AMERICAN EDUCATIONAL PRODUCTS INC, 10KSB, 2000-03-23

AMERICAN EDUCATIONAL PRODUCTS INC
10KSB, 2000-03-23
MISCELLANEOUS PUBLISHING

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]

For the fiscal year ended December 31, 1999

or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]

For the transition period from _______________ to _______________

Commission file number: 0-16310

AMERICAN EDUCATIONAL PRODUCTS, INC.
-------------------------------------
(Exact Name of Registrant as Specified in its Charter)

Colorado 84-1012129
------------------ ---------------------
(State or other jurisdiction of incor- (I.R.S. Employer
poration or organization) Identification Number)

6550 Gunpark Drive, Suite 200, Boulder, Colorado 80301
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (303) 527-3230

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

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

Common Stock, $.05 par value
-----------------------------
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B (Section 29.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]

The Registrant's revenues for the year ended December 31, 1999, were
$14,964,000.

As of March 15, 2000, the aggregate market value of the Common Stock of the
Registrant based upon the closing prices of the Common Stock as quoted by
NASDAQ (symbol "AMEP") held by non-affiliates of the Registrant was
approximately $6,254,000. As of March 15, 2000, there were 1,082,070 shares
of the Common Stock of the Registrant outstanding.

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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE

The Registrant hereby incorporates herein by reference the following
documents:

Item 13. Exhibits

1. Incorporated by reference in the Registrant's Post Effective Amendment
No. 5 to Registration Statement on Form S-18 filed with the Securities
and Exchange Commission and declared effective on July 1, 1987.
2. Incorporated by reference from the Registrant's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission, and declared
effective on August 4, 1992.
3. Incorporated by reference from the Registrant's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on March 17,
1998.
4. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated March 11, 1994 and filed with the Commission on March 24, 1994.
5. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated December 20, 1995 and filed with the Commission on January 4,
1996.
6. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated June 17, 1996, and filed with the Commission on July 3, 1996.
7. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated April 17, 1998 and filed with the Commission on May 1, 1998.
8. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated August 4, 1998 and filed with the Commission on August 17, 1998.
9. Incorporated by reference from the Registrant's Statement on Form S-3/A-
2, Securities and Exchange Commission File No. 333-67401, as filed with
the Commission on January 21, 1999.
10. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated September 1, 1999 and filed with the Commission on September 14,
1999.

Forward-Looking Statements
- --------------------------

In addition to historical information, this Annual Report contains "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, which are thus prospective. The forward-looking
statements contained herein are subject to certain risks and uncertainties
that could cause actual results to differ materially from those reflected in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, competitive pressures, changing economic
conditions, factors discussed in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations", and other
factors, some of which will be outside the control of management. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements
to reflect events or circumstances that arise after the date hereof. Readers
should refer to and carefully review the information described in future
documents the Company files with the Securities and Exchange Commission.

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<PAGE>
PART I

Item 1. Description of Business

Recent Business Developments
- ----------------------------

American Educational Products, Inc. ("AMEP" or the "Company") was organized in
1986 to pursue mergers and acquisitions. That year, the Company completed an
initial public offering and made its first acquisition, an educational product
manufacturer named Scott Resources, Inc. ("Scott"). Since that time, the
Company has focused on the education industry and the development of hands-on
educational materials and consequently, the Company's core products consist of
a broad range of proprietary materials that are used to educate students in
pre-school through high school (the "K-12" market).

AMEP's mission is to manufacture and distribute products that increase
teachers' effectiveness in the classroom, facilitate students' learning
through inquiry and discovery, and encourage parental participation in their
child's education. This mission accords with current trends in formal
instruction, as many schools have decreased their reliance on textbooks in
order to promote a more hands-on approach to learning.

In 1986, the Company adopted an acquisition strategy that was primarily
designed to enhance product lines and accelerate the Company's growth rate.
In recent years, the once fragmented education industry has undergone a period
of considerable consolidation. This overall industry consolidation has
attached additional urgency to this acquisition strategy. The Company now
seeks acquisition opportunities that, in addition to complementing existing
business, will strengthen AMEP's overall market position.

Effective September 1, 1999, AMEP acquired the business known as To-Sew ("To-
Sew") for a cash purchase price aggregating $1,270,000. To-Sew is a mail
order manufacturer and distributor of sewing kits that are primarily used in
home economics or family consumer science classes. Borrowings under the
Company's working capital line of credit plus cash flow from operations funded
the acquisition.

The Company completed two significant acquisitions during 1998, National
Teaching Aids ("NTA") and Summit Learning ("Summit"). NTA, who developed and
manufactures the Microslide(-TM-) System, was acquired in a stock purchase
transaction. The Microslide(-TM-) System consists of Microslide(-TM-)
viewers, a low cost alternative to traditional microscopes, and the
accompanying Microslide(-TM-) sets of 35mm photographic images produced under
ideal laboratory conditions. These materials are used along with NTA lesson
plans in order to illustrate various scientific topics.

The sellers provided financing for the NTA purchase. The terms of the
financing included, among other things, a convertible promissory note in the
face amount of $950,000 bearing interest at 7.5% and payable in four annual
principal payments of $237,500, plus accrued interest. Under certain
conditions, the Company can convert all or part of the note into common stock
at a conversion value of $10 per share.

In an asset purchase transaction, the Company reacquired the assets of Summit,
a mail order distributor of math and science manipulative products. AMEP had
previously owned and operated Summit but sold it in 1995 to raise capital.
The seller provided financing for a portion of the purchase price under a
secured promissory note in the principal amount of $1,182,000. The note
required monthly principal payments of $125,000 plus accrued interest at 8.5%.
The note was paid in full in April 1999.

During 1994, 1995, and 1996, AMEP experienced significant net losses and did
not have capital available to make acquisitions. As a result, the Company
focused on its original core function, the efficient manufacture of high
quality manipulative products. The Company's subsequent return to
profitability has allowed it to use some of its cash flow from operations to
fund acquisition activities. If additional funds are required for a
particular transaction, the Company pursues outside sources of capital.

Industry
- --------

AMEP operates in an industry that has the potential for significant growth.
The factors that will contribute to this expansion include increases in school
enrollment, consistent growth in the supplemental education market, and a
national political climate under which various legislative bodies are
increasing federal education expenditures as well as individual state funding
for schools.

According to projections published by the National Center for Education
Statistics (a unit of the U.S. Department of Education), combined enrollment
in public and private K-12 schools in the United States will increase for at
least the next five years. The National Center for Education Statistics
("NCES") and the U.S. Census Bureau have tracked an early 1990's "baby boom
echo," wherein birth rates increased as a result of child-bearing by those who
were themselves born in the original post-war baby boom. Between 1999 and
2005, the total number of students in the United States is expected to
increase by about 1.5 million. In addition, the NCES predicts that yearly
expenditures per pupil, which are currently about $6,800, will increase by 15%
in the next ten years.

The supplemental education market is a $3.5 billion industry growing at 10%
per year. The traditional textbook publishing market is growing less than
half as quickly at 4% and the difference is mainly attributed to evolving
teaching methods that emphasize active learning over more passive techniques.
The traditional school model of lectures, workbooks, written assignments, and
text memorization has been criticized for failing to engage students.
Likewise, a report of the Association of American Publishers ranked hands-on
tools the "most effective (out of ten) in terms of student learning," while
textbooks were ranked fifth out of ten. Statistics compiled by NCES indicate
that 73% of teachers demonstrate a concept using manipulatives, models, or
other tools and objects at least once a week. The prevailing inclination
among educators to use such products places AMEP within a particularly
favorable segment of the already well positioned education industry.

Domestic expenditures on education continue to increase. Over the past ten
years, annual governmental spending on public and private education for grades
K through 12 has increased by $139 billion. NCES estimates an additional 20%
increase between 2000 and 2008. The U.S. Department of Education reports that
overall state and local education funding increased to $326 billion in 2000
from $313 billion in 1999. Also, in view of the fact that improved education
is one of a small number of political issues that has firm bipartisan support,
federal education expenditures are likely to multiply beyond the promising
NCES estimates. According to the U.S. Department of Education, President
Clinton's education budget expands to $23.5 billion in FY 2000 from $22.5
billion in FY 1999. Senator Susan Collins (R-Maine), who co-delivered the
official Republican Response to Clinton's State of the Union address on
January 27, 2000, echoed the signal to increase federal education funding and
proposed to augment Clinton's $1 billion increase by an additional $500
million.

American school systems have shown a clear trend toward decentralization,
which enables officials at the school building level to make many of the key
decisions regarding instruction methods and school purchases ("site-based
management"). In prior years, larger government agencies usually made these
decisions for entire school districts or states. Under the new structure,
teachers have the ability to choose the curricular materials that they need to
effectively convey educational concepts. Site-based management is forcing the
industry to rethink its sales and marketing strategies in order to address the
added challenge and increased cost of delivering goods and services to an
increasingly decentralized marketplace. In terms of purchasing methods, mail
ordering is on the rise among administrators in charge of budgets as well as
individual classroom teachers. It appears that educators are also increasing
their use of the Internet as a purchasing mechanism.

Tradenames and Products
- -----------------------

AMEP uses several trade names in its marketing and product identification
efforts. All of the names currently in use, Scott Resources, Hubbard
Scientific, National Teaching Aids, Summit Learning, and To-Sew, are believed
to be valuable company assets.

The Scott product line features mathematics and earth science products. Most
of the math products are manipulatives, which are hands-on devices that depict
specific concepts via tangible illustration and demonstration. The thirteen
major math product lines manufactured under the Scott name are:

Fraction Bars(-Registered Mark-) - A comprehensive series of
manipulatives that introduce and teach fraction concepts.

Decimal Squares(-Registered Mark-) - A program that teaches decimals and
percents through a complete series of objectives, manipulatives,
activities, and tests.

Chip Trading(-Registered Mark-) - An activities program that uses
manipulatives to teach the basic skills of addition, subtraction,
multiplication, and division.

Scott Geoboards - Wooden or plastic tiles with pin arrays that teach
basic geometric concepts.

Pattern Blocks and Color Cubes - Painted wooden or plastic blocks of
various shapes that teach shapes, counting, and sorting to younger
students, and angles, fractions, areas, and volumes to older students.

Color Tiles - Plastic, square tiles that demonstrate basic operations
with whole numbers for primary age learners and problem solving skills
for intermediate and middle school learners.

Fraction Interaction(-Registered Mark-) - A video series that includes
three videos for teaching fractions. The videos are developed for middle
school learners. Videolabs, a package that combines a video and Scott
manipulatives for student activities, and Teacher Packs are also
available.

Clever Catch(-Registered Mark-) - A series of beach balls that illustrate
math, geography, money, time, and phonics skills.

Checks + Balances(-Registered Mark-) - A kit designed to teach personal
finance skills.

Math Chase(-Registered Mark-) - A set of three games that reinforce and
extend math skills at multiple levels.

AlgeBits(-TM-) - A set of manipulatives for teaching pre-algebra concepts
to middle school learners.

Stretch & Shape(-Registered Mark-) - A package with Geoboards and
activities for an introduction to geometry concepts.

Terrific Triangles(-Registered Mark-) - An activities program that uses
manipulatives to teach whole number concepts and operations at the
kindergarten and early elementary levels.

Other math products developed under the Scott tradename include mathematics
games, reproducible resource books, and teaching aids such as overhead
materials.

In earth science, the Scott subsidiary offers a comprehensive selection of
over 250 different varieties of rocks, minerals, and fossils that are sold to
customers in bulk quantities or as individual specimens. Other earth science
products include charts, classroom activity sets, and videolabs.

The Company uses the Hubbard tradename to market a comprehensive line of high
quality earth science, life science, and physical science classroom materials.
These products include three-dimensional models of animal and human anatomy; a
wide variety of astronomy and earth science experiments and models; and the
Jewel line of plant mobiles, animal cages, and fresh and salt water aquariums.
Additionally, Hubbard is the largest U.S. producer of high quality raised
relief maps with approximately 300 different maps. These maps are marketed to
consumers through a number of sales channels, including map dealers, specialty
stores, independent sales representatives, and direct mail.

The acquisition of National Teaching Aids (NTA) in 1998 equipped the Company
with a new product line. The well established NTA Microslide(-TM-) system
consists of a durable and easy to use viewer that resembles a microscope, over
150 different sets of Microslides(-TM-) for use with the viewer, and detailed
lesson plans and teacher guides for each of the slide sets. Other NTA
products include a series of Science Made Easy(-TM-) Kits that demonstrate
core concepts in organic and inorganic chemistry, photosynthesis, and various
topics in human biology. The NTA product line also includes a Human Skeleton
Model that students can assemble and reassemble.

The recently acquired To-Sew provides a product line of sewing kits used in
home economics or family and consumer science classes. To-Sew kits provide
the sewing student with all of the material needed to produce a completed
product. The kits include fabric, needles, thread, buttons, patterns, and
instructions. Most of To-Sew's sales are kits to produce small pillows in the
shapes of animals, sports equipment, cartoon characters, or other youth-
related designs. A few of the kits produce tote-bags such as gym bags or
lunch bags and there are also a few clothing designs.

The raw materials and components that the Company uses are purchased from a
large number of domestic and foreign suppliers. There are a few critical
vendors that the Company heavily relies on to supply materials and services.
If a disruption in supply from one of these vendors occurred, alternate
vendors could be found. However, delays in production could result. Although
the Company has not experienced significant increases in cost for raw material
during the last two years, the increase in petroleum and its derivative
products in early 2000 is expected to have an adverse impact on the Company's
profitability.

The educational industry is inherently seasonal. There are wide variations in
sales from month to month and as a result, accounts receivable, inventories,
and accounts payable also vary. The summer months are the most active as
educational institutions restock their supplemental materials for the next
school year. Sale terms are typically net 30 days and orders are normally
filled within 14 days.

As of December 31, 1999, the Company had an order backlog of $514,000,
compared to backlogs of $800,000 on December 31, 1998 and $136,000 on December
31, 1997. Historically, the order backlog at year-end has not been indicative
of future sales.

Markets and Marketing
- ---------------------

The Company reaches its target market primarily through the 300 distributors
that include AMEP products in their catalogs. Hence, effective relationships
with the key dealers among these distributors are critical to the Company's
success. One of AMEP's strengths is its flexibility in meeting key dealers'
needs for custom products and packaging. The Company also sells through
direct mail catalogs and independent sales representatives.

Company representatives frequently visit national and regional trade shows and
teacher's conferences such as the National Council of Teachers of Mathematics
(NCTM), the National Science Teachers Association (NSTA), the National School
Supply and Educators Association (NSSEA), and the Educational Dealers and
Suppliers Association (EDSA). Marketing efforts for maps include attendance
at the International Map Trade Association and Outdoor Retailer Association.
Appearances at these exhibitions increase the Company's visibility in the
market, provide the Company an opportunity to meet end users, and allow the
Company to evaluate the competition.

The Company believes that demand for manipulative educational products is
increasing in several international locations. Although the Company does not
own or operate any overseas facilities, it has established relationships with
certain large foreign educational dealers and approximately 7% of sales are
exports. Europe, the Pacific Rim, and the Middle East account for a majority
of international sales. Nevertheless, the international marketplace is
subject to extremely competitive pricing and politically motivated decision
making.

Competition
- -----------

The Company faces competition from businesses that range in size from sole
proprietorships to large corporations, and the products manufactured by these
competitors range from textbooks to manipulatives and models. Similarly to
AMEP, many of these entities publish catalogs and also list their products in
dealer catalogs. Some of the competitors are larger and have greater
financial resources than AMEP. The Company believes that its competitive
advantages include its inventory of proprietary products, its ability to
provide custom orders and specialized products, and its distribution network.

During the last several years, there has been increasing competition from
foreign educational product manufacturers whose merchandise is often priced
lower than the Company's. While the Company can provide its customers with
better delivery schedules and more comprehensive teacher manuals, foreign
competition could adversely affect the Company in the future.

The Company's math products directly compete with products such as Attribute
Blocks, Cuisinaire Rods, and Base 10 Blocks. In earth science and geology,
the principal direct competitors in the market are Ward's Natural Science
Establishment and Geo-Science, although some hobby outlets and science supply
houses have begun to enter this market. In recent years, NTA's Microslide(-
Registered Mark-) System has been the target of direct competition from
Learning Resources.

The Hubbard brand encounters a significant amount of direct competition for
many of its classroom products. While some of the product lines are similar
in quality and price to items manufactured by others, two product lines occupy
a special market niche. The Jewel product line of high quality aquariums,
cages, and botany apparatus is designed to meet extreme requirements of
scientific experimentation and demonstration. The Company is not aware of any
competitors producing comparable quality items for the school market. These
products are priced significantly higher than lower quality alternatives.
Similarly, Hubbard produces raised relief maps, which provide a unique
cartographic perspective. However, raised relief maps are significantly more
expensive than flat maps of the same cartographic image.

The Company believes that the educational marketplace is becoming more
competitive. Many companies within the industry are consolidating in order to
become more formidable competitors. Sales of technology-related products are
growing at a faster rate than sales of manipulatives and videos. The Company
does not manufacture technology-related products and has no such products
currently under development. Technology products often require large amounts
of capital to develop and introduce. Many of the Company's competitors are
larger, have greater financial resources, and spend more money on product
development.

Product Development
- -------------------

To maintain and improve its position in the market, the Company has made a
commitment to develop new products. A key component to product development is
to conduct regular revisions of existing products to keep them up-to-date with
changing educational standards.

When developing new products, the Company uses both internal and external
sources. External sources include independent contractors, teachers, and
other educators who submit prototypes and suggestions for the Company's
consideration. The Company reviews the submissions, obtains the rights to
worthy products, and pays royalties on product sales over the life of the
contract.

The product development process includes prototype development and formal
field testing. The Company developed 27 new products in 1999, including four
new Microslide(-Registered Mark-) sets, thirteen commodity math products, four
physical science kits, the Ocean Floor Map, Terrific Triangles(-Registered
Mark-) First Grade, three science guides, and the Astronomy Fact Book. The
Company also completed thirteen major product revisions and translated nine
products from English into French.

Intellectual Property
- ----------------------

Copyrights, trademarks, and trade secrets are the principal protection sources
for the Company's products. The Company's published materials, which include
teachers' guides, manuals, game boards, and videos, are covered by copyrights.
Each manipulative and model is accompanied by published material of some
variety. Approximately one-half of these copyrights are derived directly from
original works created by employees of the Company or by independent
contractors hired under agreement for a specific project. The remaining
copyrights are held by the Company through licensing arrangements with the
authors.

The Company owns federally registered Trademarks for the following product
names: Fraction Bars(-Registered Mark-), Decimal Squares(-Registered Mark-),
Chip Trading(-Registered Mark-), Math Chase(-Registered Mark-), Math in
Brief(-Registered Mark-), Clever Catch(-Registered Mark-), Fraction
Interaction(-Registered Mark-), Earth Science VideoLab(-Registered Mark-),
Nature Finder(-Registered Mark-), Stretch & Shape(-Registered Mark-), Checks
and Balances(-Registered Mark-), Terrific Triangles(-Registered Mark-), and
Microslide(-Registered Mark-). The Company claims common law Trademark
protection in all of its proprietary marks.

The Company considers all of the copyrights, licenses, and trademarks to be
valuable property rights. The Company believes that the protection afforded
by these intellectual property rights and the law of trade secrets is adequate
protection for its products. However, it is possible for a competitor to
develop near imitations of the Company's products without violating those
rights.

Personnel
- ---------

The Company has 94 employees in full time regular positions. Personnel are
located in Boulder, Colorado; Fort Collins, Colorado; and Chippewa Falls,
Wisconsin. There are 39 persons employed in direct manufacturing positions;
10 persons employed in factory supervisory, clerical, purchasing, and product
development positions; 14 persons employed in shipping and receiving
positions; 12 persons employed in sales, marketing and customer service
positions; and 19 persons employed in accounting, computer operations, and
other general or administrative positions.

The Company is not part of any collective bargaining agreement. There have
been no work stoppages and the Company believes its employee relations are
good.

Item 2. Description of Property

The Company owns 3.5 acres of land and five buildings on the north side of
Fort Collins, Colorado. This facility houses earth science product
manufacturing, customer service, marketing, and accounting operations. The
buildings total 18,500 square feet, of which 14,200 are manufacturing and
warehousing. The remaining 4,300 are office space.

The Company also leases 22,500 square feet of space on the east side of Fort
Collins, Colorado to provide additional warehouse and office space. Monthly
lease payments approximate $12,000 and the lease expires in April 2005.

The Wisconsin manufacturing facilities are located in Chippewa Falls,
Wisconsin. The main plant is approximately 37,000 square feet and is leased
at $8,150 per month. The lease is subject to annual renewal. The smaller
facility houses light assembly and warehousing in a leased area comprising
10,000 square feet. Monthly lease payments are $3,000 and the lease expires
in September 2000.

The Company leases space in Boulder, Colorado for its corporate headquarters.
This property consists of 1,400 square feet and is currently leased at $2,000
per month, expiring September 2000.

The Company believes that each of its facilities is adequate for its intended
purpose and does not plan any significant investment in additional facilities
during the next year.

Item 3. Legal Proceedings

Neither the Company, nor any of its subsidiaries, is currently a party to any
material pending litigation or other legal proceeding.

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

The Company did not submit any matters to a vote of its security holders
during the fourth quarter of its fiscal year ending December 31, 1999.

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PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Price Range of Common Stock
- ---------------------------

The Company's Common Stock trades on the NASDAQ SmallCap Market under the
symbol AMEP and on the Pacific Exchange under the symbol EP.

The following table has been adjusted to reflect the one-for-five reverse
stock split that became effective on April 22, 1997.

High Low
---- ---
<S> <C> <C>

1998
First Quarter 8.38 5.38
Second Quarter 10.63 8.25
Third Quarter 10.63 7.88
Fourth Quarter 10.81 9.00

1999
First Quarter 11.50 9.25
Second Quarter 10.63 8.44
Third Quarter 10.69 8.50
Fourth Quarter 12.88 10.13

2000
First Quarter
(through March 15,
2000) 10.94 9.38
</TABLE>

The bid price of the Company's common stock as of March 15, 2000 was $10.375
per share. The prices presented are bid prices that represent prices between
broker-dealers and do not include retail markups and markdowns or any
commissions to the broker-dealer. The prices may not reflect prices in actual
transactions.

As of March 15, 2000, there were approximately 200 shareholders of record and
approximately 2,000 beneficial shareholders.

Dividends
- ---------

The Company has paid no cash dividend on its common stock during the last two
fiscal years, and the Company's Board of Directors has determined that no cash
dividend on common stock will be paid for 1999. Future dividend policy is
subject to the discretion of the Board of Directors and is dependent on a
number of factors, including future earnings, capital requirements, and the
financial condition of the Company.

During 1997, the Company issued a warrant dividend to existing shareholders.
The warrant dividend consists of one warrant for each share of common stock
owned by shareholders of record on June 5, 1997. Each warrant entitles its
holder to purchase one additional share of the Company's common stock at an
exercise price of $10.00 per share. No voting rights have been attached to
the warrant. The Company retains the right to redeem the warrants upon 30
days notice for a redemption price of $0.01 per warrant in the event that
public trading of the Company's common stock equals or exceeds 110% of the
then current exercise price of the warrant for twenty consecutive days. The
warrants expire in December 2000.

<PAGE>
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Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion addresses the financial condition and results of
operations for American Educational Products, Inc. and its Subsidiaries
("AMEP" or the "Company"). AMEP currently uses several tradenames in
marketing its products, including Hubbard Scientific ("Hubbard"), National
Teaching Aids ("NTA"), Scott Resources ("Scott"), Summit Learning ("Summit"),
and To-Sew ("To-Sew").

On April 4, 1997, the Company's shareholders approved a one-for-five (1-for-5)
reverse split of its $0.01 par value common stock. The reverse split became
effective on April 22, 1997. As of that date, the par value of the Company's
common stock was increased to $0.05 per share and the number of common shares
outstanding was reduced from 4,580,794 to 916,298. The reverse split has been
shown in this discussion and in the accompanying financial statements,
including notes thereto, as a retroactive adjustment giving effect to the
split for all periods presented.

Effective September 1, 1999, the Company acquired To-Sew for a purchase price
of $1,270,000. To-Sew is a mail order manufacturer and distributor of sewing
kits. The To-Sew acquisition was recorded using the purchase method of
accounting and the operating results of To-Sew were consolidated with the
Company commencing September 1, 1999.

The Company completed two acquisitions during 1998. In May, it acquired NTA
for a purchase price of $1,835,000. NTA produces the Microslide(-TM-) system.
The NTA acquisition was recorded using the purchase method of accounting and
the operating results of NTA were consolidated with the Company commencing
June 1, 1998.

Effective July 1, 1998, AMEP acquired certain operating assets known as Summit
Learning for a total purchase cost of $1,482,000. Summit is a direct mail
marketer of math and science supplemental teaching aids. The Summit
acquisition was recorded using the purchase method of accounting and the
operating results of Summit were consolidated with the Company's commencing
July 1, 1998.

The Company has actively pursued acquisitions that have enabled the Company to
provide a broader product line and expand its presence in the educational
marketplace. Acquisitions involve numerous risks in assimilating the acquired
company's personnel, know-how, and products and services. Other risks include
limited experience in new markets and competition from companies that have
stronger positions in those markets. There can be no assurance that the
Company will be able to successfully integrate newly acquired businesses.
Such a failure could have a material adverse effect on the Company's financial
condition and results of operations. In undertaking any acquisition,
management resources will be partially diverted from the day-to-day business
of the Company.

The foregoing acquisitions affect comparisons among 1999, 1998, and 1997.
Furthermore, the acquisitions have transformed a single segment manufacturing
enterprise into a multi-segment manufacturing and distribution enterprise.
Although the Company is highly integrated and shares many common components
and expenses, the Company's information system provides separate reporting for
the manufacturing operations (Hubbard, NTA, and Scott) that sell primarily to
wholesalers, and the distribution operations (Summit and To-Sew) that sell
primarily to the end user.

The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements, including the explanatory notes, beginning
on page F-1 in this annual report.

Liquidity and Capital Resources - December 31, 1999 Compared to December 31,
1998
- ------------------------------------------------------------------------

The Company's liquidity and capital resources continued to improve during
1999. Net income for the year was $1,102,000, compared to net income of
$850,000 in 1998. Earnings before interest, taxes, depreciation and
amortization were $1,813,000 in 1999 and $2,117,000 in 1998.

During 1999, cash balances declined from $124,000 to $94,000. Cash flows from
operations of $1,655,000 were utilized in investing activities ($1,658,000)
and in financing activities ($27,000). During 1998, cash flows from
operations of $1,209,000 were utilized in investing activities ($783,000) and
in financing activities ($485,000).

During both 1999 and 1998, cash flow from operations was sufficient to fund
all of the Company's operating cash requirements. Three acquisitions were
completed during 1999 and 1998. The source of funds for the acquisitions was
a combination of increased borrowings under the Company's line of credit
facility, financing provided by the sellers, and cash flow from operations.

Effective September 1, 1999, the Company acquired To-Sew. Capitalized
acquisition costs totaled $1,417,000, including the cash purchase price,
liabilities assumed, and other acquisition expenses incurred. Funding for the
acquisition was available under the Company's borrowing arrangement with its
primary lender. Excess of cost over the fair value of assets acquired
(goodwill) of $617,000 is being amortized on a straight-line basis for fifteen
years.

In May 1998, the Company purchased all of the common stock of Learning &
Leisure, Inc. and its wholly owned subsidiary, National Teaching Aids, Inc.
(collectively, "NTA"). Capitalized acquisition costs totaled $1,984,000,
including the cash purchase price, liabilities assumed, and other acquisition
expenses incurred. The sellers provided financing for the transaction under a
$950,000 convertible note payable, a $400,000 licensing agreement, and
consultation / non-compete agreements requiring aggregate payments of
$300,000. Excess of cost over fair value of assets acquired (goodwill) of
$980,000 is being amortized on a straight-line basis over 15 years.

NTA produces the Microslide(-TM-) System. Microslides(-TM-) are 35mm
photographs taken through a microscope. Each set of photographs is designed
to teach a specific scientific concept. The 35mm images are viewed through a
Microslide(-TM-) Viewer, a specially designed plastic device that resembles a
microscope.

Effective July 1, 1998, AMEP acquired certain operating assets of Summit
Learning ("Summit"). Capitalized acquisition costs totaled $1,550,000,
including the cash purchase price, liabilities assumed, and other acquisition
expenses incurred. The seller provided financing for the acquisition in the
form of a promissory note with a principal amount of $1,182,000. In addition,
certain assets acquired in the Summit transaction were sold in September 1998.
Summit sold the assets that it had previously used in a Christmas season mail
order catalog targeted at parents and grandparents. Sales proceeds of $50,000
cash plus a note receivable were used to reduce capitalized costs of the
acquisition. The fair value of assets acquired exceeded the acquisition costs
by approximately $252,000 (negative goodwill), which is being amortized on a
straight-line basis over 15 years.

Summit distributes math and science supplemental teaching aids via direct mail
catalogs.

The Company consolidated the operations of To-Sew into the Summit facility.
These two businesses comprise the distribution segment. The cash requirements
for Summit and To-Sew peak in the first quarter of the year as promotional
material is directly mailed to educators. The cash requirements for the
manufacturing segment peak in the second quarter as the Company increases
inventory prior to the summer sales peak.

The Company's working capital line of credit is an asset based financing
arrangement with U.S. Bank Business Finance. The arrangement expires on April
30, 2002, and provides for borrowings up to $4,050,000. Certain amounts
available to be borrowed under the agreement are derived from a borrowing base
as defined in the agreement relating to allowable inventory and accounts
receivable. Under the formula, the Company could have borrowed up to
$3,218,000 as of December 31, 1999. Borrowings are collateralized by
substantially all the Company's assets. Interest, computed at a floating rate
plus 1%, is payable monthly. In addition, the Company is required to make
minimum monthly principal payments of $36,000.

The borrowing arrangement contains a demand provision such that the lender can
demand repayment at any time. Accordingly, the entire balance of outstanding
borrowings is reflected as a current liability. The lender has not indicated
that it will demand payment during 2000 and management does not expect to
receive such a demand. Should such a demand be made, the Company would not
have the funds available. However, the Company's improved financial condition
should allow it to obtain the necessary funds via either an equity placement
or alternate borrowing arrangements.

The Company believes that the funds available to it in 2000 will be adequate
to meet its operating requirements. The source of those funds will be cash
flow from operations and additional borrowings available under the arrangement
with its lender. Any acquisition activity undertaken by the Company during
2000 would be contingent upon obtaining the necessary financing.

The Company experienced a 5% working capital increase in the year ended
December 31, 1999. Current assets of $7,678,000 increased $548,000 from
December 31, 1998, and current liabilities increased $384,000 from $3,964,000
to $4,348,000. As a result, working capital increased from $3,166,000 to
$3,330,000. The current ratio (current assets divided by current liabilities)
decreased from 1.80 to 1.77. Working capital improved because of funds
generated by operations.

Total assets increased 13% from $11,202,000 at December 31, 1998, to
$12,631,000 at December 31, 1999. During the same period, total liabilities
increased 4% from $5,051,000 to $5,242,000. Both assets and liabilities
increased as a result of the acquisitions.

Accounts receivable increased from $1,876,000 at December 31, 1998, to
$1,952,000 at December 31, 1999, an increase of $76,000 or 4%.

Inventories increased from $3,733,000 at December 31, 1998, to $4,108,000 at
December 31, 1999, an increase of $375,000 or 10%. This increase can be
attributed primarily to the acquisition of To-Sew.

Prepaid advertising costs of $1,171,000 at December 31, 1999 represent costs
associated with mailing the 2000 spring catalogs. The comparable amount from
December 31, 1998 was $1,114,000.

Net property and equipment decreased from $2,596,000 at December 31, 1998, to
$2,459,000 at December 31, 1999, a decrease of $137,000 or 5%. The Company
recorded depreciation expense of $620,000 for 1999. Capital expenditures were
$478,000, which consisted of new information system hardware and software,
reproduction masters for proprietary products, production tooling, and a phone
system.

Video and film library costs decreased from $217,000 at December 31, 1998 to
$94,000 at December 31, 1999, a decrease of $123,000 or 57%. All of the
decrease represented normal amortization expense.

Intangible and other assets increased from $1,259,000 at December 31, 1998, to
$1,825,000 at December 31, 1999, an increase of $566,000 or 45%.
Substantially all of the increase represents goodwill from the Company's
continuing acquisition activities, offset by amortization of $193,000.

Accounts payable and accrued expenses increased from $1,396,000 at December
31, 1998, to $1,653,000 at December 31, 1999, an increase of $257,000 or 18%.
This increase is related to the acquisition and to spending on the 2000
catalog program.

Borrowings under the Company's working capital line of credit increased from
$1,614,000 at December 31, 1998, to $2,227,000 at December 31, 1999, an
increase of $613,000 or 38%. The increase represents the portion of the To-
Sew acquisition that was financed by increased borrowings under the line of
credit.

Stockholders' equity increased from $6,151,000 at December 31, 1998 to
$7,389,000 at December 31, 1999, an increase of $1,238,000 or 20%. The
increase consists of 1999 net income of $1,102,000, plus proceeds of $136,000
from the exercise of warrants and options.

Subsequent to December 31, 1999, the Company engaged the services of an
investor relations firm and an investment banking firm to assist the Company
in maximizing shareholder value. In connection therewith, the Company will
issue warrants to purchase 75,000 shares of common stock at an exercise price
of $8.00 per share. During fiscal year 2000, the Company expects to record a
charge in excess of $100,000 related to its investor relations and investment
banking activities.

Management continually assesses the Company's need for capital resources.
From time to time, the Company may evaluate and pursue additional sources of
capital.

Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's short-term liquidity or capital resources.

Results of Operations -- 1999 Compared to 1998 and 1997
- -------------------------------------------------------

As previously discussed, the comparisons of operating results for 1999 to 1998
and 1997 are affected by the acquisitions made by the Company.

The Company reported net income of $1,102,000 for 1999, compared to net income
of $850,000 for 1998 and $514,000 for 1997. After adjusting the per share
calculation for the one-for-five reverse split and the retroactive
implementation of SFAS 128, 1999 income was $1.03 per share, 1998 income was
$0.85 per share, and 1997 income was $0.56 per share.

The Company's revenues in 1999 were $14,964,000, an increase of $3,289,000 or
28% from the prior year revenues of $11,675,000 and an increase of $6,572,000
or 78% above 1997. Sales increased in both segments. Sales for the
Manufacturing segment increased primarily due to the inclusion of NTA for the
full year. Manufacturing revenues in 1999 were $10,342,000, an increase of
$1,188,000 or 13% from 1998 revenues of $9,154,000 and $1,951,000 or 23% from
1997 revenues of $8,392,000. NTA contributed $1,514,000 to 1999 revenues
(twelve months) compared to $648,000 in 1998 revenues (seven months), an
increase of $866,000. Distribution segment 1999 revenues increased
$2,101,000 or 83% to $4,622,000 from $2,521,000 in 1998. The acquisition of
To-Sew provided a partial year contribution of $592,000 and Summit Learning
had its first full year of operations since being acquired in July 1998.

The cost of goods sold for the year ended December 31, 1999, was $8,992,000,
an increase of 31% from the prior year figure of $6,843,000 and 72% more than
1997. Cost of goods sold increased because of acquisitions. The
Manufacturing segment cost of goods sold for 1999 was $5,448,000, an increase
of $111,000 or 2% from 1998 cost of $5,338,000 and $321,000 or 6% from 1997
cost of $5,127,000. Distribution cost of goods sold of $2,794,000 in 1999
increased $1,469,000 or 111% over $1,325,000 in 1998. Partial year costs of
goods sold attributed to To-Sew were $293,000.

Consolidated gross profits for 1999 were $5,972,000, an increase of $1,140,000
or 24% from the prior year gross profit of $4,832,000, and an increase of
$2,812,000 or 89% above 1997. As a percentage of sales, the gross margin
decreased from 41% in 1998 to 40% in 1999. The changes in both gross profit
and gross margin percent are primarily the results of acquisitions in both
segments. Manufacturing 1999 gross margin of $4,179,000 increased $543,000 or
15% from $3,636,000 in 1998 and $914,000 or 28% increase over 1997 of
$3,264,000. The increase is attributable to the acquisition of NTA. The
Distribution segment 1999 gross margin increased to $1,800,000 from $1,196,000
in 1998, an increase of $604,000 or 50%. Partial year gross profits from the
To-Sew acquisition were $299,000 with gross margin of 51%.

The advertising component of marketing costs increased $873,000 or 130% from
1998 and increased $1,452,000 or 1,528% from 1997. Both increases are
primarily the result of the Summit acquisition. Summit's advertising costs
for the twelve months of 1999 were $1,117,000 compared to $442,000 for six
months in 1998.

Other marketing costs increased by $203,000 or 18% from 1998 and increased by
$487,000 or 57% from 1997. The increased costs are primarily a function of
increased business activity. As a percentage of sales these costs were 9% in
1999, 10% in 1998, and 10% in 1997.

General and administrative expenses increased by $426,000 or 24% from 1998 and
increased by $833,000 or 61% from 1997. The increased costs are primarily a
function of increased business activity. As a percentage of sales, general
and administrative expenses were 15% in both 1999 and 1998, and 16% in 1997.

Operating income was $877,000 in 1999, $1,239,000 in 1998, and $837,000 in
1997. As a percent of sales, operating income was 6% in 1999, 11% in 1998,
and 10% in 1997. In 1999, operating income declined at Summit. The increased
costs of catalog mailings did not generate the anticipated revenue increases.
The decline at Summit was partially offset by operating income contributions
from NTA and To-Sew.

Interest expense decreased from $358,000 in 1998 (2% decrease) and increased
from $323,000 in 1997 (8% increase) to $350,000 in 1999. Variations in
interest expense have primarily been caused by fluctuations in debt levels.
Interest rates have remained relatively constant. At various times during the
past three years, debt levels have increased to fund acquisitions and have
decreased as cash flow from operations is used to reduce borrowings.

The Company recorded an income tax benefit of $575,000 in 1999. The recorded
benefit gives recognition to the Company's net deferred tax asset. During
1994, 1995, and 1996, the Company reported net operating losses ("NOL") for
tax purposes. The accumulated losses can be carried forward and used to
offset future taxable income. During 1997, 1998, and 1999, the Company
utilized a portion of its NOL carryforwards to offset taxable income reported
in those years. As of December 31, 1999, the remaining NOL carryforwards
totaled $2,400,000. Under the Tax Reform Act of 1986, the amounts of and the
benefits from NOL carryforwards are subject to certain limitations. Thus,
ultimate realization of the NOL carryforward is not guaranteed. Nevertheless,
the Company believes that it is more likely than not to be able to utilize the
NOL carryforwards before they expire in 2009, 2010, and 2011. The NOL
carryforward is the largest component of the net deferred tax asset.

The $31,000 of income tax expense in 1998 represents alternative minimum
federal taxes and state taxes that cannot be offset against the NOL
carryforward.

The Company anticipates that its effective tax rate in fiscal 2000 will
approximate 37%.

Inflation did not have any material effect on the Company's operations for
1999 and 1998. During the first two months of 2000, there has been a
significant increase in the cost of petroleum and its derivative products.
Those cost increases are expected to have a negative effect on the Company.
While the Company attempts to mitigate the impact of cost increases, there are
no guarantees that future cost increases would not have an adverse impact.

The Company historically has experienced significant seasonality in its sales
primarily due to the purchasing cycle of educational institutions. Historical
trends indicate that the first and fourth fiscal quarters will each generate
approximately 20% of annual sales and the second and third fiscal quarters
will each generate approximately 30% of annual sales. The 1999 acquisition is
not expected to materially change this pattern.

Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations.

Year 2000 Issue
- ---------------

During the past several years, the Company devoted considerable resources to
the Year 2000 Issue. The Year 2000 Issue is essentially the result of
computer programs being written using two digits rather than four to define
the year. Any of the Company's information technology ("IT") systems that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the Year 2000. This could result in a system failure or
miscalculation causing disruption of operations; including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities. The problem has the potential to affect
"non-IT" systems, that is, operating and control systems that rely on embedded
microprocessors. Embedded microprocessors have interfaces that are
inaccessible to the user and which may contain a date function that could
trigger a malfunction. In addition, like every other business enterprise, the
Company was at risk from Year 2000 Issue failures on the part of its major
business counterparts, including suppliers, distributors, and customers, as
well as potential failures in public and private infrastructure services,
including electricity, water, gas, communications, and financial services.

The Company anticipated that the two most critical dates in the Year 2000
Issue were January 1, 2000 and February 29, 2000. The Company did not
experience any Year 2000 related incidents on January 1, 2000 or February 29,
2000 and continues to operate without any apparent negative impact from the
Year 2000 Issue. Furthermore, the Company has not received any reports from
its customers, suppliers, or other business counterparts related to Year 2000
incidents.

Impact of Recently Issued Accounting Standards
- ----------------------------------------------

Statement of Financial Accounting Standards 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) was recently issued. SFAS 133
establishes accounting and reporting standards for derivative financial
instruments and for hedging activities. The Company does not currently engage
in any activities that would be covered by SFAS 133.

Item 7. Financial Statements

The following financial statements are filed as part of this report beginning
on page F-1:

1. Independent Auditor's Report

2. Consolidated Balance Sheets as of December 31, 1999, and December 31,
1998

3. Consolidated Statements of Operations for the years ended December 31,
1999, 1998, and 1997

4. Consolidated Statement of Stockholders' Equity for the period of January
1, 1997 through December 31, 1999

5. Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997

6. Notes to Consolidated Financial Statements

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

There were neither changes in accountants nor disagreements of the type
required to be reported under this Item between the Company and its
independent accountants, Hein + Associates LLP, during the fiscal years ended
December 31, 1999, or December 31, 1998.

<PAGE>
<PAGE>
PART III

Item 9. Directors, Executive Officers, Promoters, and Control Persons

The names ages, offices held, principle occupations during the last five
years, directorships, certain other affiliations, and other information for
the Registrant's Directors and Executive Officers are set forth below:

Name Age Position
- ---- --- --------
<S> <C> <C>

Dr. Robert A. Scott 61 Chairman of the Board and Secretary
Clifford C. Thygesen 64 President and Director
Clifford L. Neuman 51 Director
Dr. Wayne R. Kirschling 57 Director
Stephen G. Calandrella 38 Director
Richard J. Ciurczak 44 Director
John J. Crawford 54 Director

</TABLE>

Dr. Robert A. Scott, director since 1991, Chairman of the Board since April,
1995 and Secretary since August, 1997, has been President, Chief Executive
Officer and Professor of Sociology and Anthropology at Ramapo College of New
Jersey since 1985. Ramapo College is a coeducational state-supported
residential institution of undergraduate and graduate liberal arts, sciences
and professional studies. From 1979 to 1985, he served as Assistant
Commissioner and Director of Academic Affairs for the Indiana Commission for
Higher Education, where he was responsible for the coordination of state-wide
higher education strategic planning for both public and private institutions.
From 1969 to 1979, he was Associate Dean and Senior Administrator of the
College of Arts and Sciences of Cornell University. Dr. Scott is a member of
the Board of Directors of USACENTER.COM, INC and a member of the Executive
Committee of Hillcrest Health Service Systems, Inc., a holding company for the
Hackensack University Medical Center teaching hospital and four other
subsidiaries. Dr. Scott is Past Chairman of the Commission on International
Education of the American Council on Education, a founding member of the
Advisory Board of the New Jersey Center for International Business Education
and Research at Rutgers University, Past Chairman of the College and
University Educational Satellite Services sponsored by the American
Association of State Colleges and Universities and Public Broadcasting System,
Chairman of the Board of Directors of the New Jersey Association of Colleges
and Universities, and a member of numerous additional professional
associations. Dr. Scott received his B.A. from Bucknell University and his
Ph.D. in Sociology and Organizational Ethnography from Cornell University.

Clifford C. Thygesen, President of the Company since January 22, 1996 and a
Director since 1986, also served as its Executive Vice-President from 1986
until January 1992. Mr. Thygesen is also currently a director of Rockies
Fund, Inc. a Colorado Springs, Colorado based Business Development Company
registered under the Investment Company Act of 1940, a director of Global
Casinos, Inc., a publically-traded company engaged in the ownership and
operation of domestic and international casinos and limited stakes gaming
properties, and a director of Wall Street Racing Stables, a publically-traded
company involved in the racing of thoroughbred horses. From 1971 to 1973, Mr.
Thygesen was Vice-President of Operations for the Ithaca Gun Company of
Ithaca, New York, a manufacturer of high quality firearms. From 1973 to 1976,
Mr. Thygesen served as President of Alpine Designs Corporation, a company
which produces backpacking equipment, skiwear and hunting apparel. During the
period of his employment with Ithaca Gun Company and Alpine Designs, these two
companies were subsidiaries of General Recreation, Inc. In 1975 and 1976, Mr.
Thygesen was corporate Director of Manufacturing for General Recreation, Inc.,
and, in this capacity, assumed responsibility for decentralizing manufacturing
operations in addition to his duties at Alpine Designs. From 1977 to 1981, he
served as Vice-President of Manufacturing for Pure Cycle Corporation, a
company that designed water recycling systems for residential use. From 1981
until February, 1988, Mr. Thygesen was President, Chief Operating Officer and
a Director of Tri Coast Environmental Corporation, formerly Colorado Venture
Capital Corporation. He received his B.S. degree in Industrial Administration
from the University of Illinois in 1961.

Stephen G. Calandrella was elected as a director in November, 1996. Mr.
Calandrella has been President and a Director of The Rockies Fund, Inc., a
Colorado-based business development company registered under the Investment
Company Act of 1940 since February, 1991, and Chief Executive Officer of the
Rockies Fund, Inc. since January 30, 1994. Mr. Calandrella has previously
served as a Director of Kelly Motors, Ltd., Good Times Restaurants, Inc.,
Southshore Corp., and Cogenco International, Inc. Mr. Calandrella also served
as a Director for Combined Penny Stock Fund, Inc. and Redwood MicroCap Fund,
Inc., both of which are closed-end investment companies registered under the
Investment Company Act of 1940. Mr. Calandrella currently serves as Interim
President and a member of the Board of Directors of Global Casinos, Inc., a
publicly-held company engaged in the ownership and operation of domestic and
international casinos and limited stakes gaming properties. Mr. Calandrella
also serves as a Director of Optimax Industries, Inc., a NASDAQ listed holding
company; Guardian Technologies, a NASDAQ listed maker of bullet proof vests;
and Gold Capital Corporation, a publicly traded mining company. Mr.
Calandrella has also engaged in financing and consulting activities for
development stage companies, which consist of advising public and private
companies on capital formation methods, enhancing shareholder valuations,
mergers, acquisitions and corporate restructuring, as well as arranging for
bridge loans and equity purchases.

Clifford L. Neuman has served as a Director of the Company since November,
1990 and served as Secretary from 1992 through 1994. Mr. Neuman is a
licensed, practicing attorney and a managing member of the law firm of Neuman
& Drennen, LLC, located in Boulder, Colorado. Mr. Neuman has served as legal
counsel to the Company and its subsidiaries since 1986. Mr. Neuman received
his Bachelor of Arts degree from Trinity College in 1970 and his Juris
Doctorate degree from the University of Pennsylvania School of Law in 1973.

Dr. Wayne R. Kirschling has served as a director of the Company since
February, 1995. Dr. Kirschling currently serves as a Corporate Vice President
of Ontario Corporation, a closely held Indiana corporation with corporate
headquarters in Muncie, Indiana. Ontario engages in the manufacture and
refurbishment of components used in jet engines; the manufacture and
refurbishment of components used in semiconductor process equipment; provides
metallurgical, chemical and environmental laboratory testing; develops
software and systems for enterprises involved in collections and accounts
receivable management; and is involved in the development of an industrial
park. From 1978-1986, Dr. Kirschling served as Deputy Commissioner of Higher
Education for the Indiana Commission for Higher Education located in
Indianapolis, Indiana, where he was responsible for working with the Governor,
the State Legislature and Indiana's public and private colleges on operating
and capital budget requests, student aid funding, and approval of new
institutions and new academic programs. From 1971-1978, he was Associate
Director of the National Center for Higher Education Management Systems
located in Boulder, Colorado, where he was responsible for working with public
and private colleges throughout the U.S. to develop and implement new
management techniques and for operating a visiting scholars program for
scholars drawn from American and foreign universities, industry and
government. From 1964-1969, Dr. Kirschling served as an officer in the U.S.
Air Force, including assignments with the Office of the Secretary of the Air
Force in Washington, D.C. and at the U.S. Air Force Academy located in
Colorado Springs, Colorado. He has taught at a number of colleges and
universities including the University of Colorado, Butler University, the
University of Indianapolis and the U.S. Air Force Academy. He received his
B.S. degree from the U.S. Air Force Academy, an M.S. in Industrial Engineering
from Stanford University and an M.B.A. and D.B.A. in Management Science from
the University of Colorado.

Richard J. Ciurczak has served as a director of the Company since January,
1998, and as President and Chief Operating Officer of Nasco International,
Inc., Fort Atkinson, Wisconsin, since October, 1996. Through its four mail
order operations and twenty catalogs circulated throughout the United States
and 100 foreign countries, Nasco serves the education and agriculture
industries. Prior to October, 1996, Mr. Ciuczak served in various capacities
within Nasco dating back to 1974, including Executive Vice President and Chief
Financial Officer. Mr. Ciurczak received his Bachelor of Science degree in
Business Administration in 1976 from Seton Hall University, New Jersey, and
attended the MBA program at Seton Hall University 1977 through 1983.

John J. Crawford has been President and Chief Executive Officer of The
Aristotle Corporation ("Aristotle") since April 2, 1990, and Chairman of its
Board since April 1993. Aristotle is a holding company engaged in the design,
manufacture and marketing of women's intimate apparel. Since July 1994, Mr.
Crawford has served Aristotle in a part-time capacity. Mr. Crawford is also
the Chief Executive Officer of the Regional Water Authority, a utility located
in New Haven, Connecticut. Mr. Crawford is also a member of the Board of
Directors of Webster Financial Corporation.

During 1996, Mr. Thygesen, the Company's President and a director of the
Company, and Mr. Calandrella, also a Director of the Company, informed the
Company that they had been notified by the Securities and Exchange Commission
("Commission") that the Commission Staff intended to request that the
Commission commence an administrative proceeding against the Rockies Fund,
Inc. (the "Fund"), Mr. Calandrella, its President, and against its directors
(including Messrs. Thygesen and Calandrella) based upon certain transactions
in securities that had formerly been included in the Fund's securities
portfolio. In June 1998, the Commission issued an order instituting public
administrative proceedings. In November 1998, an administrative trial was
held at which the Fund, its President and its directors contested the Staff's
allegations, which they believe to be substantially without merit. As its
exclusive relief against the Fund, the Commissions Staff has requested the
entry of an order directing the Fund to cease and desist from committing the
securities law violations alleged by the Staff in the enforcement proceeding.
In addition, the Staff has requested entry of such an order against the Fund's
President and its directors along with certain other relief. No decision has
been rendered and there is no timetable by which a decision must be made.
Under the circumstances, the Company cannot predict with any certainty the
outcome of the action or its effect, if any, on the Company.

The Company has adopted a Formula Compensation Plan for outside Directors.
For their services, all outside Directors are paid an annual fee of $10,000
each, with the Chairman receiving an additional $12,000. In addition to cash
compensation, each outside Director is entitled to receive non-qualified stock
options exercisable to purchase 5,000 shares of Common Stock, at an exercise
price equal to the market value on the date of grant, for each year of service
as a director of the Company. However, for the past two years no options have
been granted to outside directors due to the unavailability of additional
shares under the Company's Stock Incentive Plan.

Any transactions between the Company and its officers, directors, principal
shareholders, or other affiliates have been and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties on an arms-length basis and will be approved by a majority of the
Company's independent, outside disinterested directors.

Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------

Under the Securities Laws of the United States, the Company's Directors, its
Executive (and certain other) Officers, and any persons holding more than ten
percent (10%) of the Company's common stock are required to report their
ownership of the Company's common stock and any changes in that ownership to
the Securities and Exchange Commission and the NASDAQ stock market. Specific
due dates for these reports have been established and the Company is required
to report in this Proxy Statement any failure to file by these dates.

Based solely on a review of the copies of such reports required by Section
16(a), the Company believes that its officers, Directors, and stockholders
owning greater than 10% of the Common Stock of the Company complied with all
applicable Section 16(a) filing requirements during 1998.

Item 10. Executive Compensation

The following tables and discussion set forth information with respect to all
plan and non-plan compensation awarded to, earned by or paid to the Chief
Executive Officer ("CEO"), and the Company's four (4) most highly compensated
executive officers other than the CEO, for all services rendered in all
capacities to the Company and its subsidiaries for each of the Company's last
three (3) completed fiscal years; provided, however, that no disclosure has
been made for any executive officer, other than the CEO, whose total annual
salary and bonus does not exceed $100,000.

<PAGE>
<PAGE>
<TABLE>
TABLE 1
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
----------------------------------
Annual Compensation(1) Awards Payouts
-------------------------- --------------------- -------
Other All
Annual Restricted Other
Name and Compen- Stock LTIP Compen-
Principal Year Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($)(2) ($) SARs ($) ($)
- --------------- ------- -------- ----- --------- ---------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Clifford C. Thygesen, 1999 $111,705 $0 $6,600 $0 500 $0 $0
Chief Executive Officer 1998 98,077 0 4,880 0 10,000 0 0
and President of the 1997 90,433 5,500 4,590 0 10,000 0 0
Company and its
subsidiaries

- ------------------------------
</TABLE>

<PAGE>
<PAGE>
All executive officers of the Company participate in the Company's group
health insurance plan. Mr. Thygesen was given the use of a Company leased
vehicle. Except as indicated, no executive officer received perquisites and
other personal benefits which, in the aggregate, exceeded the lesser of either
$50,000 or 10% of the total of annual salary and bonus paid during the
respective fiscal years.

Management Bonus Plans
- ----------------------

For the fiscal year ended December 31, 1999, no management bonuses were earned
or paid.

For the fiscal year ended December 31, 1998, no management bonuses were earned
or paid.

For the fiscal year ended December 31, 1997, the Management Bonus Plan ("1997
Management Bonus Plan") consisted of a contribution by the Company equal to
twenty-five percent (25%) of the Company's net profits in excess of $500,000
earned by the Company during fiscal 1997, not to exceed $62,500. Bonuses
totaling $34,354 were earned and paid under the 1997 Management Bonus Plan.

The following table sets forth certain information concerning the exercise of
incentive stock options during the last completed fiscal year by each of the
named executive officers and the fiscal year-end value of unexercised options
on an aggregated basis:

TABLE 2
Option/SAR Grants for Last
Fiscal Year-Individual Grants
<TABLE>
<CAPTION>

Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/sh) Date
- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Clifford C.
Thygesen 500 1.00% $9.125 July 22, 2004

</TABLE>

<PAGE>
<PAGE>
TABLE 3
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values

Value of
Unexercised
Number of In-the-Money
Shares Unexercised Options/SARs
Acquired Options/SARs at FY-End
on Value at FY-End (#) ($) (2)
Exercise Realized Unexercisable/ Unexercisable/
Name (#) (1) ($) Exercisable Exercisable
- ---- -------- ------- ---- ------------- --------------
<S> <C> <C> <C> <C> <C>

Clifford C.
Thygesen 0 0 0 0/37,400 $0/$217,000

</TABLE>
- ---------------

(1) Value Realized is determined by calculating the difference between the
aggregate exercise price of the options and the aggregate fair market
value of the Common Stock on the date the options are exercised.

(2) The value of unexercised options is determined by calculating the
difference between the fair market value of the securities underlying the
options at fiscal year end and the exercise price of the options.

<PAGE>
<PAGE>
Item 11. Security Ownership of Management and Principal Stockholders

The following table sets forth, as of the date of this Report and as adjusted
for the sale of Option Stock, the stock ownership of each person known by the
Company to be the beneficial owner of five (5%) percent or more of the
Company's common stock, all Directors individually and all Directors and
Officers of the Company as a group. Each person has sole voting and
investment power with respect to the shares shown, except as noted.

<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent of
Title of Beneficial Owner Ownership Class (1)
- ----- ------------------- ----------------- ----------
<S> <C> <C> <C>

Common Dr. Robert A. Scott
Stock 32 Murray Avenue
Mahwah, N.J. 07430 32,080 (2) 2.89%

" Clifford C. Thygesen
4893 Idylwild Trail
Boulder, Colorado 80301 85,405 (3) 7.50%

" Clifford L. Neuman
1507 Pine Street
Boulder, Colorado 80302 36,080 (4) 3.44%

" Stephen G. Calandrella
7210 Antelope Lane
Colorado Springs, CO 80920 10,000 (5) 0.92%

" Wayne R. Kirschling
123 East Adams
Muncie, Indiana 47305 13,000 (6) 1.19%

" Richard J. Ciurczak
901 Janesville Ave.
Ft. Atkinson, WI 53538 -0- 0%

" John J. Crawford
90 Sargent Drive
New Haven, CT 06511 -0- 0%

" The Rockies Fund, Inc.
5373 North Union Blvd.
Suite 100
Colorado Springs, CO 80918 16,5000 (7) 1.52%

" G.C. Associates Holdings Corp.
96 Cummings Point Road
Stamford, Connecticut 06902 690,230 (8) 50.68%

" All Directors and Officers
As a Group (7 Persons) 178,485 14.77%

</TABLE>
- ------------------

(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of the date of this Report or
within 60 days of such date, are treated as outstanding when determining
the percent of the class owned by such individual and when determining
the percent owned by the group.

(2) Includes non-qualified options exercisable to purchase 6,000 shares of
Common Stock at an exercise price of $4.50 per share granted March 29,
1996, non-qualified options exercisable to purchase 5,000 shares of
Common Stock at an exercise price of $3.875 per share granted May 28,
1997 pursuant to the Formula Plan for Directors, non-qualified options
exercisable to purchase 10,000 shares of Common Stock at an exercise
price of $8.00 per share granted August 18, 1998, non-qualified options
exercisable to purchase 500 shares of Common Stock at an exercise price
of $9.125 per share granted July 22, 1999, and Common Stock Purchase
Warrants exercisable through December 1, 2000, to acquire up to 5,290
shares of Common Stock at an exercise price of $10.00 per share.

(3) Includes non-qualified options exercisable to purchase 1,000 shares of
Common Stock at an exercise price of $4.50 per share granted June 5, 1995
pursuant to the Formula Plan for Directors, incentive stock options
exercisable to purchase 5,900 shares of Common Stock at an exercise price
of $4.50 per share granted February 29, 1996, incentive stock options
exercisable to purchase 10,000 shares of Common Stock at an exercise
price of $4.50 per share granted March 29, 1996, non-qualified options
exercisable to purchase 10,000 shares of Common Stock at an exercise
price of $3.875 per share granted May 28, 1997 pursuant to the Formula
Plan for Directors, non-qualified options exercisable to purchase 10,000
shares of Common Stock at an exercise price of $8.00 per share granted
August 18, 1998, non-qualified options exercisable to purchase 500 shares
of Common Stock at an exercise price of $9.125 per share granted July 22,
1999, and Common Stock Purchase Warrants exercisable through December 1,
2000, to acquire up to 19,900 shares of Common Stock at an exercise price
of $10.00 per share. Does not include 16,500 shares of Common Stock
which are owned by The Rockies Fund, Inc., a Colorado-based business
development company of which Mr. Thygesen is a director. Beneficial
ownership of shares held by The Rockies Fund, Inc. is exercised by its
Board of Directors whose members include Stephen Calandrella, Charles
Powell and Clifford C. Thygesen. Mr. Thygesen disclaims beneficial
ownership of all shares of common stock and warrants owned by The Rockies
Fund, Inc. for purposes of Section 16 of the Securities Exchange Act of
1934, as amended.

(4) Includes non-qualified options exercisable to purchase 1,000 shares of
Common Stock at an exercise price of $4.50 per share granted June 5, 1995
pursuant to the Formula Plan for directors, non-qualified options
exercisable to purchase 4,000 shares of Common Stock at an exercise price
of $4.50 per share granted March 29, 1996, non-qualified options
exercisable to purchase 5,000 shares of Common Stock at an exercise price
of $3.875 per share granted May 28, 1997 pursuant to the Formula Plan for
directors, and Common Stock Purchase Warrants exercisable through
December 1, 2000, to acquire up to 12,040 shares of Common Stock at an
exercise price of $10.00 per share.

(5) Includes non-qualified options exercisable to purchase 5,000 shares of
Common Stock at an exercise price of $4.50 per share granted November 1,
1996 pursuant to the Formula Plan for directors, and non-qualified
options exercisable to purchase 5,000 shares of Common Stock at an
exercise price of $3.875 per share granted May 28, 1997 pursuant to the
Formula Plan for directors. Does not include 16,500 shares of Common
Stock which are owned by The Rockies Fund, Inc., a Colorado-based
business development company of which Mr. Calandrella is a director.
Beneficial ownership of shares held by The Rockies Fund, Inc. is
exercised by its Board of Directors whose members include Stephen
Calandrella, Charles Powell and Clifford C. Thygesen. Mr. Calandrella
disclaims beneficial ownership of all shares of common stock and warrants
owned by The Rockies Fund, Inc. for purposes of Section 16 of the
Securities Exchange Act of 1934, as amended.

(6) Represents non-qualified options exercisable to purchase 4,000 shares of
Common Stock at an exercise price of $4.50 per share granted March
29,1996, and non-qualified options exercisable to purchase 5,000 shares
of Common Stock at an exercise price of $3.875 per share granted May 28,
1997 pursuant to the Formula Plan for directors.

(7) Represents 16,500 shares of Common Stock. The Rockies Fund, Inc., is a
Colorado-based business development company. Beneficial ownership of
shares held by The Rockies Fund, Inc. is exercised by its Board of
Directors whose members include Stephen Calandrella, Charles Powell and
Clifford C. Thygesen.

(8) Includes Common Stock Purchase Warrants exercisable through December 1,
2000, to acquire up to 279,840 shares of Common Stock at an exercise
price of $10.00 per share. G.C. is a Delaware corporation engaged in
holding investments. Geneve Holdings, Inc., a Delaware corporation
("GHI"), is a private, diversified holding company, and is the indirect
controlling shareholder of G.C. By virtue of his direct or indirect
holdings of capital stock of GHI, Mr. Edward Netter may be deemed to be
the controlling person of GHI and therefore the controlling person of
G.C. Mr. Netter disclaims beneficial ownership of all shares of common
stock and common stock purchase warrants owned by G.C. for purposes of
Section 16 of the Securities Exchange Act of 1934, as amended, or for any
other purpose. The foregoing information has been furnished to the
Company by G.C., in a report of beneficial ownership on Schedule 13D, the
accuracy of which has not been independently verified by the Company.

Item 12. Transactions with Management and Others

Clifford L. Neuman has served as a member of the Company's Board of Directors
since November 1990. Mr. Neuman also served as Secretary of the Company from
February, 1992 through November, 1994.

Mr. Neuman is a Managing Member of the law firm of Neuman & Drennen, LLC
(f/k/a Neuman & Cobb), which has served as legal counsel to the Company since
its inception in 1986.

During 1999 and 1998, the Company paid Neuman, Drennen & Stone approximately
$38,095.00 and $51,570.00, respectively, for legal services rendered during
the respective fiscal years. Finally, during fiscal 1999 and fiscal 1998, Mr.
Neuman received $10,000 in consideration for his services as a director of the
Company.

Item 13. Exhibits and Reports on Form 8-K

Exhibits Exhibit No. Title
- -------- ----------- -----

1. 3.1 Articles of Incorporation
1. 3.2 Articles of Amendment to Articles of Incorporation
1. 3.2(b) Articles of Amendment to Articles of Incorporation
dated April 21, 1987
2. 3.2(c) Articles of Amendment to Articles of Incorporation
dated February 19, 1990
1. 3.3 By-Laws
2. 4.1 American Educational Products, Inc. 1987 Incentive
Stock Option Plan, together with Option Agreement
2. 4.2 American Educational Products, Inc. 1990 Incentive
Stock Option Plan, together with Option Agreement
2. 4.3 American Educational Products, Inc. 1990 Employee
Stock Purchase Plan, together with Subscription
Agreement
3. 4.4 American Educational Products, Inc. 1997 Stock
Incentive Plan, together with Option Agreement
9. 4.5 Form of Warrant Agreement (including form of warrant)
4. 10.1 Asset Purchase Agreement dated March 1, 1994, with
Churchill Films, Inc.
5. 10.2 Asset Purchase Agreement dated December 20, 1995,
with Steck-Vaughn Publishing Corporation relating to
the sale of Summit Learning, Inc. assets
6. 10.3 Asset Purchase Agreement dated June 17, 1997, with
New SVE, Inc. relating to the sale of AEP Media
Corporation assets
7. 10.4 Stock Purchase Agreement dated April 13, 1998, with
National Teaching Aids, Inc., et al relating to the
purchase of National Teaching Aids, Inc.
8. 10.5 Asset Purchase and Sale Agreement dated August 4,
1998, with SV Distribution Company relating to the
purchase of operating assets known as Summit Learning
10. 10.6 Asset Purchase and Sale Agreement dated September 1,
1999 with To-Sew, Inc. relating to the purchase of
operating assets known as To-Sew

1. Incorporated by reference from the Registrant's Post-Effective Amendment
No. 5 to Registration Statement on Form S-18 filed with the Securities
and Exchange Commission and which was declared effective on July 1, 1987.
2. Incorporated by reference from the Registrant's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission which was
declared effective on August 4, 1992.
3. Incorporated by reference from the Registrant's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on March 17,
1998.
4. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated March 11, 1994 and filed with the Commission on March 24, 1994.
5. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated December 20, 1995 and filed with the Commission on January 4,
1997.
6. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated June 17, 1997, and filed with the Commission on July 3, 1997.
7. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated April 17, 1998, and filed with the Commission on May 1, 1998.
8. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated August 4, 1998, and filed with the Commission on August 17, 1998.
9. Incorporated by reference from the Registrant's Statement on Form S-3/A-
2, Securities and Exchange Commission File No. 333-67401, as filed with
the Commission on January 21, 1999.
10. Incorporated by reference from the Registrant's Current Report on Form 8-
K dated September 1, 1999 and filed with the Commission on September 14,
1999.

Reports on Form 8-K
- -------------------

The Registrant filed no Current Reports on Form 8-K during the fourth quarter
ended December 31, 1999.

AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

PAGE

INDEPENDENT AUDITOR'S REPORT F-2

CONSOLIDATED BALANCE SHEETS - December 31, 1999, and 1998 F-3

CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years Ended
December 31, 1999, 1998, and 1997 F-4

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY -
From January 1, 1997 through December 31, 1999 F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended
December 31, 1999, 1998, and 1997 F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7

INDEPENDENT AUDITOR'S REPORT

Board of Directors
American Educational Products, Inc.
Boulder, Colorado

We have audited the accompanying consolidated balance sheets of American
Educational Products, Inc. and Subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Educational Products, Inc. and Subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.

HEIN + ASSOCIATES LLP

Denver, Colorado
February 22, 2000

<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1999, and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>

ASSETS
CURRENT ASSETS
Cash $ 94,000 $ 124,000
Trade receivables, net of allowance of
$95,000 and $63,000 1,952,000 1,876,000
Royalty receivable 66,000 116,000
Inventories 4,108,000 3,733,000
Prepaid advertising costs 1,171,000 1,114,000
Other 287,000 167,000
------------ ------------
TOTAL CURRENT ASSETS 7,678,000 7,130,000

PROPERTY AND EQUIPMENT, net 2,459,000 2,596,000

INTANGIBLE ASSETS, net 1,732,000 1,160,000

DEFERRED TAXES, net 575,000 -

VIDEO LIBRARY, net 94,000 217,000

OTHER ASSETS 93,000 99,000
------------ ------------
TOTAL ASSETS $12,631,000 $11,202,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 2,227,000 $ 1,614,000
Current maturities of long-term debt 430,000 895,000
Accounts payable 1,349,000 1,135,000
Accrued expenses 304,000 261,000
Income taxes payable 38,000 59,000
------------ -----------
TOTAL CURRENT LIABILITIES 4,348,000 3,964,000

LONG - TERM DEBT, less current maturities 894,000 1,087,000

COMMITMENTS (Note 4)

STOCKHOLDERS' EQUITY
Preferred stock; $0.01 par value; 50,000,000
shares authorized; none issued or outstanding - -
Common stock; $0.05 par value; 100,000,000
shares authorized; 1,076,070 and 1,045,524 shares
issued and outstanding 54,000 52,000
Additional paid in capital 7,215,000 7,081,000
Retained earnings (accumulated deficit) 120,000 (982,000)
------------------------
TOTAL STOCKHOLDERS' EQUITY 7,389,000 6,151,000
------------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,631,000 $11,202,000
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
INCOME:
Net sales $ 14,964,000 $ 11,675,000 $ 8,392,000
Cost of goods sold 8,992,000 6,843,000 5,232,000
------------ ----------- ------------
Gross profit 5,972,000 4,832,000 3,160,000
OPERATING EXPENSES:
Advertising and catalog costs 1,547,000 674,000 95,000
Other marketing 1,338,000 1,135,000 851,000
------------ ----------- ------------
Total marketing 2,885,000 1,809,000 946,000
General and administrative 2,210,000 1,784,000 1,377,000
------------ ----------- ------------
Total operating expenses 5,095,000 3,593,000 2,323,000
------------ ----------- ------------
OPERATING INCOME 877,000 1,239,000 837,000

INTEREST EXPENSE, net (350,000) (358,000) (323,000)

INCOME BEFORE INCOME TAXES 527,000 881,000 514,000
Income tax benefit (expense) 575,000 (31,000) -
------------ ----------- ------------
NET INCOME $ 1,102,000 $ 850,000 $ 514,000
=========== =========== ============
Basic earnings per Share $ 1.03 $ 0.85 $ 0.56
=========== =========== ============
Diluted earnings per Share $ 0.95 $ 0.79 $ 0.53
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.

AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 1997 through December 31, 1999

COMMON STOCK Additional Retained
Number Paid Earnings
of Common in (Accumulated
Shares Stock Capital Deficit) Total
-------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>

Balance as of January 1, 1997 915,449 $46,000 $ 6,468,000$(2,346,000)$4,168,000

Sale of common stock under the
employee stock purchase plan 1,423 - 6,000 - 6,000
Exercise of options 3,000 - 12,000 - 12,000
Issuance of common stock
for services 3,000 - 18,000 - 18,000
Net income - - - 514,000 514,000
-------- --------- ---------- ---------- ----------
Balance as of December 31, 1997 922,872 46,000 6,504,000 (1,832,000) 4,718,000

Sale of common stock under the
employee stock purchase plan 1,367 - 7,000 - 7,000
Exercise of options 43,285 2,000 229,000 - 231,000
Exercise of warrants 78,000 4,000 341,000 - 345,000
Net income - - - 850,000 850,000
-------- --------- ---------- ---------- ----------
Balance as of December 31, 1998 1,045,524 52,000 7,081,000 (982,000) 6,151,000

Sale of common stock under the
employee stock purchase plan 1,731 - 13,000 - 13,000
Exercise of options 28,815 2,000 121,000 - 123,000
Net income - - - 1,102,000 1,102,000
-------- --------- ---------- ---------- ----------
Balance as of December 31, 1999 1,076,070 $ 54,000 $7,215,000 $ 120,000 $7,389,000
========= ========= ========== =====================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998, and 1997

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,102,000 $ 850,000 $ 514,000
Expenses not requiring cash outlays:
Depreciation 620,000 603,000 665,000
Amortization 316,000 275,000 344,000
Bad debt expense 93,000 67,000 13,000
Imputed interest expense 54,000 37,000
Income not providing cash inflow:
Deferred tax provision (575,000) - -
Changes in working capital items:
Accounts receivable (208,000) 81,000 (393,000)
Inventories 126,000 (164,000) (65,000)
Prepaid advertising costs 3,000 (888,000) (38,000)
Accounts payable 148,000 492,000 (219,000)
Accrued expenses 22,000 (109,000) (76,000)
Other (46,000) (35,000) (37,000)
----------- ---------- ----------
Net cash provided by operating
activities 1,655,000 1,209,000 708,000

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net cash paid (1,417,000) (550,000) -
Installment proceeds from sale of
assets 165,000 118,000 127,000
Purchase of property and equipment 406,000) (351,000) (235,000)
----------- ---------- ----------
Net cash provided (used) by
investing activities (1,658,000) (783,000) (108,000)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long
term debt 1,170,000 550,000 3,186,000
Payments on notes payable and long
term debt (1,333,000) (1,618,000) (3,746,000)
Net proceeds from common stock
transactions 136,000 583,000 36,000
----------- ---------- ----------
Net cash (used) by financing
activities (27,000) (485,000) (524,000)
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH (30,000) (59,000) 76,000

Cash, at beginning of period 124,000 183,000 107,000
----------- ---------- ----------
Cash, at end of period $ 94,000 $ 124,000 $ 183,000
========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

Nature of Business - American Educational Products, Inc. (AMEP or the Company)
was organized as a Colorado corporation in 1986.

The Company sells a wide variety of educational products through multiple
sales channels. The Company's products include those developed and
manufactured by the Company, as well as products manufactured by other
companies. The Company's customers include educational institutions,
wholesalers, individual educators, and consumers. Approximately 93% of the
Company's 1999 sales were in the United States and the remainder was exported
to various locations throughout the world.

The Company utilizes several trade names in its marketing efforts. Scott
Resources (Scott) specializes in manufacturing math products and earth science
(geology) products. Hubbard Scientific (Hubbard) specializes in manufacturing
science products for teaching life science (biology and chemistry) and
physical science (physics and astronomy). National Teaching Aids (NTA)
specializes in manufacturing Microslide Viewers and the related Microslides.
Summit Learning (Summit) distributes a wide array of math and science products
primarily through the use of direct mail advertising. To-Sew (To-Sew) designs
sewing kits that are sold via direct mail advertising to family and consumer
science educators.

Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
notes. Estimates that have a significant impact are a) future value of
deferred tax assets, b) future sales to be derived from catalog mailings, c)
useful life of intangible assets, d) future recoverability of all long-lived
assets, e) net realizable value of inventory, f) future collectability of
accounts receivable, and g) useful life and salvage value of property and
equipment. Actual results could differ from those estimates.

Revenue Recognition - Sales are recorded at time of shipment and an allowance
is provided for estimated future returns.

Inventories - Inventories are valued at the lower of cost [using costing
systems that approximate a first-in, first-out (FIFO) basis] or market, and
consist of the following:

DECEMBER 31,
1999 1998
------------- ----------
<S> <C> <C>

Raw material $ 2,068,000 $ 1,908,000
Work in process 29,000 48,000
Finished goods 2,437,000 2,092,000
Less valuation
allowance (426,000) (315,000)
------------- -----------
TOTAL $ 4,108,000 $ 3,733,000
============= ===========
</TABLE>

Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed by the straight-line method over estimated useful
lives ranging generally from 3 to 32 years. Depreciation expense was
$620,000, $603,000, and $665,000, for the years ended December 31, 1999, 1998,
and 1997, respectively.

Maintenance and repairs are charged to expenses when incurred. Property
replacements and betterments that extend the life of assets, including
reproduction masters for significant, non-routine product updates, are
capitalized and subsequently depreciated. During 1998, the Company
implemented the provisions of AICPA Statement of Position No. 98-1 Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use
("SOP 98-1"). SOP 98-1 specifies the types of costs that must be capitalized
and the types for costs that must be expensed during the development and
implementation phases of software installation.

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------ ----------
<S> <C> <C>

Reproduction masters $ 3,517,000 $ 3,437,000
Plant machinery and
equipment 1,994,000 1,971,000
Office furniture and
equipment 287,000 279,000
Land and buildings 738,000 737,000
Information systems 1,095,000 724,000
Vehicles and other 36,000 36,000

------------ -----------
7,667,000 7,184,000
Less accumulated depreciation ( 5,208,000)( 4,588,000)
------------ -----------
$2,459,000 $2,596,000
============ ===========
</TABLE>

Video Library - The Company capitalizes costs incurred relating to the
development of educational video products. These costs are amortized over the
estimated future unit sales of the video products on an individual film
forecast computation method. Estimated future unit sales of each video
represent a significant estimate and are reviewed quarterly by the Company.
Amortization expense was $123,000, $142,000, and $138,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.

As of December 31, 1999, and 1998, the video library consists of:

Production costs - completed
videos $ 940,000 $ 940,000
Accumulated amortization ( 846,000) ( 723,000)
----------- -----------
TOTAL $ 94,000 $ 217,000
=========== ==========
</TABLE>

Intangibles - In the various acquisitions made by the Company, the purchase
price was allocated to individual assets, including intangible assets, based
upon their estimated fair market value. If any portion of the overall
purchase price cannot be allocated to specific assets, that portion is
allocated to goodwill. Copyright costs are amortized over the shorter period
of the estimated remaining lives of the products or the estimated remaining
lives of their related copyrights. The lives range from 2 years to 6 years.

Costs allocated to "non-compete" covenants are amortized over the contractual
lives of the non-competition agreements, generally ranging from four to six
years.

Goodwill is amortized over fifteen years. Evaluation of the goodwill
amortization period is highly subjective and is periodically analyzed based
upon changing conditions. The Company believes that the actual economic life
of its various goodwill amounts will ultimately exceed the fifteen years used
for accounting purposes.

As of December 31, 1999, and 1998, intangible assets consist of:

<TABLE>
<CAPTION>
1999
--------------------------
ACCUMULATED
COST AMORTIZATION NET
------------- ----------- ----------
<S> <C> <C> <C>

Copyrights $ 650,000 $(607,000) $ 43,000
Covenants 1,189,000 (753,000) 436,000
Goodwill 1,345,000 (92,000) 1,253,000
------------ ----------- ----------
$3,184,000$(1,452,000) $1,732,000
============ =========== ==========
1998
--------------------------
ACCUMULATED
COST AMORTIZATION NET
------------- ----------- ----------
<S> <C> <C> <C>

Copyrights $ 650,000 $ (544,000) $ 106,000
Covenants 890,000 (688,000) 202,000
Goodwill 879,000 (27,000) 852,000
------------ ----------- ----------
$2,419,000$(1,259,000) $1,160,000
============ =========== ==========
</TABLE>

Prepaid Advertising Costs - Substantially all of the Company's advertising is
through the mailing of catalogs. The printing and mailing costs of catalogs
are recorded as a current prepaid cost. These costs are amortized to expense
based upon individual cost pools using actual and estimated future revenues
for each catalog. All other advertising costs are expensed when the
advertising first takes place.

Long-Lived Assets - Management periodically assesses recoverability of all
long-lived assets, including intangibles. The assessment for impairment is
performed whenever events or changes in circumstance indicate that the
carrying value of an asset may not be recoverable. The assessment compares
the carrying value of the assets to the estimated future cash flows of the
assets, exclusive of interest. If an impairment is indicated, a provision is
made to reduce the asset's carrying value to its estimated fair value.

Fair Value of Financial Instruments and Concentration of Credit Risk - The
carrying value of the Company's trade receivables and trade payables are
considered to approximate fair value due to their short maturities. The fair
value of the Company's notes payable are considered to approximate fair value
because the effective interest rates on the obligations approximate the
Company's current cost of borrowing.

The Company has a concentration of credit risk because substantially all of
its sales are either direct to educational institutions or to distributors who
sell to educational institutions. Management believes that the allowance for
doubtful accounts is sufficient to cover the related credit risk.

Stock-Based Compensation - Statement of Financial Accounting Standards No. 123
Accounting for Stock-Based Compensation ("SFAS 123") requires disclosure of
the fair value and other characteristics of stock options granted to
employees. Under the provisions of SFAS 123, the Company has elected to
continue using the intrinsic value method of accounting for employee stock-
based compensation in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25").

Income Taxes - The Company accounts for income taxes under the liability
method of SFAS 109. Deferred income taxes reflect the effect of temporary
differences between the tax basis of assets and liabilities and the carrying
value of those assets and liabilities for financial reporting purposes.
Deferred income taxes also reflect the value of net operating loss
carryforwards. Tax effects are computed using the tax rates and laws enacted
as of the balance sheet date.

Earnings Per Share - The earnings per share is presented in accordance with
the provisions of Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"). SFAS 128 specifies the method of
computation, presentation, and disclosure for earnings per share ("EPS"). It
requires the presentation of the two EPS amounts, basic and diluted. Basic
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted EPS includes the dilution
that would occur if outstanding stock options and other dilutive securities
were exercised. Under certain circumstances, the calculation results in an
anti-dilutive impact. An anti-dilutive impact means that the calculation
increases earnings per share or reduces losses per share. All securities with
an anti-dilutive impact are excluded from the diluted EPS calculation.
Earnings per share amounts have been adjusted, for all years presented, to
reflect the one-for-five stock split effective April, 1997.

Supplemental Disclosures of Cash Flow Information -

DECEMBER 31,
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>

Cash payments for:
Interest $318,000 $297,000 $306,000
=========== ========== =========
Income Taxes $20,000 $21,000 $0
=========== ========== =========
Non-cash investing and financing
activities:
Capital leases incurred in exchange for
equipment purchases $72,000 $186,000 $0
=========== ========== =========
Acquisition of companies with debt $0 $2,609,000 $0
=========== ========== =========
</TABLE>

Impact of Recently Issued Accounting Standards - In June 1998, Statement of
Financial Accounting Standards No. 133 Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133") was issued. SFAS 133 establishes
accounting and reporting standards for derivative financial instruments and
for hedging activities. The Company does not currently engage in any
activities that would be covered by SFAS 133.

Reporting Comprehensive Income - Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130") became effective during
1998. SFAS 130 establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Since its inception, the
Company has not entered into any transactions that meet the definition of
comprehensive income other than net income or net loss. Accordingly, the
balance of accumulated comprehensive income at December 31, 1999 was nil and
total comprehensive income for each of the three years ending December 31,
1999 was equal to the net income reported for the year.

2. ACQUISITIONS:

Effective September 1, 1999, AMEP acquired certain operating assets known as
To-Sew. The purchase price was $1,270,000. Certain other costs incurred in
connection with the acquisition resulted in total capitalized costs of
$1,417,000. Funding for the acquisition was available under the Company's
financing arrangement with its primary lender.

To-Sew assembles and distributes sewing kits used as teaching aids in the
family and consumer science curriculum. Several times per year, To-Sew mails
catalogs, posters, and other solicitation material directly to educators. The
To-Sew acquisition was recorded using the purchase method of accounting and
the operating results were included in the Company's consolidated results of
operations commencing September 1, 1999.

In May 1998, the Company purchased all of the common stock of Learning &
Leisure, Inc. and its wholly owned subsidiary, National Teaching Aids, Inc.
(collectively, "NTA") for a purchase price of $1,835,000. The sellers
provided financing for the transaction under a $950,000 convertible note
payable, a $400,000 licensing agreement, and consultation / non-compete
agreements requiring aggregate payments of $300,000. In addition, AMEP
assumed certain liabilities and incurred other expenses that increased total
capitalized acquisition costs to $1,984,000.

The NTA acquisition has been recorded using the purchase method of accounting
and the operating results of NTA were included in the Company's consolidated
results of operation commencing June 1, 1998.

Effective July 1, 1998, AMEP acquired certain operating assets of Summit
Learning. Summit distributes math and science supplemental teaching aids via
direct mail catalogs. The purchase price was $1,482,000. The seller provided
financing for the acquisition in the form of a promissory note with a
principal amount of $1,182,000. In addition, AMEP assumed certain liabilities
and incurred other expenses that increased total capitalized acquisition costs
to $1,550,000. Some of Summit's catalogs were targeted toward the consumer
market. That portion of the business was sold in September 1998. Sales
proceeds consisting of $50,000 cash plus a note receivable of $150,000 were
used to reduce the capitalized costs of the acquisition.

The Summit acquisition was recorded using the purchase method of accounting
and the operating results of Summit were included in the Company's
consolidated results of operations commencing July 1, 1998.

The following pro-forma presentation has been prepared as if all of the
acquisitions had occurred on January 1, 1997.

PRO-FORMA (unaudited) YEAR ENDED DECEMBER 31,
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>

Net sales $16,029,000 $16,607,000$19,055,000
Net income (loss) $1,067,000 $363,000 $(534,000)
Basic earnings (loss) per
share $1.00 $0.40 $(0.58)
Diluted earnings (loss) per share $0.92 $0.34 $(0.58)

</TABLE>

The pro-forma amounts presented above include adjustments to historical
amounts for interest on acquisition debt incurred, amortization of goodwill,
and depreciation of revalued furniture and equipment. The pro-forma
information is not necessarily indicative of the results of operation of the
combined company had these events occurred on January 1, 1997. Furthermore,
AMEP made substantial changes to the operations of each acquired enterprise
subsequent to the acquisition date. Specifically, a duplicative facility
acquired with NTA was closed and the operations were relocated to Chippewa
Falls, Wisconsin. A duplicative facility acquired with To-Sew was closed and
the operations were relocated to Fort Collins, Colorado. The number of
catalogs and costs thereof mailed by Summit were substantially reduced. None
of these changes are reflected in the pro-forma amounts above. Therefore, the
amounts presented above are not indicative of future results.

3. NOTES PAYABLE AND LONG-TERM DEBT:

The Company has a $4,050,000 revolving line of credit pursuant to an asset-
based financing agreement that expires April 30, 2002. Borrowing under this
line of credit bears interest at a floating rate plus 1% (totaling 9.5% as of
December 31, 1999). Interest is payable monthly. The principal balance was
$2,227,000 at December 31, 1999. The amounts available to be borrowed under
the agreement are derived from a borrowing base formula as defined in the
agreement relating to allowable inventory and accounts receivable. As of
December 31, 1999, the borrowing base formula would have limited borrowings to
$3,218,000. The line of credit is collateralized by substantially all of the
Company's assets. As the financing agreement contains a subjective "due-upon-
demand" clause, the entire balance is classified as a current liability.
Scheduled principal payments are $36,000 per month.

The Company's long-term debt consisted of the following:

1999 1998
----------- ----------
<S> <C> <C>

Note Payable to the sellers of NTA,
principal due in four annual
installments of $237,500. At the
option of the Company, can be
converted into common stock at a
rate of $10 per share.
Collateralized by intellectual
property. $687,000 $905,000

License agreement, due in four annual
installments of $100,000.
Collateralized by intellectual
property. 257,000 323,000

Note Payable to the seller of Summit,
principal due in monthly installments
of $125,000. Accrued interest is
payable monthly at 8.5%.
Collateralized by Summit's operating
assets. - 431,000

Capital lease obligations, due in
monthly installments of $13,000 with
varying maturities. Collateralized
by information system hardware and
manufacturing equipment. 321,000 146,000

Other 59,000 177,000
----------- ----------
Total 1,324,000 1,982,000
Less current maturities ( 430,000) ( 895,000)
----------- ----------
Long-term debt $894,000 $1,087,000
=========== ==========
</TABLE>

At December 31, 1999, the future minimum principal payments on long term debt
and capitalized lease obligations were as follows:

<S> <C>

2000 $430,000
2001 413,000
2002 394,000
2003 79,000
2004 8,000
------------
Total $ 1,324,000
============
</TABLE>

The note payable to the sellers of NTA bears interest at a stated rate of
7.5%, payable annually. For financial reporting purposes, the note was
assigned an additional 2.5% of imputed interest (total interest rate of 10%).
The face value of the note was $712,500 at December 31, 1999 and $950,000 at
December 31, 1998. The license agreement is non-interest bearing. For
financial reporting purposes, the note was assigned 10% of imputed interest.
The face value of the license payable was $300,000 at December 31, 1999 and
$400,000 at December 31, 1998.

4. COMMITMENTS:

The Company leases office space, equipment, and warehouse facilities under
noncancellable operating leases. Total rental expense for each of the last
three years was $322,000 in 1999, $240,000 in 1998, and $133,000 in 1997.
Future minimum rental commitments at December 31, 1999 are as follows:

<S> <C>

2000 $ 317,000
2001 168,000
2002 157,000
2003 153,000
2004 158,000
Thereafter 37,000
-----------
Total $ 990,000
===========
</TABLE>

The Company has certain royalty agreements with third parties on various
products. Total royalty expense for each of the last three years was $156,000
in 1999, $115,000 in 1998, and $109,000 in 1997.

5. STOCKHOLDERS' EQUITY:

Preferred Stock - The Company has authorized 50,000,000 shares of preferred
stock. These shares may be issued in series with such rights and preferences
as may be determined by the Board of Directors. None of the shares are issued
and outstanding.

Common Stock - On April 4, 1997, the Company's shareholders approved a one-
for-five (1-for-5) reverse split on its $0.01 par value common stock. The
reverse split became effective on April 22, 1997. As of that date, the par
value of the Company's common stock was increased to $0.05 per share and the
number of common shares outstanding was reduced from 4,580,794 to 916,298.
The reverse split has been shown in the accompanying financial statements and
notes as a retroactive adjustment giving effect to the split for all periods
presented.

During 1997, the Company issued a warrant dividend to existing shareholders.
The warrant dividend consisted of one warrant for each share of common stock
owned by shareholders of record on June 5, 1997. Each warrant entitles its
holder to purchase one additional share of the Company's common stock at an
exercise price of $10.00 per share. No voting rights have been attached to
the warrant. The Company retains the right to redeem the warrants upon 30
days notice for a redemption price of $0.01 per warrant in the event that
public trading of the Company's common stock equals or exceeds 110% of the
then current exercise price of the warrant for twenty consecutive trading
days. The warrants expire in December 2000.

A registration statement under the securities act of 1933 was filed regarding
the warrants and was declared effective by the Securities and Exchange
Commission in December 1997. The warrants were issued and began trading on
December 5, 1997 on the NASDAQ Small Cap Market System under the symbol AMEPW.
NASDAQ informed the Company that, in its opinion, the ex-dividend date for
these warrants should be December 5, 1997, the day that trading commenced. As
a result of the delayed ex-dividend date, the Company determined that it
should issue additional warrants to disenfranchised shareholders who sold
shares between June 5, 1997 and December 5, 1997. The additional warrants
were issued in 1999 after the amended registration statement was declared
effective by the Securities and Exchange Commission. All of these warrants,
amounting to 992,000, were issued and outstanding at December 31, 1999. There
were 916,000 warrants outstanding at December 31, 1998 and 1997.

Earnings per Share - The following is a reconciliation of basic and diluted
earnings per share:

For the year ended December 31, 1999
Income Shares Per Share
(Numerator)(Denominator) Amount
------------- ----------- ---------
<S> <C> <C> <C>

Basic EPS
Income available to common
shareholders $1,102,000 1,071,000 $1.03
Effect of dilutive securities =========
Stock options 65,000
Warrants 25,000
Convertible debt 0 0
Diluted EPS ---------- ----------
Income available to common stock-
holders plus assumed conversions $1,102,000 1,161,000 $0.95
========== ========== =========

* Additional income of $79,000 and additional shares of 79,000 would be anti-
dilutive

For the year ended December 31, 1998
Income Shares Per Share
(Numerator)(Denominator) Amount
------------- ----------- ---------
<S> <C> <C> <C>

Basic EPS
Income available to common
shareholders $850,000 1,000,000 $0.85
Effect of dilutive securities =========
Stock options 64,000
Warrants 11,000
Convertible debt 47,000 63,000
Diluted EPS --------- ---------
Income available to common stock-
holders plus assumed conversions $897,000 1,138,000 $0.79
========= ========= =========

For the year ended December 31, 1998
Income Shares Per Share
(Numerator)(Denominator) Amount
------------- ----------- ---------
<S> <C> <C> <C>

Basic EPS
Income available to common
shareholders $514,000 918,000 $0.56
Effect of dilutive securities ========
Stock options 29,000
Warrants 15,000
Diluted EPS --------- ---------
Income available to common stock-
holders plus assumed conversions $514,000 962,000 $0.53
========= ========= =========
</TABLE>

Options to purchase 183,300 shares of common stock were outstanding at
December 31, 1999. All of them had a dilutive effect on the 1999 earnings per
share calculation. For purposes of calculating diluted EPS, outstanding
options resulted in 65,000 incremental shares determined using the treasury
stock method.

The Company also had warrants outstanding at December 31, 1999 to purchase
992,000 shares of common stock at an exercise price of $10.00 per share. For
the purposes of calculating diluted EPS, outstanding warrants resulted in
25,000 incremental shares using the treasury stock method.

Options to purchase 172,450 shares of common stock were outstanding at
December 31, 1998. All of them had a dilutive effect on the 1998 earnings per
share calculation. For purposes of calculating diluted EPS, outstanding
options resulted in 64,000 incremental shares determined using the treasury
stock method.

The Company also had warrants outstanding at December 31, 1998 to purchase
916,000 shares of common stock. The 916,000 warrants had an anti-dilutive
effect and were therefore excluded from the calculation of diluted EPS. The
excluded warrants had an exercise price of $10.00 per share.

Options to purchase 161,700 shares of common stock were outstanding at
December 31, 1997. Of that total, 159,000 options had a dilutive effect on
the 1997 earnings per share calculation. For purposes of calculating diluted
EPS, outstanding options resulted in 29,000 incremental shares determined
using the treasury stock method. The remaining 2,700 options had an anti-
dilutive effect and were therefore excluded from the calculation of diluted
EPS. The excluded options had an exercise price of $7.125 per share.

The Company also had warrants outstanding at December 31, 1997 to purchase
994,000 shares of common stock. Of that total, 78,000 warrants had a dilutive
effect on the 1997 earnings per share calculation. For purposes of
calculating diluted EPS, those warrants resulted in 15,000 incremental shares
determined using the treasury stock method. The remaining 916,000 warrants
had an anti-dilutive effect and were therefore excluded from the calculation
of diluted EPS. The excluded warrants had an exercise price of $10.00 per
share.

ESPP - Substantially all of the Company's regular full-time employees are
eligible to participate in an employee stock purchase plan (ESPP), except
those owning more than 5% of the Company's common stock or more than $25,000
in value of the Company's common stock. Stockholders have authorized issuance
of up to 60,000 shares under the ESPP. Under the ESPP, employees may purchase
shares at 85% of the NASDAQ quoted market value on either the beginning or
ending date of the six month enrollment period, whichever is less. The number
of shares purchased under the ESPP for each of the three years ending December
31 was 1,731 in 1999, 1,367 in 1998, and 1,423 in 1997. The remaining shares
available to be issued under the ESPP totaled 16,000 as of December 31, 1999.
Expenses related to the ESPP are not material.

Stock Options - On June 2, 1997, the shareholders approved the 1997 Stock
Incentive Plan. The 1997 Stock Incentive Plan (the "1997 Plan") superseded
the previously existing plan, the 1990 Incentive Stock Option Plan, and all
activity under the 1990 was merged into the 1997 Plan. The 1997 Plan was
created to conform to recent changes in securities and tax laws and
regulations and to conform to new requirements of the NASDAQ Stock Market.

The 1997 Plan authorizes the Board of Directors to issue incentive stock
options to executive officers and key employees and to grant non-qualified
stock options and/or stock purchase rights to officers, employees, former
employees, directors, and consultants. The options are generally granted for
a five-year period, with the exercise price based upon the market price of the
Company's freely traded common stock on the date of the grant. The total
number of options authorized for issuance under the Plan is 179,300.

Of the 41,800 incentive stock options outstanding at December 31, 1999, 33,000
were fully vested and exercisable and the remaining 8,800 will become
exercisable in 2000. The incentive stock options had exercise prices ranging
from $3.875 to $7.125.

At December 31, 1999, there were 16,485 shares authorized for future grants of
incentive stock options under the existing Plan.

The Company has issued non-qualified stock options under the terms of the 1997
Plan (and its predecessor plan). During 1997, the Company issued 36,500 non-
qualified stock options to its directors at 100% of fair value at the date of
the grant. During 1998, the Company issued 59,000 non-qualified stock options
to its employees and directors at 100% of fair value at the date of the grant.
During 1999, the Company issued 46,500 non-qualified stock options to its
employees and directors at 100% of fair value at the date of the grant. All
141,500 non-qualified options outstanding at December 31, 1999 were
exercisable. The non-qualified stock options had exercise prices ranging from
$3.875 to $9.125.

The following is a summary of the number of shares under option:

<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------
INCENTIVE NON- WEIGHTED
STOCK QUALIFIED AVERAGE
OPTION STOCK EXERCISE
PLAN OPTIONS TOTAL PRICE
---------- -------- -------- ---------
<S> <C> <C> <C> <C>

Balance, Jan. 1, 1997 53,200 48,500 101,700 $7.90
Options granted 81,800 85,000 166,800 $4.40
Options exercised ( 1,000) (2,000) (3,000) $4.00
Options expired ( 1,300) 0 ( 1,300) $11.25
Options terminated ( 54,000)( 48,500) (102,500) $7.82
---------- -------- -------- ---------
Balance, Dec. 31, 1997 78,700 83,000 161,700 $4.40
Options granted 0 59,000 59,000 $8.00
Options exercised ( 7,385)( 29,000) ( 36,385) $4.50
Options terminated ( 1,865)( 10,000) ( 11,865) $5.20
---------- -------- -------- ---------
Balance, Dec. 31, 1998 69,450 103,000 172,450 $5.59
Options granted 0 46,500 46,500 $9.13
Options exercised ( 25,850)( 3,000) ( 28,850) $4.86
Options terminated ( 1,800)( 5,000) ( 6,800) $8.61
---------- -------- -------- ---------
Balance, Dec. 31, 1999 41,800 141,500 183,300 $6.49
========== ======== ======== =========
</TABLE>

For all options granted during the last three years, the weighted average
market price of the Company's common stock on the grant date was equal to the
weighted average exercise price. The weighted average remaining contractual
life for all options as of December 31, 1999, was approximately 2.9 years. If
not previously exercised or terminated, options outstanding at December 31,
1999, will expire as follows:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
YEAR SHARES PRICE
---------- -------- --------
<S> <C> <C>

2000 6,600 $4.50
2001 39,700 $4.21
2002 40,500 $3.89
2003 55,000 $8.00
2004 41,500 $9.125
</TABLE>

Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for its stock options
that are granted to employees and directors. Accordingly, no compensation
cost has been recognized for grants of options where the exercise price is not
less than the quoted market value of the Company's common stock on the grant
date. Had compensation cost been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS
123, the Company's net income and earnings per share would have changed to the
pro forma amounts indicated in the following table:

YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>

Net income
As reported $1,102,000 $850,000 $514,000
Pro forma $946,000 $512,000 $306,000
Basic earnings per common share
As reported $1.03 $0.85 $0.56
Pro forma $0.88 $0.51 $0.33
Diluted earnings per common share
As reported $0.95 $0.79 $0.53
Pro forma $0.81 $0.49 $0.32

</TABLE>

These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years.

The fair value of each option granted was estimated as of the date of grant
using the Black - Scholes option pricing model with the following weighted
average assumptions:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>

Estimated fair value/share
of options granted $4.62 $4.41 $2.23
Expected volatility 59% 58% 59%
Risk free interest rate 5.8% 5.2% 5.6%
Expected dividends $0.00 $0.00 $0.00
Expected term (in years) 4.0 5.0 5.0

</TABLE>

6. INCOME TAXES:

The composition of income tax benefit (expense) for the years ended December
31 was as follows:

1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>

Current $0 $(31,000) $0
Deferred 575,000 0 0
--------- -------- --------
Total $575,000 $(31,000) $0
========= ======== ========
</TABLE>

Generally, the difference between the Company's current effective tax rate and
the Federal statutory rate of 34% is primarily caused by the addition of state
taxes (2% - 3%) offset by the utilization of net operating loss (NOL)
carryforwards.

In previous years, the Company incurred net operating losses. Internal
Revenue Service regulations allow the Company to carryforward its net
operating losses and offset them against future taxable income, if any. As of
December 31, 1999, the NOL carryforwards approximate $2,400,000 and expire in
the years 2009, 2010, and 2011. Current tax regulations impose a number of
limitations and restrictions on the usage of net operating loss carryforwards.
Specifically, the Company must earn future taxable income such that the NOL's
can be used as a deduction. A change in control of the Company could limit
the usage of the NOL. Thus, there is no guarantee that the Company will be
able to utilize the carryforwards before they expire. Nevertheless, the
Company believes that it is more likely than not that it will utilize the NOL
carryforwards before they expire.

The tax benefit reported in 1999 represents recognition of a net deferred tax
asset composed primarily of the NOL carryforward. The current tax expense
recorded in 1998 represents certain minimum federal and state taxes. There
was no current tax expense in 1997 as all taxable income was offset by NOL
carryforwards.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities as of December 31 were as
follows:

1999 1998
---------- --------
<S> <C> <C>

Deferred tax assets (liabilities):
Current
Accounts receivable $31,000 $23,000
Inventories 132,000 117,000
Prepaid advertising costs (434,000) (412,000)
Net operating losses 271,000 272,000
Long-term
Property, plant and
equipment (113,000) (472,000)
Net operating losses 688,000 1,210,000
Net deferred tax asset 575,000 738,000
Valuation allowance 0 (738,000)
--------- --------
Total $575,000 $0
========== ========
</TABLE>

During 1999, the Company determined that it was more likely than not that it
would be able to offset future taxable income against the net operating loss
carryforwards. Accordingly, the valuation allowance was reduced. The Company
will periodically review the net realizable value of its deferred tax asset.
Should the deferred tax asset become impaired in the future, an appropriate
valuation allowance will be provided.

7. CONSOLIDATED SEGMENT DATA:

The Company has adopted Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information ("SFAS
131"), which established standards for the way companies report information
about their operating segments. Prior period amounts have been restated to
conform to the requirements of this new statement.

The Company's reportable segments are integrated business units that design,
develop, assemble and distribute similar products. The difference between the
two segments is the type of customer. The manufacturing segment sells
primarily to wholesalers. The distribution segment sells primarily to the end
user. Although all segments are managed as part of an integrated enterprise,
they are reported herein in a manner consistent with the internal reports
prepared for management.

Transactions between reportable segments are recorded at cost. Substantially
all general and administrative services are provided by the Company to the
segments without charge. Acquisition related expenses, including amortization
of acquisition costs, are considered a corporate expense. All of the
Company's assets are located in the United States of America.

AMEP is operated as an integrated enterprise and the segment amounts reported
herein would not necessarily be indicative of operating results if the
segments were operated independently.

<TABLE>
<CAPTION>
Manu- Distri-
Description Year facturing bution Corporate Total
- ----------- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>

Net Sales 1999 $10,342,000 $4,622,000 $0 $14,964,000
1998 9,154,000 2,521,000 0 11,675,000
1997 8,392,000 0 0 8,392,000

Operating 1999 $2,868,000 $226,000 $(2,217,000) $877,000
Income 1998 2,439,000 584,000 (1,784,000) 1,239,000
1997 2,319,000 0 (1,482,000) 837,000

Interest 1999 $170,000 $39,000 $141,000 $350,000
Expense 1998 204,000 19,000 135,000 358,000
1997 267,000 0 56,000 323,000

Assets 1999 $7,661,000 $2,367,000 $2,603,000 $12,631,000
1998 8,242,000 1,484,000 1,476,000 11,202,000
1997 6,250,000 0 1,001,000 7,251,000

Depreciation 1999 $578,000 $28,000 $330,000 $936,000
and 1998 628,000 0 250,000 878,000
Amortization 1997 663,000 0 346,000 1,009,000

</TABLE>

<PAGE>
<PAGE>
SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act, the Registrant has duly caused this annual report to be signed
on its behalf by the undersigned thereunto duly authorized.

AMERICAN EDUCATIONAL PRODUCTS, INC.

Dated: March 23, 2000 By: /s/ Clifford C. Thygesen
-------------- -----------------------------
Clifford C. Thygesen, President

Pursuant to the requirements of the Securities and 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 dates indicated.

Signature Title Date
- --------- ----- ----

/s/ Robert A. Scott Chairman of the Board, March 23, 2000
- ------------------------ Secretary and Director --------------
Robert A. Scott

/s/ Clifford C. Thygesen President and Director March 23, 2000
- ------------------------ (Chief Operating Officer) --------------
Clifford C. Thygesen

/s/ Frank L. Jennings Vice President and March 23, 2000
- ------------------------ Assistant Secretary --------------
Frank L. Jennings (Chief Accounting Officer)

/s/ Stephen G. Calandrella Director March 23, 2000
- ------------------------ --------------
Stephen G. Calandrella

/s/ Richard J. Ciurczak Director March 23, 2000
- ------------------------ --------------
Richard J. Ciurczak

/s/ Wayne R. Kirschling Director March 23, 2000
- ------------------------ --------------
Wayne R. Kirschling

/s/ John J. Crawford Director March 23, 2000
- ------------------------ --------------
John J. Crawford

/s/ Clifford L. Neuman Assistant Secretary and March 23, 2000
- ------------------------ Director --------------
Clifford L. Neuman

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES F-3 AND F-5 OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 94
<SECURITIES> 0
<RECEIVABLES> 2,113
<ALLOWANCES> (95)
<INVENTORY> 4,108
<CURRENT-ASSETS> 7,678
<PP&E> 7,667
<DEPRECIATION> (5,208)
<TOTAL-ASSETS> 12,631
<CURRENT-LIABILITIES> 4,348
<BONDS> 894
0
0
<COMMON> 54
<OTHER-SE> 7,335
<TOTAL-LIABILITY-AND-EQUITY> 12,631
<SALES> 14,964
<TOTAL-REVENUES> 14,964
<CGS> 8,992
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,095
<LOSS-PROVISION> 93
<INTEREST-EXPENSE> 350
<INCOME-PRETAX> 527
<INCOME-TAX> 575
<INCOME-CONTINUING> 1,102
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,102
<EPS-BASIC> 1.03
<EPS-DILUTED> 0.95

</TABLE>