UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.

                                   FORM 10-KSB

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

                     FOR THE FISCAL YEAR ENDED JULY 31, 1998

                            THE MILLBROOK PRESS INC.
           (Name of Small Business Issuer as Specified in its Charter)

         Delaware                                        06-1390025
(State or other jurisdiction of               (IRS Employer Identification No.)
incorporation or organization)

                             2 Old New Milford Road
                              Brookfield, CT 06804
                    (Address of principal executive offices)
                                 (203) 740-2220
                (Issuer's telephone number, including area code)

Securities Registered pursuant to Section 12 (b) of the Exchange Act:
                                                                    Common Stock

Securities Registered pursuant to Section 12 (g) of the Exchange Act:
                                                                            None

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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 __

Check if disclosure of delinquent  filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained,  to the best of Registrant's
knowledge,  in  definitive  proxy  of  information  statements  incorporated  by
reference in Part III of this form 10-KSB or any  amendment to this Form 10-KSB.
(X)

Revenues for the Fiscal year ended July 31, 1998 were $15.6 million.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant,  based upon  price of the Common  Stock on  October  22,  1998,  was
approximately  $3,894,000.  As of July 31, 1998, the Registrant had  outstanding
3,455,000 shares of Common Stock.
<PAGE>
                            THE MILLBROOK PRESS, INC.
                            FORM 10-KSB ANNUAL REPORT

                                Table of Contents



                                     PART I

                                                                           Page

Item 1.      Description of Business                                        2

Item 2.      Description of Properties                                     11

Item 3.      Legal Proceedings                                             11

Item 4.      Submission of Matters to a Vote of Security Holders           12

                                PART II

Item 5.      Market for Common Equity and Related Stockholders Matters     12

Item 6.      Management's Discussion and Analysis or Plan of Operations    13

Item 7.      Financial Statements                                          17

Item 8.      Changes in and Disagreements with Accountants
             on Accounting and Financial Disclosures                       34

                               PART III

Item 9.      Directors, Executive Officers, Promoters and Control 
             Persons; Compliance with Section 16(a) of the Exchange Act    34

Item 10.     Executive Compensation                                        34

Item 11.     Security Ownership of Certain Beneficial Owners and
             Management                                                    34

Item 12.     Certain Relationships and Related Transactions                34

Item 13.     Exhibits, List and Reports on Form 8-K                        35

<PAGE>
Part I

Item 1.  Description of Business

Overview

The  Millbrook  Press Inc.  (the  "Company" or  "Millbrook"),  is a publisher of
children's nonfiction books, in both hardcover and paperback, for the school and
library market and the consumer market. The Company has published more than 1100
hardcover  and 500  paperback  books  under its  Millbrook,  Copper  Beech,  and
Twenty-First Century imprints.  The Company's books have been placed on numerous
recommended   lists   by   libraries,   retail   bookstores,   and   educational
organizations.  Books  published  under the Millbrook  imprint have evolved from
information-intensive  school and  library  books to include  its current mix of
highly graphic,  consumer-oriented  books.  Therefore,  many of its books can be
distributed  to the school and public  library  market as hardcover  books while
being  simultaneously  distributed to the consumer market as either hardcover or
paperback  books.  The majority of Copper Beech books are  published to both the
consumer and library  markets.  Twenty-First  Century Books titles are published
primarily for the library market.

The consumer market in children's books consists of books purchased by consumers
through the traditional  trade bookstores such as Barnes & Noble and Waldenbooks
and educational  chain stores such as Zainy Brainy and  Learningsmith,  Inc., as
well  as  the  non-traditional  distribution  channels  such  as  direct  sales,
catalogs,  direct mail, book clubs, book fairs, non-book retail stores, and on a
smaller scale, certain museums,  national parks,  historical sites, theme parks,
gift shops and toy stores.

In order to establish itself as a leading  publisher of children's books for the
consumer market, the Company intends to: (i) continue publishing preschool/early
elementary novelty books, books for beginning readers and early readers, chapter
books for young readers and  children's  popular-reference  books;  (ii) acquire
companies or develop  strategic  partnerships  that broaden its product line and
extend its distribution in consumer market channels;  (iii) expand its marketing
capabilities  in the consumer  market by increasing its in-house sales force and
management;  and (iv)  develop  books  that can be  exploited  through  emerging
distribution  channels in the consumer market,  including special sales channels
such as book clubs, book fairs, direct sales, catalogs,  direct mail, commercial
on-line services and the Internet. The Company believes that the high quality of
its books,  its  emphasis  on  publishing  books for  multiple  markets  and its
expanded distribution capabilities makes it well positioned to increase its book
sales to the expanding  consumer  market while at the same time  increasing  its
established sales base in the school and library market.

Industry Background

Although  consumer  expenditures for children's books showed a modest decline in
1997,  after  significant  growth from 1992-1996,  the Book Industry Study Group
estimates an increase of 5.9% in 1998 and a  compounded  annual rate of 5.7% for
the period  1997-2002.  This growth will result in  expenditures of $1.8 billion
for hardcover books and $1.4 billion for paperback books.

As a result,  school library  expenditures are estimated to grow to $190 million
and public  library  expenditures  to $205 by the year 2002, for a total of $395
million.

SCHOOL AND LIBRARY MARKET

The school and public  library  market is undergoing  significant  change due to
long-term social and

                                      -2-
<PAGE>

economic  forces.  The United States  Department of Education  predicts that the
student population from kindergarten through twelfth grade will increase 8% from
1997 to 2006, with an overall net gain of  approximately  3.8 million  students.
Because many school districts  allocate  instructional  material funds on a "per
head"  basis,  the Company  believes  that money  allocated  to schools for book
acquisitions should increase as the student population increases. In addition to
demographic  changes,  demand  for books has also  increased  as a result of the
school  and  public  library  market  becoming  aware  of,  and  responsive  to,
supporting the innovative instructional programs being developed and used in the
classroom.  New  teaching  philosophies  such as the "reading  initiative,"  and
"cross-curriculum  teaching" developed in the 1980s and 1990s have increased the
demand for  different and better books.  Librarians  are working with  classroom
teachers to select books that meet  classroom  criteria of being  multicultural,
visually stimulating,  interesting,  curriculum-related and suitable for a range
of reading ability.

CONSUMER MARKET

Demand for children's  books should also increase in the consumer  market due to
the  projected  increase  in the  number of  school-age  children.  The  Company
believes  that,  in  addition  to the  larger  school-age  population  the  most
important factors that will sustain larger sales of children's books include the
increased  availability of quality books,  particularly paperback books, and the
convenience of being able to purchase inexpensive  paperback books as opposed to
traveling  to  libraries.  In addition,  the Company  believes the growth in the
number of affluent,  better-educated  parents and the  increased  emphasis  they
place on education as a whole has also contributed to this trend.

Demand for children's  books in the consumer  market has also increased  because
the methods by which hardcover and paperback books are distributed  have changed
significantly in the past five years, leading to greater accessibility and shelf
space  for  books.  Traditionally,  books  were  primarily  sold at small  local
bookstores with limited selections. Many such bookstores were replaced by larger
mall bookstores which in turn were replaced by book superstores  (such as Barnes
& Noble).  Concurrently,  alternate  means of distribution  have developed.  For
example,  books are now sold by certain  retailers such as TJ Maxx,  educational
chain stores such as Learningsmith and Zany Brainy,  outlets and warehouse clubs
such as Sam's  Warehouse,  Costco,  and B.J.'s and on a smaller  scale,  certain
museums,  national  parks,  historical  sites,  theme parks,  gift shops and toy
stores.  Books are also more  accessible  to children  and  parents  through the
expansion of direct sales channels such as book fairs,  school and consumer book
clubs,  display sales and catalogs.  Book fairs are generally  week-long  events
conducted  on  school  premises  and  sponsored  by  school   librarians  and/or
parent-teacher  organizations  and are intended to provide students with quality
books at  reasonable  prices in order to help them  become  more  interested  in
reading.  The Company has identified more than 600 catalogs that sell children's
books, including such oddly diverse ones as an anatomical supply catalog.

CROSSOVER OF SALES

Demand for children's books has also increased because a book can now be sold to
both the school and  public  library  and the  consumer  market.  Traditionally,
hardcover library books addressed topics typical for school reports and research
and were created with the purpose of maximizing  information content rather than
appealing  to  consumers.  Because  books sold in the school and public  library
market  in the past  were  sold to  librarians/teachers  based on  content,  the
product was often informationally rich, but somewhat aesthetically  unappealing.
Conversely,  a paperback book sold in the consumer market was not designed as an
information  source,  but rather to attract a consumer's  attention  and thereby
sell itself from the shelf.  Accordingly  these books failed to address  certain
topics and lacked the  informational  content of library  books.  The  Company's
books, and books for the children's book market in general,

                                      -3-
<PAGE>

are now designed to appeal to both markets.  A book filled with  information  is
combined with an attractive title, cover and internal design to catch the eye of
the consumer  browsing the shelf. The same book can then be bound as a hardcover
book  and  sold to  school  and  public  libraries.  Additionally,  as  either a
hardcover  or a  paperback,  the book  appeals  to  teachers  and can be used as
supplemental reading in the classroom.

Company Strategy

The Company's goal is to be a "one-stop  publisher,"  publishing and marketing a
diverse product line servicing most of the major segments of the children's book
market.  The  Company's  strategy is to continue to  diversify  its products and
distribution  channels for those products by  capitalizing  on the long-term and
short-term changes occurring in the children's book publishing  industry in both
the school and public library market and particularly in the consumer market.

The Company  believes  that this  diversified  approach to its product line will
enable it to achieve broad market  penetration in the children's book market and
minimize the risk of fluctuations or weakness in any one particular segment. The
Company  believes that its experience in publishing  children's books as well as
its reputation  for quality gained over the past eight years,  combined with the
evolution and  anticipated  growth rates for children's  books in the school and
public library and consumer  markets,  creates an opportunity for the Company to
expand the list of books in which it maintains a significant  ownership interest
and increase the recognition of its brand names.  The Company  believes that the
elements  required to achieve this goal are (i) publishing  books of the highest
quality,  created in house, through packaging arrangements or licensed, with the
ability  to  satisfy  two or more of the  markets  which it now  services,  (ii)
expanding  its  product  offerings  to  take  advantage  of its  investments  in
distribution  and its exposure to the consumer  market and (iii)  enhancing  its
existing marketing operations to support its product-line expansion initiatives.
Industry  conditions  among  publishers  in  recent  years  has  led to  ongoing
divestitures  and the Company  intends to accelerate its growth and increase its
market penetration by selectively acquiring other publishers of children's books
or by  formulating  strategic  alliances to increase the market  exposure of its
books. The Company also intends to explore  opportunities in electronic media by
selectively   participating   in  publishing  and  marketing   opportunities  in
commercial  on-line services and on the Internet.  Key elements of the Company's
strategy are:


o    CROSSOVER OF SALES.  The Company  believes that  significant  opportunities
     exist to market  products  typically  developed  for one market  into other
     markets.  To initiate its strategy of selling books that can crossover into
     two or more  markets,  in 1995 the Company began  reformatting  many of its
     previously published ("backlist") school and public library books under its
     Millbrook  imprint  into  paperback  books,  selling  them in the  consumer
     market. In addition,  the Company's  paperback books have also been sold as
     supplemental  materials for the classroom.  Similarly,  the Company's books
     under the Copper Beech  imprint are also  published in hardcover  format to
     sell to the school and public  library  market.  The  Company  will seek to
     continue to produce books in the future under both the Millbrook and Copper
     Beech  imprints  that will appeal to two or more  markets in order to fully
     exploit a book's sales potential.

o    TARGET  NEW  MARKET  NICHES/ACQUISITION   OPPORTUNITIES.   The  Company  is
     continually   seeking  new  market  niches  that  offer  opportunities  for
     achieving  significant sales growth. The Company has targeted the preschool
     novelty as a growing  market and plans to  continue  its  emphasis  on that
     segment  with books  containing  moveable  elements or books  bundled  with
     additional  merchandise.  The Company will publish  books for the beginning
     reader  (four to six years old) and early  reader

                                      -4-
<PAGE>

     (five to eight years old) as well as chapter  books for ages seven  through
     eleven.  The Company will publish  popular  reference  materials  for young
     readers from seven through fifteen.  In addition,  the Company will seek to
     expand its penetration of the supplemental classroom market where its books
     may also be used as  instructional  material.  Where possible,  the Company
     will re-format existing books for distribution into new markets, leveraging
     its investments in product development over a broader base.

     The Company has entered into a joint  venture with the Magic Attic Press to
     publish  their  doll-related  fiction  titles,  which the Company  believes
     should provide significant growth in both the library and consumer markets.

     The Company may also seek acquisition  opportunities covering niche markets
     in which the Company does not currently  compete and product  extensions in
     its  existing  markets.  The  Company's  product  development  strategy may
     include  joint  ventures  with  strategic  partners  to  minimize  up-front
     development costs.  Currently,  however,  the Company has no commitments or
     agreements with respect to any acquisitions or joint ventures.

o    ENHANCE  MARKETING  AND SALES  FORCE.  Since  inception,  the  Company  has
     increased its penetration  into the school and public library  market.  The
     Company intends to continue to build on these efforts by increasing its use
     of direct  mail,  expanding  circulation  of  catalogs  and  extending  its
     advertising  programs to achieve better coverage and increased  marketplace
     penetration.   The  Company  also  intends  to  enhance  its  telemarketing
     capabilities  in order to help strengthen  sales of books to retailers.  In
     the  consumer  market,  the  Company  intends  to rely more  heavily  on an
     in-house sales force rather than a commissioned sales force, with a view to
     entirely  replacing the commissioned  force with in-house  personnel in the
     future. The Company believes this change will enable it to more effectively
     concentrate the Company's selling efforts on mass retail, major book chains
     and special sales accounts and to facilitate the Company's entry into newly
     targeted markets.

o    EXPAND DISTRIBUTION. The Company intends to expand its existing channels of
     distribution  by  increasing  its  use  of  in-store  promotion,   consumer
     advertising and  telemarketing.  The Company believes that  decision-making
     with respect to purchasing  books is becoming more complex due to expansion
     in types of  outlets  selling  books and the  increasing  use of  marketing
     techniques to put the Millbrook  imprint in direct  contact with  children,
     parents and teachers will increase  sales.  The Company intends to increase
     its participation in book fairs, book clubs, catalogs and to distribute its
     books to  alternative  retail  outlets.  The Company may also seek to enter
     into additional  strategic  partnerships to extend its distribution in both
     the consumer and in school and public library market  channels.  Currently,
     however,  the Company has no commitments or agreements  with respect to any
     strategic partnership.

o    ADAPT TO NEW TECHNOLOGIES. The Company has begun digitally storing the text
     and graphics of its books so as to be well  positioned to take advantage of
     opportunities  in  the  electronic  media  industry,  including  commercial
     on-line services and the Internet,  if and when such  opportunities  become
     available.

o    CONTINUE TO DEVELOP  HIGH  QUALITY  BOOKS.  The Company  intends to develop
     additional  books through internal  development in  collaboration  with its
     network of authors and  artists.  The Company is now  selectively  entering
     into  agreements  with certain  high-profile  authors and  illustrators  to
     increase the recognition of its brand names.

                                      -5-
<PAGE>
Products

The Company  publishes  children's books in hardcover and paperback  formats for
the school and public library market and the consumer  market.  When the Company
began  publishing  books in 1991, the books created were mainly series books and
were intended to be sold singularly and in sets to the school and public library
market.  Since then,  the Company's  products have evolved into a diverse set of
highly-graphic,  consumer-oriented single books. The Company's Millbrook imprint
primarily targets the school and public library,  while its Copper Beech imprint
primarily  targets  the  consumer  market.  Nevertheless,  the  Company  designs
virtually all of its books to appeal to teachers and  librarians,  as well as to
children and parents.  This approach allows the Company's books to be introduced
simultaneously in more than one market, with the intent of increasing sales. For
example,  in fiscal 1998,  the Company  published  99 hardcover  books under the
Millbrook  imprint for the school and public library  market,  of which 44 books
were suitable for and published simultaneously as hardcovers or paperbacks to be
sold in the  consumer  market,  and 68  hardcover  books under the Copper  Beech
imprint for the school and library  market,  of which 37 books were suitable for
and published  simultaneously  as hardcovers  or  paperbacks,  to be sold in the
consumer market.

Product Development

The Company develops books through internal and external resources.  The Company
may also acquire books through co-publishing arrangements and/or the acquisition
of other licenses.

INTERNAL DEVELOPMENT

Nearly 75% of the books  published  under the Millbrook  imprint are produced by
the Company's  editorial  staff.  A book concept can originate  from a number of
sources such as (i) analysis of the Company's  sales  statistics for an existing
book to help assess how a similar book  targeting a similar age group will fair,
(ii) analysis of school age  demographics  and other social and economic factors
from  current  philosophical  trends  in  education  (i.e.  the  whole  language
movement) to the globalization of education,  (iii) review of competitors' books
to  determine  if and how the Company  can publish a superior  book on a similar
topic,  (iv) reading  children's  magazines  to determine  what young people are
interested in and (v) maintaining  personal contact with  librarians,  teachers,
and  booksellers.  Once  conceived,  a book  proposal  is  circulated  to sales,
production, marketing, design and financial departments of the Company for their
input  and  depending  on  their  input,  the  proposal  will go  forward  or be
terminated.  A favorable  decision  causes the editorial  department to contract
with an  appropriate  author  and/or artist from its pool of  approximately  350
authors and artists.  The Company believes it has excellent  relationships  with
its authors and artists, including many well-known names in the field.

Authors and artists  are  typically  engaged on a royalty  basis.  Royalties  on
hardcover and paperback  editions are paid on the net sales and range from 6% to
10% of net sales with an average of 7% of net sales for  hardcover and paperback
books.  The Company  believes its average  royalty rates are slightly lower than
overall  industry  standards.  The Company  expects its average royalty rates to
increase as the Company  increases  its  emphasis  on  consumer-oriented  books.
Virtually  all of  Millbrook's  contracts  call for an advance  payment  against
future royalties. Advances range from $1,000 for a simple series book to as much
as $15,000 to a well-known  artist for a picture book. In almost all cases,  the
Company  retains  control  of  all  book  club,  reprint,  electronic,  foreign,
serialization,   and  commercial   rights.   The  income   generated  from  such
arrangements is divided equally between the Company and the author.

Upon the delivery of a manuscript from an author/illustrator  and after editing,
fact-checking and approval,  the Company's in-house staff plans and prepares the
layout,  illustrations and cover to be used

                                      -6-
<PAGE>
for the book.  Upon completion of the editing,  graphics and layout,  a computer
produces a mechanical of the book with all elements in place. A cost estimate is
then prepared which determines print quantity and retail price of the book. Book
printing is done by an outside supplier,  usually in the United States, on a bid
contract basis.  The Company's  products  require varying periods of development
time  depending  upon the  complexity of the graphics and design and the editing
process.  Most of the  Company's  books can be developed in a period that ranges
from  nine to  eighteen  months.  Millbrook  is often  cited in  reviews  of the
Company's  books for one or more  outstanding  design elements  (cover,  layout,
type, etc.). Jackets and interior design are either created in-house or assigned
to freelance artists under the supervision of the Company's art department.  The
use  of  outside  authors,  illustrators  and  freelancers  for  jacket  design,
fact-checking  and copy editing  allows the Company to produce a large number of
books per year with a relatively  small staff and allows a tremendous  amount of
flexibility needed for the Company to continue to produce a broad product line.


EXTERNAL DEVELOPMENT

Approximately 25% of books published under the Millbrook imprint are produced by
outside  sources.  Most of these books are  produced by outside  packagers  that
cooperate  and  consult  with  Millbrook  during  the  development  process  but
otherwise provide the full range of services needed to publish children's books.
These arrangements include cooperation with other publishers in England, such as
Templar or Quarto, to which the Company pays a share of the cost of developing a
relatively  expensive book such as an atlas,  and the Company retains the rights
to sell the book in the United States and Canada while the publisher retains the
right to sell the book in its home country  and/or  elsewhere.  At present,  the
Company has six regular  suppliers from England and two United States  companies
with whom it has ongoing  projects.  The Company has entered into an  exclusive,
long-term  joint  venture  with  Aladdin,  a major  children's  packager for the
international  market,  which  expires on  January  1, 2002,  but can be renewed
thereafter,  to produce 50 nonfiction  titles per year to be published under the
Company's  newly-created imprint,  Copper Beech. The exclusive agreement between
the  Company and Aladdin  was  designed  to produce  books with strong  consumer
market appeal in popularly  priced  paperback books as well as content  suitable
for hardcover books for sales to libraries.  The books are to be wholly owned by
the Company. Aladdin is responsible for the production,  printing and binding of
such books,  although development costs for such books are shared by Aladdin and
the Company. Aladdin retains the sales rights for these books to countries other
than the  United  States,  Canada  and the  Philippines.  Royalties  are paid to
Aladdin based on the Company's sales.  Development  recovery amounts are paid to
the Company based on sales by Aladdin to other parts of the world.

LICENSES

In the normal course of its business, the Company acquires licenses from foreign
book  publishers  for the rights to market and sell in the United  States  books
that were created  either with or without input from the Company.  The licensing
usually includes all subsidiary  rights such as first and second  serialization,
commercial rights,  electronic rights,  foreign and translation rights,  reprint
rights and rights to any means yet to be developed for transmitting information.

Marketing and Distribution

The  Company's  sales and  marketing  efforts are  designed  to broaden  product
distribution,  increase the number of first-time and repeat purchasers,  promote
brand-name  recognition,  assist  retailers and properly  position,  package and
merchandise  the Company's  products.  The Company  utilizes  various  marketing
techniques  designed to promote brand  awareness and recognition and to maximize
the

                                      -7-
<PAGE>
amount of shelf space devoted to its product line in retail  outlets,  including
complimentary  copies,  reviews  and  recommendations,   catalogs,  advertising,
brochures,  exhibits, publicity campaigns and in-store promotions. The Company's
marketing  efforts are geared toward its two major  markets:  (i) the school and
public library market and (ii) the consumer market.

SCHOOL AND PUBLIC LIBRARY

The Company  targets the school and public  library  market  through  three main
channels:  wholesalers,  telemarketing and direct sales. Large school and public
library systems tend to purchase their books through wholesalers on a bid basis,
while smaller systems purchase  directly from a commission sales  representative
or through a telemarketing program such as the one the Company conducts.  During
the fiscal year ended July 31, 1998, approximately 67% of the Company's sales in
the school and public library market were made through  wholesalers.  While most
wholesalers  do not  engage  in sales  and  marketing  efforts  on behalf of the
Company's products,  they provide schools and public libraries with a wide range
of selection  and  convenience  as well as  discounts  on bulk  orders.  Baker &
Taylor, one of the largest  wholesalers in the school and public library market,
accounted  for 13% of the  Company's net sales in the fiscal year ended July 31,
1998.  While  the  Company  believes  that  there  are  alternative  wholesalers
available,  a  significant  reduction  in sales to Baker & Taylor  would  have a
material  adverse  effect on the  Company's  results  of  operations.  Through a
complementary marketing program of telemarketing,  advertising,  review programs
and direct sales calls, the Company believes that one of its greatest  strengths
is its ability to reach the individual  teacher,  principal or librarian  making
the purchase decision. Telemarketing generates 25% of the Company's sales in the
school and public library  market.  Telemarketing  penetrates the market through
its  "preview  program"  where  books  are given on loan to  teachers  and other
decision-makers on the premise that the quality of the book will sell itself. In
September  1998, the Company  initiated a website that will allow  librarians to
participate  in the "preview  program"  electronically.  This should  extend the
reach of the program  significantly.  The remaining 8% of the Company's sales in
this area results from  direct-selling  efforts where commissioned  salespersons
conduct face-to-face meetings at school and libraries with decision-makers or by
purchase from the Company's catalogs and advertising.

The Company markets its books in numerous ways to support the foregoing efforts.
The Company sends  complementary  copies of each newly published book to library
media  reviewers and columnists and major county or district school systems that
have their own review and  recommendation  process.  The Company believes that a
favorable review in a respected library journal can significantly  influence the
sales  prospects of a particular  book.  Many of the Company's  books  published
under the Millbrook imprint have received favorable reviews, but there can be no
assurance  that the Company will  continue to receive  favorable  reviews in the
future.  The Company  produces three catalogs and one magazine  insert per year.
For its school and library accounts, the Company produces one full-line catalog,
consisting of a complete  annotated backlist as well as new publications for the
Fall that is mailed to 100,000 current and perspective  accounts.  An eight-page
insert  is  produced  in  January  to  introduce  the new  list for  Spring  for
distribution  in School  Library  Journal (the major  professional  journal from
which  librarians  make purchase  decisions) and at  conventions  throughout the
year.  The Company  produces  two  full-line  catalogs per year for the consumer
market  in May and  December.  The  Company  also  advertises  in many  consumer
journals, newsletters and newspapers. The Company produces promotional materials
for  individual  titles,  themes,  authors and  illustrators.  It also  produces
standard "leave-behind" sell sheets that refresh a librarian's recollection of a
sales  presentation.  Finally,  the Company  exhibits its books at many national
conventions covering the school and public library and consumer markets.

The expanding use of children's books in the classroom,  especially in paperback
formats, has complicated the traditional  distribution networks since contacting
the particular teacher or other

                                      -8-
<PAGE>
individual  in  charge  of  curriculum  decisions  can be  more  difficult  than
contacting the school librarian.  The Company has created marketing  programs to
extend school sales beyond the library and into the classroom.  For example, the
Company's telemarketing division is currently test-marketing  curriculum-related
books and materials to teachers, principals and curriculum coordinators.

CONSUMER

The sales  channels in the consumer  market are more diverse than the school and
public library market and require a different  marketing  approach.  The Company
has recently attracted  experienced and talented sales and marketing  personnel.
The new in-house  consumer  sales group covers the two major areas:  traditional
consumer book markets and non-traditional  consumer book markets.  The Company's
merchandising  and  marketing   programs  have  increased  its  traditional  and
non-traditional  consumer  sales from $4.8  million in fiscal  year 1997 to $5.7
million in fiscal 1998.

As in the case with the school and public library market,  a large proportion of
the Company's sales in the consumer market are made through wholesalers. Ingram,
one of the largest  wholesalers in the consumer market,  accounted for 7% of the
Company's  net sales in the  fiscal  year ended  July 31,  1998,  and 67% of its
wholesale sales to the consumer  market.  While the Company  believes that there
are  alternative  wholesalers  available,  a  significant  reduction in sales to
Ingram would have a material adverse effect on the Company's operations.

The Company has three sales groups:  the in-house sales group,  the commissioned
sales group and the special sales group. The in-house sales group, consisting of
an  in-house  sales  director,  a manager of national  accounts  and a full-time
salaried sales person, is responsible for sales,  promotion and merchandising to
the major  national  and  large  regional  accounts.  Two  additional  full-time
salaried  sales  people  will be  added  January  1,  1999.  This  group is also
responsible for sales to the network of wholesalers  supporting  these accounts.
The commissioned sales group currently consists of approximately 30 commissioned
representatives who are responsible for sales to independent  bookstores,  small
regional  chains and certain  special  sales outlets and regional  jobbers.  The
special sales group managed by a sales director  markets to  specialized  retail
outlets such as museums,  national parks,  historical  sites,  theme parks, gift
shops and toy stores,  consumer and school  catalogs,  direct mail,  book fairs,
book clubs,  and display sales  companies.  The Company's sales  representatives
sell the full range of the  Company's  products.  The sales  groups  provide the
Company with highly  valuable  insight by obtaining  feedback from  customers on
current product  performance and potential  acceptance of proposed products.  In
addition  to the  marketing  efforts  discussed  with  respect to the school and
public library market,  the Company conducts  additional  marketing  designed to
increase  brand name  recognition  in the  consumer  market.  The Company  makes
certain that good reviews, which can stimulate sales, are sent to the news media
on a regular basis. The Company participates with various outlets in advertising
directly to individuals through media and catalogs. In-store promotions, such as
posters,  points of purchase  displays,  brochures,  holiday  end-of-counter and
front-of-store displays, are also utilized by the Company to further enhance its
sales in the consumer market.

Manufacturing and Shipping

All of the Company's  books are printed and bound by third-party  manufacturers.
During fiscal year 1998, approximately 30% of the Company's printing and binding
needs were provided by Worzalla, an industry leader in library-bound,  short-run
printing  and  binding.  Manufacturing  is a  significant  expense  item for the
Company,  with a total of $5.5 million (or approximately 35% of net sales) spent
in 1998. The Company has used Worzalla's  services since the Company's inception
and enjoys a strong working relationship with Worzalla.  The Company believes it
has  sufficient  alternative  sources  of  manufacturing

                                      -9-
<PAGE>
services to meet its foreseeable needs should  Worzalla's  services no longer be
available  to the  Company  although  manufacturing  costs  could  be  adversely
impacted.

Shipping  orders  accurately  and  promptly  upon their  receipt is an important
factor in the Company's  customer service and in closing a sale. Most publishing
companies ship products within one week of receipt of a customer  order,  and in
general the  Company  meets or betters  this  timetable.  The Company  processes
customer orders through an in-house  processing  department.  The Company leases
warehouse  space from,  and its products are shipped to,  Mercedes  Distribution
Center of Brooklyn, New York.

Competition

The  children's  book  publishing  marketplace  in the school and public library
market  and  in  the  consumer  market  is  fragmented  and  very   competitive.
Competition  in the school and public  library  market is based upon  quality of
products,  brand name recognition and book content.  In the consumer market, the
primary  factors are brand name  recognition,  book  content,  availability  and
price.

There  are  many  publishers  of  material  similar  to  the  Company's  product
offerings.  The Company's chief and direct  competitors in the school and public
library market include  Childrens  Press,  Dorling  Kindersley  Publishing Inc.,
Franklin  Watts Inc.,  Lerner  Publications  Co. and Troll  Communications.  The
Company's chief and direct  competitors in the consumer market include  Barron's
Educational Series Inc.,  Candlewick Press,  Dorling  Kindersley Inc.,  Larousse
Kingfisher Chambers Inc., Random House Inc. and Usborne Publishing Ltd.

The Company also  competes  with a large number of other  publishers  for retail
shelf  space in large  bookstore  chains  such as  Barnes & Noble,  Borders  and
Waldenbooks. In addition to competition among like types of publishing programs,
the overall  competition for limited  educational  budgets is intense when other
producers of materials used in classrooms and libraries are included, especially
producers  and  distributors  of electronic  hardware and software.  A number of
these  competitors have considerably  greater financial and marketing  resources
than  the  Company.  Nevertheless,  the  Company  believes  that  the  depth  of
experience  of its  management  and its  connections  into the  hierarchy of the
education  sector  give the  Company a  competitive  edge not only in  producing
quality  books  marketable in the school and library and consumer  markets,  but
also  in  foreseeing   long-term  and  short-term  social  and  economic  forces
influencing the children's book industry.

Protection of Proprietary Rights

Nearly all the Company's  books have been  copyrighted in the United States,  in
the name of the author or artist and then all such copyrights have been assigned
to the Company. As a result, the Company owns the exclusive right to exploit the
copyright in the marketplace.  On books created in-house by the Company, it owns
world  rights  for  all  aspects  of the  market,  including  first  and  second
serialization,  commercial rights,  electronic  rights,  foreign and translation
rights,  reprint  rights,  and  rights  to any  means  yet to be  developed  for
transmitting information.  There are a limited number of books for which foreign
rights and  electronic  rights will revert to the author if the Company does not
exploit them in a given period of time, usually two years after publication.  On
books that are imported under the Millbrook  imprint,  the Company has exclusive
rights for all United States markets and the  Philippines.  On more than half of
the  imported  titles,  the  Company  holds the  Canadian  rights  as well.  The
Company's trade names,  Millbrook,  Twenty-First  Century and Copper Beech,  are
used to publish books  primarily for the school and library  market and consumer
market  respectively.  The Company  considers  these trade names material to its
business.

                                      -10-
<PAGE>
For the Copper Beech titles, the Company has exclusive rights for all markets in
the United States and Canada.  World rights are retained for books originated by
Aladdin and the Company participates in the profits generated from such sales on
a 25% basis.

Employees

As of July 31,  1998,  the  Company  has  approximately  48  employees.  90% are
full-time  and 10% are  part-time.  The  Company  has never  experienced  a work
stoppage and its employees are not covered by a collective bargaining agreement.
The Company believes its relations with its employees are good.

Item 2.  Description of Properties

The Company owns no real property.  The Company  conducts its operation  through
two  facilities.  The Company leases  approximately  5,500 square feet of office
space in  Brookfield,  Connecticut at a current rental of $112,000 per year plus
utilities  and taxes.  This lease  expires in December  2002.  The Company  also
leases  approximately 1,900 square feet and 751 square feet of space in New York
City at a rental of $34,340  per year plus  utilities  and taxes and $16,522 per
year plus  utilities and taxes  respectively.  These leases expire in April 2004
and  February  1999  respectively.  The  Company  also  leases  office  space in
Southhampton,  New York at a current  rental of $12,000 per year plus  utilities
and taxes. This lease expires in September 1999.

Item 3.  Legal Proceedings

The Company is not currently a party to any material legal proceedings.


                                      -11-
<PAGE>
Item 4.  Submission of Matters to a Vote of Security Holders

         None

PART II

Item 5.  Market for Common Equity and Related Stockholders Matters

The Common Stock of The Millbrook  Press Inc. is traded under the symbol MILB on
the NASDAQ  SmallCap  Market.  The Company's  Common Stock is also traded on the
Boston Stock Exchange under the symbol MILB. The following  table sets forth the
ranges of the high and low  closing  bid  prices  for the  Common  Stock for the
fiscal  years ended July 31, 1997 and July 31,  1998,  as reported on the NASDAQ
SmallCap  Market,  the  principal  trading  market  for the  Common  Stock.  The
Company's  Common  Stock  commenced  trading  on the Nasdaq  SmallCap  Market on
December 17, 1996. The quotations are interdealer  prices without adjustment for
retail markups, markdowns, or commission and do not necessarily represent actual
transactions.

                                  COMMON STOCK
                            YEAR ENDED JULY 31, 1998

                                  High              Low

First Quarter                     6-3/8             4-5/8

Second Quarter                    5-5/8             4-1/2

Third Quarter                     4-1/2             3-3/4

Fourth Quarter                    4-1/4             3

                            YEAR ENDED JULY 31, 1997

First Quarter                     -                 -

Second Quarter                    7                 5-3/8

Third Quarter                     6                 5

Fourth Quarter                    6-3/8             5-3/8

As of  July  31,  1998,  the  Company  had  3,455,000  shares  of  Common  Stock
outstanding and 27 holders of record of the Company's  Common Stock. The Company
believes that at such date, there were in excess of 600 beneficial owners of the
Company's Common Stock.

The  Company  has never paid any  dividends  on its Common  Stock.  The  Company
currently intends to retain all earnings, if any, to support the development and
growth of the Company's business.  Accordingly,  the Company does not anticipate
that any cash dividends will be declared on its Common Stock in the  foreseeable
future.

                                      -12-
<PAGE>
Item 6.    Management's Discussion and Analysis or Plan of Operation

The following  discussion and analysis  should be read in  conjunction  with the
Financial  Statements  of The  Millbrook  Press Inc.  and  related  Notes to the
Financial Statements which are included elsewhere in this Form 10-KSB.

OVERVIEW

         General

         In February 1994, the Company was  incorporated and acquired the assets
of The Millbrook Press Inc.,  which had commenced  operations in 1989.  Prior to
January  1991,  The Millbrook  Press Inc. had no revenues and incurred  expenses
related to administrative  costs associated with the formation and production of
its first  publication  list.  Subsequent to January  1991,  the Company has had
significant net sales in the school and public library  market.  Books published
under the Millbrook imprint have evolved from  information-intensive  school and
library  books to include its current mix of highly  graphic,  consumer-oriented
books. Therefore,  the Company has incurred significant expenses relating to the
establishment of the infrastructure that can enable the Company to sell books to
the consumer  market and/or develop books that can appeal to both the school and
public library market and the consumer market.

         Acquisition

         On December 5, 1997 the Company  completed an  acquisition  to purchase
certain  assets of  Twenty-First  Century Books, a division of Henry Holt & Co.,
Inc.  ("Holt").  The  purchase was  effective as of December 1, 1997.  Under the
agreement, the Company paid Holt $2,013,000 for the assets.

         Consumer Market compared to School and Public Library Market

As the Company sells more of its products in the consumer market, the results of
operations  and  its  financial   condition   could  be  influenced  by  certain
distinctions  between  consumer market and the school and public library market.
It is generally  more difficult to collect  receivables  in the consumer  market
than in the school and  library  market.  Sales to the  consumer  market  have a
higher  return  rate than  sales to the school  and  public  library  market and
accordingly the Company will need to deduct a higher reserve for return from its
gross sales.  Sales to the consumer market have a lower gross profit margin than
sales to the school and library market because  consumer sales have higher sales
discounts  and  promotional  allowances  than  sales to the  schools  and public
library market.

         Sales Incentives and Returns

In  connection  with  the  introduction  of new  books,  many  book  publishers,
including the Company,  discount  prices of existing  products,  provide certain
promotional  allowances and give other sales incentives to their customers.  The
Company  intends to continue  such  practices in the future.  In  addition,  the
practice in the publishing industry is to permit customers including wholesalers
and retailers to return merchandise.  Most books not sold may be returned to the
Company,  and the  Company  gives  credit.  The rate of  return  also can have a
significant  impact on quarterly  results since certain  wholesalers have in the
past  returned  large  quantities  of  products  at  one  time  irrespective  of
marketplace  demand for such  products,  rather than  spreading  out the returns
during the course of the year.  The Company  computes net sales by  concurrently
deducting a reserve for returns from its gross

                                      -13-
<PAGE>

sales.  Return allowance may vary as a percentage of gross sales based on actual
return  experience.  The Company  believes  that as gross sales to the  consumer
market increase as a proportion of its overall sales,  returns will constitute a
greater proportion of net sales. Although the Company believes its reserves have
been  adequate to date,  there can be no assurance  that returns by customers in
the future will not exceed historically  observed  percentages or that the level
of returns  will not exceed the amount of reserves  in the future.  In the event
that the  amount  reserved  proves to be  inadequate,  the  Company's  operating
results will be adversely affected.

RESULTS OF OPERATIONS

 Fiscal 1998 Compared to Fiscal 1997

Fiscal 1998 revenues  increased  approximately  24% from $12.6 million in fiscal
1997 to $15.6 million in fiscal 1998.  Increased sales resulted from significant
increases  in trade and school and library  sales.  The  increasing  size of the
Company's  backlist,  the introduction of the Company's beginning reader program
and the increase in quality of the  Company's  frontlist is largely  responsible
for the trade sales increase.  The acquisition of Twenty-First Century Books and
continuing increases in existing imprints were responsible for the growth in the
library market.

Gross profit margin for the fiscal year ended July 31, 1998  increased to 50% of
net sales  compared  to 46% of net  sales for the same  period  last  year.  The
increase in gross profit margin resulted from lower paper,  printing and binding
cost as a percentage of sales compared to fiscal 1997.

Selling and  marketing  expenses  for fiscal 1998  decreased to 33% of net sales
from 36% of net sales for fiscal  1997.  Selling  and  marketing  expenses  have
increased as a result of the Company's efforts to expand its internal  marketing
operations and higher warehousing and distribution costs due to increased sales.
However, as a percentage of net sales,  selling and marketing expenses decreased
due primarily to special sales for which no marketing efforts are needed.

General and  administrative  expenses  for fiscal 1998  decreased by $173,000 to
$1.7 million compared with $1.9 million for fiscal 1997. This decrease is due to
expenses incurred in fiscal 1997 in connection with the Company's initial public
offering (the "IPO").

For the fiscal year ended July 31,  1998,  the Company had  operating  income of
$866,000,  or 6% of net sales compared to a loss of $661,000, or 5% of net sales
for fiscal 1997.  The increase in  operating  income is due to increased  sales,
lower cost of sales and lower general and administrative expenses.

Net  interest  expense  increased  from  $197,000  in fiscal 1997 to $218,000 in
fiscal  1998.  The  increase in interest  expense is due to the  acquisition  of
Twenty-First Century Books.

Liquidity and Capital Resources

As of July 31,  1998,  the Company  had cash and working  capital of $34,000 and
$5.4 million,  respectively,  as opposed to cash and working capital of $323,000
and $6.6 million,  respectively  as of July 31, 1997.  This decrease in cash and
working capital was due to the acquisition of Twenty-First Century Books.

The Company has  available a $7,500,000  revolving  line of credit with People's
Bank. The line of credit  restricts the ability of the Company to obtain working
capital in the form of  indebtedness  other than

                                      -14-
<PAGE>

indebtedness incurred in the ordinary course of the Company's business, to grant
security  interest  in the  assets of the  Company  or to pay  dividends  on the
Company's  securities.   As  of  July  31,  1998,  the  Company  has  $3,875,000
outstanding  under this line.  The  reason for the  increase  in the debt is the
acquisition of Twenty-First Century Books and to meet working capital needs.

Inventory  of finished  goods  totaled $6.7 million and $4.9 million at July 31,
1998 and July 31,  1997,  respectively.  The higher level of inventory is due to
the acquisition of Twenty-First Century Books, the introduction of the beginning
reader  program,  and the  increasing  size of our trade and school and  library
backlist.  The increase in accounts receivable of $2,121,000 from the prior year
is due to increased sales.

Based on its current  operating  plan,  the Company  believes  that its existing
resources  together  with cash  generated  from  operations  and cash  available
through its credit line will be sufficient to satisfy the Company's contemplated
working capital requirements through approximately July 31, 1999. However, there
can be no assurance that the Company's  working  capital  requirements  will not
exceed its  available  resources or that these funds will be  sufficient to meet
the Company's longer-term cash requirements for operations.  Accordingly, either
before or after  July 31,  1999,  the  Company  may seek  additional  funds from
borrowings or through debt or equity financing.

Forward-Looking Statements

This Form 10KSB contains certain  forward-looking  statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the  safe  harbors   created   hereby.   Investors   are   cautioned   that  all
forward-looking  statements  involve risks and  uncertainty,  including  without
limitation, the Company's future cash resources and liquidity and the ability of
the Company to fully exploit a book's sales  potential in the school and library
and  consumer  markets.  Although  the  Company  believes  that the  assumptions
underlying the forward-looking  statements contained herein are reasonable,  any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the  forward-looking  statements included in this Form 10-KSB will prove to
be  accurate.  In  light  of  the  significant  uncertainties  inherent  in  the
forward-looking  statements  included herein,  the inclusion of such information
should not be regarded as a  representation  by the Company or any other  person
that the objectives and plans of the Company will be achieved.

Year 2000 Disclosure

Many currently  installed  computer  systems and software  products are coded to
accept only  two-digit  entries in the date code  field.  These date code fields
will need to accept four digit  entries to  distinguish  21st century dates from
20th century dates. As a result,  in less than two years,  computer  systems and
software used by many companies,  including customers and potential customers of
the  Company,  may  need  to  be  upgraded  to  comply  with  such  "Year  2000"
requirements.  The Company is closely  monitoring the progress the developers of
the Software the Company utilizes in many of its customer  projects,  as well as
the developers of the software  utilized in internal  systems are making towards
ensuring  that the products the Company  utilizes are Year 2000  compliant.  The
Company believes that its internal systems and third party software incorporated
into client solutions will be Year 2000 compliant.  Failure to provide Year 2000
compliant business solutions and software to its customers could have a material
adverse  effect on the Company's  business,  results of operations and financial
condition.  The  Company's  costs to ensure that  internal  systems and software
acquired for integration into client business  solutions are Year 2000 compliant
has not been and is not expected to become significant.

                                      -15-
<PAGE>

Further,  the Company  believes  that the  purchasing  patterns of customers and
potential  customers  may be affected by Year 2000  issues as  companies  expend
significant  resources to correct or patch their  current  software  systems for
Year 2000 compliance.  These  expenditures may result in reduced funds available
to purchase products and services such as those offered by the Company.

                                      -16-
<PAGE>

Item 7.          Financial Statements






                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



The Shareholders and The Board of Directors
The Millbrook Press Inc.:


We have audited the accompanying balance sheet of The Millbrook Press Inc. as of
July 31, 1998 and the related statement of operations, stockholders' equity and
cash flows for the year 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
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 our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Millbrook Press Inc. as of
July 31, 1998 and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.



/s/ ARTHUR ANDERSEN LLP



Stamford, Connecticut,
September 15, 1998

                                      -17-
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



The Shareholders and the Board of Directors
The MillBrook Press Inc.:

We have audited the accompanying balance sheet of The Millbrook Press Inc. as of
July 31, 1997, and the reltated statements of operations, stockholders' equity
and cash flows for the year 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
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 aduit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of The Millbrook Press Inc. as of
July 31, 1997 and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.

As discussed in the Notes to Financial Statements, in 1997 the Company adopted
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 123. "Accouinting for Stock-Based
Compensation."


/s/ KPMG Peat Marwick LLP



New York, New York
October 3, 1997

                                      -18-
<PAGE>
                            THE MILLBROOK PRESS INC.


                                 BALANCE SHEETS

                             JULY 31, 1998 AND 1997




<TABLE>
<CAPTION>
                                                                                                        1998                 1997
                                                                                                    -----------          -----------
                                                ASSETS
<S>                                                                                                 <C>                  <C>        
Current assets:
    Cash                                                                                            $    34,000          $   323,000
    Accounts receivable (less allowance for returns and bad debts
        of $630,000 in 1998 and $456,000 in 1997)                                                     4,945,000            2,824,000
    Inventories                                                                                       6,709,000            4,935,000
    Royalty advances, net                                                                               857,000              359,000
    Prepaid expenses                                                                                    423,000              582,000
                                                                                                    -----------          -----------
                      Total current assets                                                           12,968,000            9,023,000
                                                                                                    -----------          -----------
    Plant costs, net                                                                                  4,248,000            3,124,000
    Fixed assets, net                                                                                   236,000              256,000
    Goodwill, net                                                                                     3,336,000            3,055,000
    Royalty advances, net                                                                               673,000              277,000
    Other assets                                                                                         15,000               34,000
                                                                                                    -----------          -----------
                      Total assets                                                                  $21,476,000          $15,769,000
                                                                                                    -----------          -----------


                                 LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Notes payable to banks                                                                          $ 3,875,000          $      --
    Accounts payable and accrued expenses                                                             3,406,000            2,271,000
    Royalties payable                                                                                   248,000              199,000
                                                                                                    -----------          -----------
                      Total current liabilities                                                       7,529,000            2,470,000
                                                                                                    -----------          -----------
</TABLE>

                                      -19-
<PAGE>
                            THE MILLBROOK PRESS INC.


                                 BALANCE SHEETS

                             JULY 31, 1998 AND 1997

                                   (Continued)

<TABLE>
<CAPTION>
                                                                                                    1998                     1997
                                                                                               ------------            ------------
<S>                                                                                            <C>                     <C>         
Commitments
Stockholders' equity:
    Common Stock, par value $.01 per share, authorized
        12,000,000 shares; issued and outstanding                                                    35,000                  35,000
        3,455,000 shares in 1998 and 1997
    Additional paid-in capital                                                                   17,556,000              17,556,000
    Accumulated deficit                                                                          (3,644,000)             (4,292,000)
                                                                                               ------------            ------------
                      Total stockholders' equity                                                 13,947,000              13,299,000
                                                                                               ------------            ------------
                      Total liabilities and stockholders' equity                               $ 21,476,000            $ 15,769,000
                                                                                               ------------            ------------
</TABLE>




                 The accompanying notes to financial statements
                   are an integral part of these statements.

                                      -20-
<PAGE>
                            THE MILLBROOK PRESS INC.


                            STATEMENTS OF OPERATIONS

                   FOR THE YEARS ENDED JULY 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                                                   1998                     1997
                                                                                              ------------             ------------
<S>                                                                                           <C>                      <C>         
Net sales                                                                                     $ 15,615,000             $ 12,573,000
Cost of sales                                                                                    7,802,000                6,738,000
                                                                                              ------------             ------------
                                 Gross profit                                                    7,813,000                5,835,000
                                                                                              ------------             ------------
Operating expenses:
     Selling and marketing                                                                       5,176,000                4,552,000

     General and administrative                                                                  1,771,000                1,944,000
                                                                                              ------------             ------------
                                 Total operating expenses                                        6,947,000                6,496,000
                                                                                              ------------             ------------
Operating income (loss)                                                                            866,000                 (661,000)
Interest expense                                                                                   218,000                  197,000
                                                                                              ------------             ------------
Net income (loss)                                                                                  648,000                 (858,000)
Preferred dividend accrued                                                                            --                   (284,000)
                                                                                              ------------             ------------
Net income (loss) available to common stockholders                                            $    648,000             $ (1,142,000)
                                                                                              ============             ============ 
Earnings (loss) per share (basic and diluted)                                                 $        .19             $       (.46)
                                                                                              ============             ============ 
</TABLE>

                 The accompanying notes to financial statements
                   are an integral part of these statements.

                                      -21-
<PAGE>
                            THE MILLBROOK PRESS INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

                   FOR THE YEARS ENDED JULY 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                            Additional
                                                  Preferred Stock           Common Stock      Paid-In    Accumulated
                                                 Shares     Amount        Shares    Amount    Capital      Deficit        Total
                                                 ------  -----------    ---------  -------  -----------  -----------   ------------
<S>                                              <C>     <C>            <C>        <C>      <C>          <C>           <C>         
Balance at July 31, 1996                         4,700   $ 6,190,000    1,026,308  $10,000  $ 3,991,000  $(3,150,000)  $  7,041,000
Preferred stock dividend                          --         284,000         --       --           --       (284,000)          --
Conversion of preferred stock                    4,700)   (6,474,000)  (  473,692    5,000    6,469,000         --             --
Issuance of common stock warrants                 --            --           --       --         23,000         --           23,000
Issuance of common stock                          --            --      1,955,000   20,000    7,073,000         --        7,093,000
Net loss                                          --            --           --       --           --       (858,000)      (858,000)
                                                 -----   -----------    ---------  -------  -----------  -----------   ------------
Balance at July 31, 1997                          --     $      --      3,455,000  $35,000  $17,556,000  $(4,292,000)  $ 13,299,000
Net income                                        --            --           --       --           --        648,000        648,000
                                                 -----   -----------    ---------  -------  -----------  -----------   ------------
Balance at July 31, 1998                          --     $      --      3,455,000  $35,000  $17,556,000  $(3,644,000)  $ 13,947,000
                                                 -----   -----------    ---------  -------  -----------  -----------   ------------
</TABLE>                                                 
                 The accompanying notes to financial statements
                   are an integral part of these statements.



                                      -22-
<PAGE>
                            THE MILLBROOK PRESS INC.

                            STATEMENTS OF CASH FLOWS

                       YEARS ENDED JULY 31, 1998 AND 1997
<TABLE>
<CAPTION>
                                                                                                         1998                1997
                                                                                                     -----------        -----------
<S>                                                                                                  <C>                <C>         
Cash flows from operating activities:
    Net income (loss)                                                                                $   648,000        $  (858,000)
    Depreciation and amortization                                                                      1,548,000          1,123,000
    Provision for returns and bad debts                                                                  174,000            127,000
    Accretion of warrants                                                                                   --               23,000
    Changes in assets and liabilities, excluding effects from acquisition of
      Twenty-First Century Books:
        Increase in accounts receivable                                                               (2,295,000)          (867,000)
        Increase in inventories                                                                       (1,261,000)        (1,458,000)
        Increase in royalty advances                                                                    (610,000)          (205,000)
        (Increase) decrease in prepaid expenses                                                          159,000           (290,000)
        Decrease in other assets                                                                          19,000             25,000
        Increase in accounts payable and accrued expenses                                              1,135,000            130,000
        Increase in royalties payable                                                                     49,000             49,000
                                                                                                     -----------        -----------
                      Net cash used in operating activities                                             (434,000)        (2,201,000)
                                                                                                     -----------        -----------
Cash flows from investing activities:
    Capital expenditures                                                                                 (65,000)           (64,000)

    Plant costs, excluding effect from acquisition of Twenty-First Century Books                      (1,652,000)        (1,397,000)

    Payment for acquisition of Twenty-First Century Books                                             (2,013,000)              --
                                                                                                     -----------        -----------
                      Net cash used in investing activities                                           (3,730,000)        (1,461,000)
                                                                                                     -----------        -----------
Cash flows from financing activities:
    Repayment of notes payable                                                                              --           (4,992,000)
    Proceeds from borrowings under notes payable                                                       3,875,000          1,750,000
    Proceeds from sale of capital stock                                                                     --            7,093,000
                                                                                                     -----------        -----------
                      Net cash provided by financing activities                                        3,875,000          3,851,000
                                                                                                     -----------        -----------
                      Net increase (decrease) in cash                                                   (289,000)           189,000
                                                                                                     -----------        -----------
Cash at beginning of year                                                                                323,000            134,000
                                                                                                     -----------        -----------
Cash at end of year                                                                                  $    34,000        $   323,000
                                                                                                     -----------        -----------
Supplemental disclosures:
    Interest paid                                                                                    $   218,000        $   193,000
                                                                                                     -----------        -----------
</TABLE>
                 The accompanying notes to financial statements
                   are an integral part of these statements.

                                      -23-
<PAGE>
                            THE MILLBROOK PRESS INC.


                          NOTES TO FINANCIAL STATEMENTS

                             JULY 31, 1998 AND 1997




(1)       DESCRIPTION OF THE BUSINESS:

          The Millbrook Press Inc. ("Company") was incorporated and commenced
          operations as an independent company on February 23, 1994. The Company
          is a publisher of children's nonfiction books, in both hardcover and
          paperbacks, for preschoolers through young adults. The Company's books
          are distributed to the school and public library market, trade
          bookstores and other specialty retail and direct sales markets through
          wholesalers, its own telemarketing efforts and commissioned sales
          representatives. The Company was formed to acquire the net assets of a
          wholly owned subsidiary of Antia Publishing Company, which is a wholly
          owned subsidiary of Groupe de la Cite International, a French
          corporation.

(2)       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

              CASH AND CASH EQUIVALENTS-

              Cash and cash equivalents consist of cash in banks and highly
              liquid, short-term investments with original maturities of three
              months or less at the date acquired.

              REVENUE RECOGNITION-

              Revenue from the sale of books to wholesalers is recognized at
              shipment. The Company provides a reserve for product returns.
              Sales from telemarketing activities are recognized when the
              customer accepts all or part of a sample shipment.

              INVENTORIES-

              Inventories of sheets and bound books, which are primarily located
              in a public warehouse or at customers as inventory on preview, are
              stated at the lower of cost or market, with cost determined by the
              average cost method. Allowances are established to reduce recorded
              costs of obsolete and slow moving inventory to its net realizable
              value.

              ROYALTY ADVANCES-

              Licensing agreements for rights to future publications usually
              require a non-refundable partial payment of the royalty in advance
              of the publication. The Company charges royalty advances to
              expense in the period during which the related sales are recorded.
              If it appears that an advance will exceed total royalties to be
              incurred based upon 



                                      -24-
<PAGE>
              estimated sales, such excess is immediately expensed. Royalty
              advances for publications to be published in excess of one year
              from the balance sheet date are classified as non-current assets.

              PLANT COSTS-

              Plant costs consisting of plates, photo engravings, separations
              and other text costs of unpublished books are amortized over five
              years from publication date or the estimated remaining life, if
              shorter. Plant costs at July 31, 1998 and 1997 are presented net
              of accumulated amortization of $6,115,000 and $4,859,000
              respectively.

              ADVERTISING COSTS-

              Advertising costs are expensed in the periods in which the costs
              are incurred. Catalog costs consisting of the costs of producing
              and distributing catalogs are expensed ratably over the year in
              which the costs are incurred in relation to sales. Advertising
              expense for the years ended July 31, 1998 and 1997 was $538,000
              and $460,000, respectively.

              FIXED ASSETS-

              Fixed assets are recorded at cost. Depreciation and amortization
              of fixed assets are computed on the straight-line method based on
              useful lives ranging from 7-10 years for office furniture and
              equipment and 5 years for computers. Leasehold improvements are
              amortized over the lesser of the lease term or the life of the
              asset.

              GOODWILL AND OTHER LONG LIVED ASSETS-

              Goodwill represents the excess of the cost over the fair value of
              the net assets acquired. For financial reporting purposes, the
              excess of cost over the fair value of net assets acquired is
              amortized over 20 years using the straight-line method.
              Accumulated amortization at July 31, 1998 and 1997 is $842,000 and
              $636,000, respectively. Pursuant to Internal Revenue Code Section
              197, for Federal income tax purposes such goodwill is deductible
              over 15 years.

              The Company systematically reviews the recoverability of its long
              lived assets by comparing their unamortized carrying value to
              their anticipated undiscounted future cash flows. Any impairment
              is charged to expense when such determination is made.

              INCOME TAXES-

              Deferred tax assets and liabilities are recognized for the future
              tax consequences attributable to differences between the financial
              statement carrying amounts of existing assets and liabilities and
              their respective tax bases and operating loss and tax credit
              carryforwards. Deferred tax assets and liabilities are measured
              using enacted tax rates expected to apply to taxable income in the
              years in which those temporary differences are expected to be
              realized or settled. The effect on deferred tax assets and
              liabilities of a change in tax rates is recognized in income in
              the period that includes the enactment date.

                                      -25-

<PAGE>
              EARNINGS (LOSS) PER SHARE-

              In February 1997, the Financial Accounting Standards Board issued
              Statement of Financial Accounting Standards No. 128, "Earnings per
              Share" ("SFAS 128"). SFAS 128 requires dual presentation of basic
              earnings per share ("EPS") and diluted EPS on the face of all
              statements of earnings for all entities with complex capital
              structures. Basic EPS is computed as net earnings divided by the
              weighted-average number of common shares outstanding for the
              period. Diluted EPS reflects the potential dilution that could
              occur from common shares issuable through stock-based compensation
              plans including stock options, restricted stock awards, warrants
              and other convertible securities using the treasury stock method.
              The Company has adopted the provisions of SFAS 128 in fiscal 1998.
              Fiscal 1997 EPS data have been restated to conform to SFAS 128.

              Earnings (loss) per share are net earnings (loss) less the
              dividend requirements on preferred stock, divided by the weighted
              average number of common stock outstanding for the periods. Per
              share data for 1998 and 1997 does not assume the exercise of
              common stock options issued under the non-qualified 1994 Stock
              Option Plan, the Underwriter's Purchase Option or the exercise of
              the warrants issued in conjunction with the Bridge financing (Note
              13) because the effects of such exercise would have been
              antidilutive. Per share data reflects the reverse stock split
              effected on August 29, 1996 described in Note 13.

              STOCK OPTIONS-

              Prior to August 1, 1996, the Company accounted for its stock
              option plan in accordance with the provisions of Accounting
              Principles Board ("APB") Opinion No. 25, "Accounting for Stock
              Issued to Employees", and related interpretations. As such,
              compensation expense would be recorded on the date of grant only
              if the current market price of the underlying stock exceeded the
              exercise price. On August 1, 1996, the Company adopted SFAS No.
              123, "Accounting for Stock-Based Compensation", which allows
              entities to continue to apply the provisions of APB Opinion No. 25
              and provide pro forma net income and pro forma earnings per share
              disclosures for employee stock option grants made in fiscal 1996
              and future years as if the fair-value-based method defined in SFAS
              No. 123 had been applied. The Company has elected to continue to
              apply the provisions of APB Opinion No. 25 and provide the pro
              forma disclosure provisions of SFAS No. 123.

              USE OF ESTIMATES-

              The preparation of financial statements in accordance with
              generally accepted accounting principles requires management to
              make estimates and assumptions that affect the reported amounts of
              assets and liabilities and the reported amounts of revenue and
              expenses during the reported periods. Actual results could vary
              from the estimates and assumptions used in the preparation of the
              accompanying financial statements.

                                      -26-
<PAGE>
(3)       FIXED ASSETS:

          Fixed assets at July 31, 1998 and 1997 consist of the following:

                                                 1998           1997
                                              ---------      ---------
           Office furniture and equipment     $ 137,000      $ 126,000
           Computers                            341,000        289,000
           Telecommunication equipment           33,000         33,000
           Leasehold improvements                46,000         43,000
                                              ---------      ---------
                                                557,000        491,000
           Accumulated depreciation            (321,000)      (235,000)
                                              ---------      ---------
                                              $ 236,000      $ 256,000
                                              ---------      ---------


          Depreciation expense for the years ended July 31, 1998 and 1997 was
          $86,000 and $79,000, respectively.

(4)       NOTES PAYABLE TO BANKS:

          On December 14, 1995, the Company entered into a revolving line of
          credit agreement with a bank that provided for borrowings up to
          $2,700,000. The bank increased the available line of credit to
          $4,000,000 on June 17, 1997 and to $7,500,00 on June 10, 1998. The
          line of credit provides for an interest rate at the bank's base rate
          plus .5% (9% at July 31, 1998 and 1997). At July 31, 1998, the amount
          outstanding under this credit agreement was $3,875,000. Advances under
          this line of credit are collateralized by substantially all of the
          assets of the Company. The revolving line of credit, which is payable
          upon demand by the bank, contains various covenants which include,
          among other things, a minimum tangible net worth requirement. The
          revolving line of credit prohibits the Company from the declaration or
          payment of dividends on common stock.


(5)       INCOME TAXES:

          No Federal income taxes have been provided for the years ended July
          31, 1998 and 1997, due to the Company's net operating losses. The
          actual income tax expense differs from the "expected" income tax
          benefit computed by applying the U.S. Federal corporate income tax
          rate to loss before income taxes for the years ended July 31, 1998 and
          1997 as follows:

Computed "expected" income tax benefit            $220,000            $(292,000)
State and local income taxes, net of Federal
      benefit                                       39,000              (17,000)
Increase (decrease) in valuation allowance         265,000              292,000
Nondeductible expenses                               6,000               17,000
                                                  --------            ---------
               Provision for income taxes         $   -               $   -
                                                  ========            =========
                                      -27-
<PAGE>
          The tax effects of temporary differences between the financial
          statement carrying amounts and tax bases of assets and liabilities
          that give rise to the deferred tax assets and deferred tax liabilities
          at July 31, 1998 and 1997 are the following:

<TABLE>
<CAPTION>
                                                           1998                   1997
                                                       -----------            -----------
<S>                                                    <C>                    <C>        
             Deferred tax assets:
               Accounts receivable allowances          $    72,000            $   173,000
               Inventory reserves                          336,000                180,000
               Unicap                                       51,000                   --
               Plant costs                                  93,000                155,000
               Net operating loss carryforwards            297,000                638,000
                                                       -----------            -----------
                                                           849,000              1,146,000
             Less:  Valuation allowance                   (697,000)            (1,071,000)
                                                       -----------            -----------
                    Net deferred tax asset                 152,000                 75,000
                                                       -----------            -----------
             Deferred tax liabilities:
               Goodwill amortization                      (139,000)               (65,000)
               Fixed asset depreciation                    (13,000)               (10,000)
                                                       -----------            -----------
                                                          (152,000)               (75,000)
                    Net deferred income taxes          $      --              $      --
                                                       -----------            -----------
</TABLE>

          In assessing the realizability of deferred tax assets, management
          considers whether it is more likely than not that some portion or all
          of the deferred tax asset will be realized. The ultimate realization
          of the deferred tax asset is dependent upon the generation of future
          taxable income during the periods in which temporary differences or
          net operating loss carryforwards become deductible. Based on the
          Company's net operating losses to date, the Company has established a
          valuation allowance of $697,000 at July 31, 1998. The Company's tax
          net operating loss carryforward of approximately $747,000 at July 31,
          1998 expires in the years 2009 to 2012. The Tax Reform Act of 1986
          included certain provisions relating to changes in stock ownership
          which, if triggered, could result in future annual limitations on the
          utilization of the net operating loss carryforwards.

(6)       STOCK OPTION PLAN:

          The Company has reserved 675,000 shares of common stock under its
          non-qualified 1994 Stock Option Plan ("Option Plan") which provides
          that a committee, appointed by the Board of Directors, may grant stock
          options to eligible employees, officers and directors of the Company
          or its affiliates. The number of shares reserved for issuance is
          adjusted in accordance with the provisions of the Plan. All stock
          options granted by the Company expire seven years after the grant
          date. Stock options vest over a period from 2-5 years as determined by
          the stock option committee.

          In October 1996, the Company amended the Option Plan to decrease the
          exercise price on outstanding options from $8.00 per share to the
          initial public offering price of $4.50 per share. Non-vested options
          outstanding on the effective date (December 23, 1996) of the initial
          public offering, representing options for 283,500 shares, will vest
          50% one year from that date and an additional 50% two years from that
          date. As of July 31, 1998 and 1997, 


                                      -28-
<PAGE>
          there were options outstanding for 502,000 shares and 438,500 shares,
          respectively, under the Option Plan.

          The per share weighted-average fair value of stock options granted
          during 1998 and 1997, calculated in accordance with SFAS No. 123, was
          $1.88 and $2.51 on the date of grant using the Black Scholes
          option-pricing model with the following weighted-average assumptions:
          1998 - expected volatility 37%, risk-free interest rate of 5.7% and an
          expected life of 5 years; 1997 - expected volatility 40%, risk-free
          interest rates ranging from 6.3% to 6.9%, and an expected life of 7
          years.

          The Company applies APB Opinion No. 25 in accounting for its Option
          Plan. Had the Company determined compensation cost based on the fair
          value at the grant date for its stock options under SFAS No. 123, the
          Company's net income (loss) would have changed to the pro forma
          amounts indicated below:

                                                             1998      1997
                                                         -----------  --------
           Net income (loss)
             As reported                                  $648,000  $  (858,000)
             Pro forma                                     223,000   (1,199,000)
           Earnings (loss) per share (basic and diluted)                        
             As reported                                       .19         (.46)
             Pro forma                                         .06         (.60)
                                                                    
          Pro forma net income (loss) reflects only options granted in 1998 and
          1997. Therefore, the full impact of calculating compensation cost for
          stock options under SFAS No. 123 is not reflected in the pro forma net
          loss amounts presented above because compensation cost is reflected
          over the options' vesting periods of 2-5 years and compensation cost
          for options granted prior to August 1, 1995 is not considered.


                                      -29-
<PAGE>
          Stock Option Plan activity during the periods indicated is as follows:

                                                                   Weighted-
                                                                   Average
                                                                   Exercise
                                            Number of Shares        Price
                                            ----------------       --------

           Balance at July 31, 1996            285,500              8.00
             Granted                           463,500              4.78
             Cancelled                        (310,500)             8.00
                                              --------

           Balance at July 31, 1997            438,500              4.60 (a)
             Granted                           101,000              4.50
             Forfeited                         (37,500)             4.50
                                              --------
           Balance at July 31, 1998            502,000              4.50
                                              --------

          (a)  As discussed above, in October 1996, the Company amended the
               Option Plan to decrease the exercise price on outstanding options
               from $8.00 per share to $4.50 per share.

          At July 31, 1998 and 1997, the range of exercise prices was $4.50 -
          $6.075. The weighted-average remaining contractual life of outstanding
          options at July 31, 1998 and 1997 was 4.9 and 4.7 years, respectively.

          At July 31, 1998 and 1997, the number of options exercisable were
          219,000 and 107,000, respectively, and the weighted-average exercise
          price of those options was $4.50.

          In December 1996 in connection with the initial public offering, the
          Company sold to the Underwriter for $100, the Underwriter's Purchase
          Option ("Purchase Option"), consisting of the right to purchase up to
          an aggregate of 170,000 shares of common stock. The Purchase Option is
          exercisable at $6.075 per share for a period of four years commencing
          one year from December 17, 1996.

(7)       401(K) PROFIT SHARING PLAN:

          The Company maintains a Non-standardized Prototype Cash or Deferred
          Profit Sharing 401(k) Plan (the "Plan"). Participation in the Plan by
          employees requires that they complete six months of service for the
          Company and attain 21 years of age. Employees on the Plan's effective
          date did not have to satisfy the six-month service requirement. The
          Company determines each year a discretionary matching contribution.
          Such additional contribution, if any, shall be allocated to employees
          in proportion to each participant's contribution. The Company did not
          contribute to the Plan during the years ended July 31, 1998 and 1997.


                                      -30-
<PAGE>
(8)       COMMITMENTS

          The Company leases office facilities under operating leases which
          expire at various dates through 2004. The leases are subject to
          escalation clauses as they relate to certain expenses of the lessor,
          i.e., utilities and real estate taxes.

          Minimum future rental payments under non-cancelable operating leases
          having initial or remaining terms in excess of one year are as
          follows:

          Year ending July 31                        Amount
                        1999                         $167,000
                        2000                          149,000
                        2001                          148,000
                        2002                           83,000
                        2003                           36,000
                        Thereafter                     24,000
                                                     --------
                                                     $607,000
                                                     ========


          Rent expense for the years ended July 31, 1998 and 1997 were $167,000
          and $146,000, respectively.

          In May 1994, the Company entered into an agreement with Aladdin Books,
          a British publishing company, whereby Aladdin agreed to produce no
          less than 50 titles per year for Millbrook through January 1, 2002.
          The titles are to be wholly owned by Millbrook. Aladdin is responsible
          for production, printing and binding. Production costs are shared by
          Aladdin and Millbrook. Aladdin retains sales rights for these titles
          to countries other than the United States, Canada and the Philippines.
          Royalties are paid to Aladdin based on Millbrook sales. Development
          recovery amounts are paid to Millbrook based on sales by Aladdin to
          other parts of the world. Net payables to Aladdin at July 31, 1998 and
          1997 are $681,000 and $1,003,000, respectively.

          During fiscal 1997, the Company signed an agreement with an author to
          create a beginning reader series consisting of forty-eight titles to
          be published over the next two years. Twenty-four of these titles were
          published in fiscal 1998. The Company will advance royalties to this
          author at $19,000 per title when certain provisions of this agreement
          are met. At July 31, 1998, the Company has advanced royalties in
          accordance with this agreement of $667,000.

(9)       FAIR VALUE OF FINANCIAL INSTRUMENTS:

          CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES-

          The carrying amount approximates fair value because of the short term
          maturity of these instruments.

                                      -31-
<PAGE>
              NOTES PAYABLE-

              The carrying amount of these financial instruments approximates
              fair values based on the fact that the related interest rates
              fluctuate with market rates.

(10)      CONCENTRATION OF CREDIT RISK:

          The company extends credit to various companies in the retail and mass
          merchandising industry for the purchase of its merchandise which
          results in a concentration of credit risk. This concentration of
          credit risk may be affected by changes in economic or other industry
          conditions and may, accordingly, impact the Company's overall credit
          risk. Although the Company generally does not require collateral, the
          Company performs ongoing credit evaluations of its customers and
          reserves for potential losses are maintained. One customer accounted
          for 7% and 12% of the Company's net sales for the years ended July 31,
          1998 and 1997, respectively.

(11)      ACQUISITION OF TWENTY-FIRST CENTURY BOOKS:

          On December 5, 1997, certain assets of Twenty-First Century Books
          ("Twenty-First Century"), were acquired by the Company for
          approximately $2,013,000 in cash. The acquisition has been recorded
          using the purchase method of accounting. Accordingly, the accompanying
          financial statements include the results of operations of Twenty-First
          Century from December 5, 1997. The consolidated balance sheet at July
          31, 1998 includes the accounts of Twenty-First Century based on a
          preliminary allocation of the purchase price. The allocation is
          expected to be finalized after various studies and other work have
          been completed. Goodwill resulting from this acquisition will be
          amortized on a straight line basis over 20 years.

(12)      PREFERRED STOCK:

          On December 23, 1996, in conjunction with the Company's initial public
          offering, all preferred shares outstanding, plus accrued and unpaid
          dividends were converted to 473,692 shares of common stock. Additional
          preferred stock may be issued by the Board of Directors on such terms
          and with such rights, preferences and designations as the Board may
          determine without any vote of the stockholders. No preferred shares
          were issued or outstanding at July 31, 1998 and 1997.

(13)      CAPITAL STRUCTURE:

          In August 1996, the Board of Directors of the Company approved a
          recapitalization plan that included (i) a bridge financing ("Bridge
          Loan") in the principal amount of $1,750,000 and the issuance of an
          aggregate amount of 875,000 warrants as outlined below and (ii) an
          initial public offering of 1,700,000 shares of common stock.

          In connection with the Bridge Loan, the Company effected a reverse
          stock split of common stock on the basis of .3976 shares of common
          stock for each share of common stock. Common stock outstanding and
          earnings (loss) per share data reflect the reverse stock split for all
          periods presented.


                                      -32-
<PAGE>
              BRIDGE LOAN-

              On August 29, 1996, the Company consummated the closing of a
              private placement bridge offering in which it sold 17 1/2 units
              for an aggregate of $1,750,000. Each unit consists of a $100,000
              interest bearing unsecured convertible promissory note ("Note")
              and a warrant to purchase 50,000 shares of common stock at an
              initial exercise price of $3.00 per share ("Bridge Warrant"). The
              Note provided for interest at a rate of 10% per annum through
              November 30, 1996 and thereafter at a rate of 15% per annum and is
              payable upon the earlier of February 28, 1998 or the closing of
              the initial public offering by the Company. The carrying value of
              the Note has been reduced by $23,000 to reflect the fair market
              value of the Bridge Warrants at issue date and has been accreted
              up to the face value of $1,750,000 using the interest method. Fees
              incurred in connection with the financing were $314,000. In
              December 1997, at the consummation of the initial public offering
              the Bridge Loan was paid in full.

              INITIAL PUBLIC OFFERING-

              On December 23, 1996, the Company sold 1,955,000 shares of common
              stock, including the underwriter's over-allotment, in an initial
              public offering which generated net proceeds of approximately
              $7,093,000. The net proceeds were primarily used to repay existing
              bank debt and the Bridge Loan.


                                      -33-

<PAGE>

Item 8.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosures.

On May 5, 1998, the Audit  Committee of the Board of Directors of the Registrant
dismissed KPMG Peat Marwick LLP ("Peat  Marwick") as independent  accountants to
the  Registrant  and  appointed  Arthur  Andersen  LLP  as the  new  independent
accountants  to  the  Registrant.  Peat  Marwick's  accountant's  report  on the
financial statements of the Registrant for the past two years and any subsequent
interim period through the date of dismissal did not contain an adverse  opinion
or a disclaimer of opinion and was not qualified or modified as to  uncertainty,
audit scope, or accounting principles.  There were no other reportable events or
disagreements  with  Peat  Marwick  to  report  in  response  to item 304 (a) of
Regulation S-B.

Part III

Item 9.  Directors,   Executive   Officers,   Promoters  and  Control   Persons;
         Compliance with Section 16 (a) of the Exchange Act.

         The information  required by Item 9 regarding directors is incorporated
by  reference  to the  information  appearing  under the  caption  "Election  of
Directors"  in the Company's  definitive  Proxy  Statement  relating to its 1998
Annual  Meeting of  Stockholders  to be filed with the  Securities  and Exchange
Commission  within 120 days after the close of its fiscal year. The  information
required  by Item 9  regarding  executive  officers  appears  under the  caption
"Executive Officers of the Registrant" in Part I.

Item 10.  Executive Compensation.

         The information required by Item 10 is incorporated by reference to the
information  appearing  under  the  caption  "Executive   Compensation"  in  the
Company's  definitive  Proxy  Statement  relating to its 1998 Annual  Meeting of
Stockholders to be filed with the Securities and Exchange  Commission within 120
days after the close of its fiscal year.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

         The information required by Item 11 is incorporated by reference to the
information  appearing under the caption  "Security  Ownership" in the Company's
definitive  Proxy Statement  relating to its 1998 Annual Meeting of Stockholders
to be filed with the  Securities and Exchange  Commission  within 120 days after
the close of the fiscal year.

Item 12.  Certain Relationships and Related Transactions

         The information required by Item 12 is incorporated by reference to the
information  appearing  under the  caption  "Certain  Relationships  and Related
Transactions" in the Company's  definitive Proxy Statement  relating to its 1998
Annual  Meeting of  Stockholders  to be filed with the  Securities  and Exchange
Commission within 120 days after the close of the fiscal year.

                                      -34-
<PAGE>
Item 13.  Exhibits, List and Reports on Form 8-K

      (a) Exhibits


EXHIBIT
NUMBER                              DESCRIPTION OF EXHIBIT
------            --------------------------------------------------------------

**3.1             Restated Certificate of Incorporation of the Company.

**3.2             By-laws of the Company, as amended.

**4.1             Form of Common Stock Certificate.

**4.2             Form  of   Underwriter's   Purchase   Option  granted  to  GKN
                  Securities.

**4.3             Form of bridge Warrant.

 *10.1            Employment  Agreement,  dated as of  August  1,  1998,  by and
                  between the Company and Jeffrey Conrad.

**10.2            Employment  Agreement,  dated as of December 12, 1996,  by and
                  between the Company and Jean E. Reynolds.

**10.3            Consulting  Agreement,  dated as of December 13, 1996,  by and
                  between the Company and Farrell Associates, Inc.

**10.4            Consulting  Agreement,  dated as of December 13, 1996,  by and
                  between the Company and Graham  International  Publishing  and
                  Research, Inc.

**10.5            Form of Indemnification Agreement between each of the Officers
                  and Directors of the Company and the Company.

**10.6            Agreement of Lease,  dated  September 27, 1994, by and between
                  the Company and Arnold S. Paster.

**10.7            Agreement of Lease,  dated March 26, 1996,  by and between the
                  Company and Land First II Group.

**10.8            Agreement of Lease and rider attached thereto,  dated February
                  15, 1996, by and between the Company and  Ninety-Five  Madison
                  Company.

**10.9            1994 Stock Option Plan, as amended.

**10.10           Loan and  Security  Agreement,  dated as of December 14, 1995,
                  between People's Bank and the Company.

*10.11            Amendment to Loan and Security Agreement, dated June 10, 1998,
                  between People's Bank and the Company.

                                      -35-
<PAGE>


**10.12           Agreement  made  effective as of August 1, 1996 by and between
                  Aladdin Books Limited and the Company.

***10.13          Employment  Agreement,  dated as of January 20,  1997,  by and
                  between the Company and Satish Dua.

  *27             Financial Data Schedule




--------------------------------------------------------------------------------
*                 Filed herewith
**                Filed as an Exhibit to the Company's Registration Statement on
                  Form SB-2 (No. 33-14631)

***               Filed as an Exhibit  to the  Company's  Annual  Report on Form
                  10-KSB for the year ended July 31, 1997

                  (b)  REPORTS ON FORM 8-K

                  The Company filed a Form 8-K under Item 4 (Form 8-K).

                                      -36-

<PAGE>

                                   SIGNATURES

         In accordance with Section 13 or 15 (d) of the Securities  Exchange Act
of 1934,  the  registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                               THE MILLBROOK PRESS INC.

   Dated:  October 29, 1998                    By: /s/ Jeffrey Conrad
                                                   -----------------------------
                                                   Jeffrey Conrad, President and
                                                   Chief Executive Officer

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the dated indicated.

 Signatures                          Title                            Date

 /S/ JEFFREY CONRAD            President and                   October 29, 1998
 ------------------------      Chief Executive Officer
 Jeffrey Conrad                (Principal Executive
                               Officer)

 /S/ SATISH DUA                Chief Financial Officer         October 29, 1998
 ------------------------      (Principal Financial
 Satish Dua                    Officer and Principal
                               Accounting Officer)

 /S/ HOWARD GRAHAM             Chairman of the Board           October 29, 1998
 ------------------------
 Howard Graham

 /S/ FRANK J. FARRELL          Director                        October 29, 1998
 ------------------------
 Frank Farrell

 /S/ BARRY FINGERHUT           Director                        October 29, 1998
 ------------------------
 Barry Fingerhut

 /S/ BARRY RUBENSTEIN          Director                        October 29, 1998
 ------------------------
 Barry Rubenstein

 /S/ HANNAH STONE              Director                        October 29, 1998
 ------------------------
 Hannah Stone

                                      -37-