 24, 2003, the Company entered
into a new $6,500,000 financing arrangement with a financial institution. The
arrangement includes three separate revolving lines of credit. The arrangement
provides for advances up to $4,000,000 over two years, subject to borrowing base
restrictions limited to 80 percent of eligible accounts receivable and 35
percent of inventory. The second line of credit is $2,000,000 over two years,
while the final $500,000 line of credit is for a one-year period. All three
lines of credit bear interest at LIBOR plus 2.25 percent. Total borrowings are
secured by substantially all assets of the Company and are subject to certain
financial covenants. At December 31, 2003, no amounts were outstanding under
this arrangement. This new financing agreement replaced a $5,500,000 line of
credit that existed at December 31, 2002.

                                      F-12

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. LINES OF CREDIT AND LONG-TERM DEBT  (CONTINUED)

The Company also has an arrangement for a three year reducing revolver in the
amount of $500,000 at an interest rate of LIBOR plus 2.25 percent. At December
31, 2003, no amounts were outstanding under this arrangement.

Long-term debt at December 31, 2003 and 2002, consisted of the following:

<TABLE>
<CAPTION>
                                                     2003         2002
                                                   --------     --------
<S>                                                <C>          <C>
Obligations under capital leases (Note 6)          $207,543     $286,497
Notes payable under line of credit (see above)            -      600,000
                                                   --------     --------
                                                    207,543      886,497
Less current maturities                              86,998       78,953
                                                   --------     --------
                                                   $120,545     $807,544
                                                   ========     ========
</TABLE>

The future payments under capital lease obligations are reflected in Note 6.

CONVERTIBLE NOTE PAYABLE TO STOCKHOLDER: In December 2002, the Company borrowed
$1,000,000 under a subordinated convertible note payable to its largest
stockholder. The terms of this note provided for quarterly interest payments at
a rate of 10 percent with principle due December 30, 2004, and conversion into
common stock if the Company secured a certain level of debt financing. As a
result of the aforementioned new financing agreement in February 2003, this
note, plus accrued interest, was converted into 289,785 shares of common stock
at a conversion price of $3.50 per share.

NOTE 4.  NET REVENUE BY PRODUCT LINE

The Company operates as one business segment, with three major product lines.
The Company's revenues, net of returns, by major product line for the years
ended December 31, 2003 and 2002, are as follows:

<TABLE>
<CAPTION>
Net Product Line Revenue              2003             2002
                                   -----------     -----------
<S>                                <C>             <C>
Test Preparation                   $15,109,423     $ 7,047,514
College Preparation                  9,359,264       9,076,236
Instruction                          1,279,393       1,235,086
                                   -----------     -----------
Total Net Product Line Revenue      25,748,080      17,358,836

Shipping and Handling Revenue        2,066,568       1,466,388
                                   -----------     -----------
Total Net Revenue                  $27,814,648     $18,825,224
                                   ===========     ===========
</TABLE>

                                      F-13

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. INCOME TAXES

Federal and state income tax expense for the years ended December 31, 2003 and
2002, consisted of the following:

<TABLE>
<CAPTION>
               2003         2002
             --------     --------
<S>          <C>          <C>
Current      $693,000     $321,000
Deferred       50,000       28,000
             --------     --------
Total        $743,000     $349,000
             ========     ========
</TABLE>

For the years ended December 31, 2003 and 2002, the income tax provision differs
from the amount of income tax determined by applying the U.S. federal income tax
rate to pretax income, due to the following:

<TABLE>
<CAPTION>
                                                     2003           2002
                                                  ---------      ---------
<S>                                               <C>            <C>
Computed federal income tax at statutory rate     $ 690,000      $ 323,000
State income taxes, net of federal benefit           71,000         45,000
Benefit of income taxed at lower rate               (20,000)        (9,000)
Other, including nondeductible expenses, net          2,000        (10,000)
                                                  ---------      ---------
                                                  $ 743,000      $ 349,000
                                                  =========      =========
</TABLE>

Net deferred tax assets and liabilities are comprised of the following at
December 31, 2003 and 2002:

<TABLE>
<CAPTION>
                                          2003           2002
                                       ---------      ---------
<S>                                    <C>            <C>
Deferred tax assets:
   Allowance for doubtful accounts     $  15,000      $  20,000
   Allowance for sales returns           229,000        188,000
   Inventory                              89,000         71,000
   Net operating loss                     63,000         69,000
                                       ---------      ---------
                                         396,000        348,000
                                       ---------      ---------

Deferred tax liabilities:
   Fixed assets                         (140,000)       (74,000)
   Allowance for purchase returns       (179,000)      (147,000)
                                       ---------      ---------
                                        (319,000)      (221,000)
                                       ---------      ---------
Net deferred tax assets                $  77,000      $ 127,000
                                       =========      =========
</TABLE>

                                      F-14
<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. INCOME TAXES (CONTINUED)

The aforementioned net deferred tax assets are reflected on the consolidated
balance sheets as follows:

<TABLE>
<CAPTION>
                                                      December 31
                                             ------------------------------
                                                 2003              2002
                                             ------------      ------------
<S>                                          <C>               <C>
Current assets                               $    154,000      $    132,000
Noncurrent assets                                 (77,000)           (5,000)
                                             ------------      ------------
Net deferred tax assets                      $     77,000      $    127,000
                                             ============      ============
</TABLE>

As of December 31, 2003, the Company had approximately $185,000 of net operating
loss (NOL) carryforwards available to reduce federal taxable income to 2014.
Future utilization of these loss carryforwards is subject to certain limitations
under provisions of the Internal Revenue Code, including limitations subject to
Section 382, which relate to a 50 percent change in control over a three-year
period. Such a change did take place in 1998, and the NOL carryforwards were
adjusted accordingly. The Company's ability to utilize the aforementioned NOL
carryforwards is limited to approximately $17,600 per year.

NOTE 6. COMMITMENTS

OPERATING LEASES: The Company is leasing its premises under an operating lease
that expires in October 2008. The Company also leases certain office equipment
under operating leases. In December 2003, the Company entered into a three-year
lease for office space in Round Rock, Texas.

Future minimum rental obligations under operating leases are as follows:

<TABLE>
<CAPTION>
Years ending December 31:
<S>                                                              <C>
         2004                                                    $  350,000
         2005                                                       351,000
         2006                                                       343,000
         2007                                                       306,000
         2008                                                       249,000
                                                                 ----------
                                                                 $1,599,000
                                                                 ==========
</TABLE>

Rent expense under the aforementioned operating leases was $264,000 and $216,000
in 2003 and 2002, respectively.

CAPITAL LEASES: The Company also has capital leases for the use of certain
office equipment. Lease terms are generally three to five years. Effective
interest rates on these obligations approximate 12 percent.

                                      F-15
<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. COMMITMENTS (CONTINUED)

A summary of equipment under capital leases as of December 31, 2003 and 2002, is
as follows:

<TABLE>
<CAPTION>
                                                 2003              2002
                                             ------------      ------------
<S>                                          <C>               <C>
Office equipment                             $    360,082      $    360,082
Less accumulated depreciation                     177,078           105,718
                                             ------------      ------------
                                             $    183,004      $    254,364
                                             ============      ============
</TABLE>

Approximate minimum annual lease payments under capital leases are as follows:

<TABLE>
<CAPTION>
Years ending December 31:
<S>                                                                             <C>
         2004                                                                   $ 106,284
         2005                                                                     106,284
         2006                                                                      23,490
                                                                                ---------
                                                                                  236,058

Less amount representing interest                                                  28,515
                                                                                ---------
Present value of minimum lease payments (included in long-term debt -- Note 3)  $ 207,543
                                                                                =========
</TABLE>

EMPLOYMENT AGREEMENTS: The Company has employment agreements with certain
executive officers, which provide severance benefits in the event the Company,
without cause, terminates such officers.

NOTE 7. CAPITAL STOCK

AUTHORIZED CAPITAL STOCK: The Company has authorized 10,000,000 shares of
capital stock, of which 8,500,000 are designated as common shares and 1,500,000
are designated as preferred shares.

NOTE 8. STOCK OPTIONS

As discussed in Note 1 to the financial statements, the Company accounts for
employee stock-based compensation under APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. The pro forma fair value of
each option grant as presented in Note 1 to the financial statements is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants: no dividends,
risk-free interest rates of 3.8 to 4.2 percent in 2003 and 3.3 to 4.2 percent in
2002, expected lives of five to ten years, and no expected volatility.

The 1998 Stock Option Plan (the Plan) permits the granting of incentive stock
options and nonqualified options. A total of 800,000 shares of the Company's
common stock have been reserved for issuance pursuant to options granted under
the Plan.

                                      F-16
<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.  STOCK OPTIONS (CONTINUED)

A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
                                                     Weighted-                      Weighted-
                                                     Average                        Average
                                                      Grant                         Exercise
                                                    Fair Value     Shares             Price
                                                    ----------     -------          --------
<S>                                                 <C>            <C>              <C>
Outstanding at December 31, 2001                    $     1.20     481,664          $   2.70
   Granted                                                0.95     231,900              3.00
                                                                   -------
Outstanding at December 31, 2002                          1.12     713,564              2.80
   Granted                                                1.22      50,500              3.60
   Exercised                                              0.53     (35,889)             1.20
                                                                   -------
Outstanding at December 31, 2003                          1.16     728,175              2.93
                                                                   =======
</TABLE>

There were 435,099 and 340,014 options exercisable at December 31, 2003 and
2002, respectively, at weighted-average exercise prices of $2.83 and $2.56 per
share, respectively. The weighted-average remaining contractual life of all
outstanding options was 7.04 years at December 31, 2003.

In a prior year, two officer/stockholders exercised options to purchase shares
of Company stock. The shares were issued in exchange for $125,000 of nonrecourse
promissory notes receivable bearing interest at 6 percent per annum. The notes,
plus all accrued interest, were due on July 31, 2003, and were collateralized by
the shares acquired. For financial reporting purposes, the notes receivable were
accounted for as a reduction of stockholders' equity. These notes were repaid in
May 2003.

NOTE 9. RELATED-PARTY TRANSACTIONS

The Company paid approximately $83,000 in 2003 for consulting and market
research services provided by two companies that are owned by one of the
Company's directors.

                                      F-17