UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





x
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
quarterly period ended February 28, 2009





o
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
transition period from _______________ to _______________.





Commission
File No. 000-50916





Peoples
Educational Holdings, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
                      
                      41-1368898(State
      or other jurisdiction of
                        incorporation
      or organization)
                      
                      (I.R.S.
      Employer Identification No.)





299
Market Street, Saddle Brook, NJ  07663


(Address
of principal executive offices) (Zip Code)





(201)
712-0090


(Registrant’s
telephone number, including area code)





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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated
filer,”  “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈ (Do
      not check if a smaller reporting company)
            Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈          No
x





Indicate
the number of shares outstanding of each of the Issuer's classes of common
stock, as of the latest practical date: 4,462,202 shares of Common Stock (par
value $0.02 per share) outstanding on April 3, 2009.





TABLE OF
CONTENTS





PagePART
      I.
                      FINANCIAL
      INFORMATIONItem
      1: Financial Statements:Condensed
      Consolidated Balance Sheets as of February 28, 2009 (Unaudited) and May
      31, 2008 and February 29, 2008 (Unaudited)
                      3Condensed
      Consolidated Statements of Operations for the Three and Nine Months Ended
      February 28, 2009 and February 29, 2008 (Unaudited)
                      4Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended February
      28, 2009 and February 29, 2008 (Unaudited)
                      5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                      6Item
      2: Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                      10Item
      4(T): Controls and Procedures
                      17PART
      II.
                      OTHER
      INFORMATIONItem
      1: Legal Proceedings
                      18Item
      2: Unregistered Sales of Equity Securities and Use of
    Proceeds
                      18Item
      3: Defaults Upon Senior Securities
                      18Item
      4: Submission of Matters to a Vote of Security Holders
                      18Item
      5: Other Information
                      18Item
      6: Exhibits
                      18SIGNATURES
                      19EXHIBITS
                      20


2





PEOPLES
EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED BALANCE SHEETS





UNAUDITED
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          UNAUDITED(In
      Thousands-Except Share Data)
                                                          
                                                          February 28, 2009
                                                          
                                                          
                                                          May 31, 2008
                                                          
                                                          
                                                          February 29, 2008ASSETSCurrent AssetsCash
      and Cash Equivalents
                                                          
                                                          $
                                                          33
                                                          
                                                          
                                                          $
                                                          53
                                                          
                                                          
                                                          $
                                                          131Accounts
      Receivable Net of Allowances forDoubtful
      Accounts and Returns
                                                          
                                                          
                                                          1,706
                                                          
                                                          
                                                          
                                                          3,664
                                                          
                                                          
                                                          
                                                          2,625Inventory
                                                          
                                                          
                                                          3,941
                                                          
                                                          
                                                          
                                                          4,394
                                                          
                                                          
                                                          
                                                          4,807Prepaid
      Expenses and Other
                                                          
                                                          
                                                          370
                                                          
                                                          
                                                          
                                                          404
                                                          
                                                          
                                                          
                                                          431Prepaid
      Marketing Expenses
                                                          
                                                          
                                                          964
                                                          
                                                          
                                                          
                                                          829
                                                          
                                                          
                                                          
                                                          735Deferred
      Income Taxes
                                                          
                                                          
                                                          661
                                                          
                                                          
                                                          
                                                          1,024
                                                          
                                                          
                                                          
                                                          1,157Total
      Current Assets
                                                          
                                                          
                                                          7,675
                                                          
                                                          
                                                          
                                                          10,368
                                                          
                                                          
                                                          
                                                          9,886Equipment
      - At Cost, Less Accumulated Depreciationof
      $2,215, $1,994 and $1,917, respectively
                                                          
                                                          
                                                          446
                                                          
                                                          
                                                          
                                                          566
                                                          
                                                          
                                                          
                                                          634Other AssetsDeferred
      Prepublication Costs, Net
                                                          
                                                          
                                                          13,826
                                                          
                                                          
                                                          
                                                          15,200
                                                          
                                                          
                                                          
                                                          16,003Deferred
      Income Taxes
                                                          
                                                          
                                                          1,796
                                                          
                                                          
                                                          
                                                          1,536
                                                          
                                                          
                                                          
                                                          1,028Trademarks,
      Net
                                                          
                                                          
                                                          191
                                                          
                                                          
                                                          
                                                          191
                                                          
                                                          
                                                          
                                                          167Prepaid
      Expenses and Other
                                                          
                                                          
                                                          376
                                                          
                                                          
                                                          
                                                          263
                                                          
                                                          
                                                          
                                                          329Prepaid
      Marketing Expenses
                                                          
                                                          
                                                          123
                                                          
                                                          
                                                          
                                                          495
                                                          
                                                          
                                                          
                                                          630Total
      Other Assets
                                                          
                                                          
                                                          16,312
                                                          
                                                          
                                                          
                                                          17,685
                                                          
                                                          
                                                          
                                                          18,157Total Assets
                                                          
                                                          $
                                                          24,433
                                                          
                                                          
                                                          $
                                                          28,619
                                                          
                                                          
                                                          $
                                                          28,677LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent LiabilitiesCurrent
      Maturities of Long Term Obligations
                                                          
                                                          $
                                                          2,045
                                                          
                                                          
                                                          $
                                                          2,042
                                                          
                                                          
                                                          $
                                                          2,048Accounts
      Payable
                                                          
                                                          
                                                          2,830
                                                          
                                                          
                                                          
                                                          4,906
                                                          
                                                          
                                                          
                                                          3,228Accrued
      Compensation
                                                          
                                                          
                                                          232
                                                          
                                                          
                                                          
                                                          247
                                                          
                                                          
                                                          
                                                          322Other
      Accrued Expenses
                                                          
                                                          
                                                          294
                                                          
                                                          
                                                          
                                                          347
                                                          
                                                          
                                                          
                                                          555Deferred
      Revenue
                                                          
                                                          
                                                          403
                                                          
                                                          
                                                          
                                                          475
                                                          
                                                          
                                                          
                                                          634Total
      Current Liabilities
                                                          
                                                          
                                                          5,804
                                                          
                                                          
                                                          
                                                          8,017
                                                          
                                                          
                                                          
                                                          6,787Long
      Term Obligations, Less Current Maturities
                                                          
                                                          
                                                          11,885
                                                          
                                                          
                                                          
                                                          14,046
                                                          
                                                          
                                                          
                                                          14,696Total Liabilities
                                                          
                                                          
                                                          17,689
                                                          
                                                          
                                                          
                                                          22,063
                                                          
                                                          
                                                          
                                                          21,483Commitments and
    ContingenciesStockholders' EquityPreferred
      Stock, authorized 1,500,000 shares; none issued
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Common
      Stock, $0.02 par value; authorized 8,500,000 shares; issued 4,478,434shares, 4,470,734 shares and 4,470,734 shares,
      respectively
                                                          
                                                          
                                                          89
                                                          
                                                          
                                                          
                                                          89
                                                          
                                                          
                                                          
                                                          89Additional
      Paid In Capital
                                                          
                                                          
                                                          8,043
                                                          
                                                          
                                                          
                                                          8,013
                                                          
                                                          
                                                          
                                                          7,989Accumulated
      Deficit
                                                          
                                                          
                                                          (1,324
                                                          )
                                                          
                                                          
                                                          (1,482
                                                          )
                                                          
                                                          
                                                          (820
                                                          )Treasury
      Stock – 16,232 shares for all periods, at cost
                                                          
                                                          
                                                          (64
                                                          )
                                                          
                                                          
                                                          (64
                                                          )
                                                          
                                                          
                                                          (64
                                                          )Total Stockholders' Equity
                                                          
                                                          
                                                          6,744
                                                          
                                                          
                                                          
                                                          6,556
                                                          
                                                          
                                                          
                                                          7,194Total Liabilities and Stockholders'
      Equity
                                                          
                                                          $
                                                          24,433
                                                          
                                                          
                                                          $
                                                          28,619
                                                          
                                                          
                                                          $
                                                          28,677





See Notes
to Condensed Consolidated Financial Statements


3


PEOPLES
EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)





(In
      Thousands, Except Per Share Data)Three
      Months Ended
                  
                  
                  Nine
      Months EndedFebruary
                  
                  
                  February2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenue,
      Net
                  
                  $
                  5,204
                  
                  
                  $
                  6,390
                  
                  
                  $
                  29,481
                  
                  
                  $
                  31,759Cost
      of RevenueDirect
      Costs
                  
                  
                  1,733
                  
                  
                  
                  2,086
                  
                  
                  
                  13,242
                  
                  
                  
                  13,825Prepublication
      Cost Amortization
                  
                  
                  1,688
                  
                  
                  
                  1,671
                  
                  
                  
                  5,040
                  
                  
                  
                  5,066Total
                  
                  
                  3,421
                  
                  
                  
                  3,757
                  
                  
                  
                  18,282
                  
                  
                  
                  18,891Gross
      Profit
                  
                  
                  1,783
                  
                  
                  
                  2,633
                  
                  
                  
                  11,199
                  
                  
                  
                  12,868Selling,
      General and Administrative Expenses
                  
                  
                  3,146
                  
                  
                  
                  3,611
                  
                  
                  
                  10,366
                  
                  
                  
                  11,967Income
      (Loss) from Operations
                  
                  
                  (1,363
                  )
                  
                  
                  (978
                  )
                  
                  
                  833
                  
                  
                  
                  901Other
      Expenses, Net
                  
                  
                  2
                  
                  
                  
                  18
                  
                  
                  
                  18
                  
                  
                  
                  42Interest
      Expense
                  
                  
                  126
                  
                  
                  
                  392
                  
                  
                  
                  564
                  
                  
                  
                  1,134Income
      (Loss) Before Income Taxes
                  
                  
                  (1,491
                  )
                  
                  
                  (1,388
                  )
                  
                  
                  251
                  
                  
                  
                  (275
                  )Income
      Tax Expense (Benefit)
                  
                  
                  (546
                  )
                  
                  
                  (536
                  )
                  
                  
                  93
                  
                  
                  
                  (163
                  )Net
      Income (Loss)
                  
                  $
                  (945
                  )
                  
                  $
                  (852
                  )
                  
                  $
                  158
                  
                  
                  $
                  (112
                  )Net
      Income (Loss) per Common Share:Basic
      and Diluted
                  
                  $
                  (0.21
                  )
                  
                  $
                  (0.19
                  )
                  
                  $
                  0.04
                  
                  
                  $
                  (0.03
                  )Weighted-average
      Number ofCommon
      Shares Outstanding:Basic
      and Diluted
                  
                  
                  4,457
                  
                  
                  
                  4,455
                  
                  
                  
                  4,455
                  
                  
                  
                  4,441





See Notes
to Condensed Consolidated Financial Statements





4




PEOPLES
EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)





(In
      Thousands)
                  
                  Nine
      Months EndedFebruary2009
                  
                  
                  2008Cash
      Flows From Operating ActivitiesNet
      Income (Loss)
                  
                  $
                  158
                  
                  
                  $
                  (112
                  )Adjustments
      to Reconcile Net Income (Loss) to Net CashProvided
      by Operating ActivitiesDepreciation
                  
                  
                  221
                  
                  
                  
                  232Amortization
      of Prepublication Costs and Intangible Assets
                  
                  
                  5,048
                  
                  
                  
                  5,092Stock-Based
      Compensation
                  
                  
                  30
                  
                  
                  
                  26Market
      Value Adjustment of Interest Rate Swap
                  
                  
                  36
                  
                  
                  
                  238Deferred
      Income Taxes
                  
                  
                  103
                  
                  
                  
                  (159
                  )Changes
      in Assets and LiabilitiesAccounts
      Receivable
                  
                  
                  1,958
                  
                  
                  
                  1,336Inventory
                  
                  
                  453
                  
                  
                  
                  463Prepaid
      Expenses and Other
                  
                  
                  (79
                  )
                  
                  
                  (56
                  )Prepaid
      Marketing Expenses
                  
                  
                  237
                  
                  
                  
                  309Accounts
      Payable and Accrued Expenses
                  
                  
                  (2,144
                  )
                  
                  
                  (3,311
                  )Deferred
      Revenue
                  
                  
                  (72
                  )
                  
                  
                  307Net
      Cash Provided By Operating Activities
                  
                  
                  5,949
                  
                  
                  
                  4,365Cash
      Flows From Investing ActivitiesPurchases
      of Equipment
                  
                  
                  (101
                  )
                  
                  
                  (169
                  )Expenditures
      for Intangibles
                  
                  
                  (8
                  )
                  
                  
                  (52
                  )Expenditures
      for Prepublication Costs
                  
                  
                  (3,666
                  )
                  
                  
                  (3,889
                  )Net
      Cash Used In Investing Activities
                  
                  
                  (3,775
                  )
                  
                  
                  (4,110
                  )Cash
      Flows From Financing ActivitiesNet
      Payments Under Line of Credit
                  
                  
                  (663
                  )
                  
                  
                  (178
                  )Proceeds
      From the Exercise of Stock Options
                  
                  
                  -
                  
                  
                  
                  88Principal
      Payments On Long-Term Debt
                  
                  
                  (1,531
                  )
                  
                  
                  (132
                  )Net
      Cash Used In Financing Activities
                  
                  
                  (2,194
                  )
                  
                  
                  (222
                  )Net
      Increase (Decrease) in Cash and Cash Equivalents
                  
                  
                  (20
                  )
                  
                  
                  33Cash
      and Cash EquivalentsBeginning
      of Period
                  
                  
                  53
                  
                  
                  
                  98End
      of Period
                  
                  $
                  33
                  
                  
                  $
                  131Supplemental
      Cash Flow InformationCash
      Payments for:Interest
                  
                  $
                  581
                  
                  
                  $
                  929





See Notes
to Condensed Consolidated Financial Statements


5


Peoples
Educational Holdings, Inc., and Subsidiary


Notes
to Condensed Consolidated Financial Statements (UNAUDITED)





NOTE 1 - Basis of
Presentation


Nature of
business: Peoples Educational Holdings, Inc. (PEH), through its wholly owned
subsidiary, Peoples Education, Inc. (PE), formerly known as The Peoples
Publishing Group, Inc., publishes and markets its own supplementary educational
textbooks and materials for the K-12 school market. The materials are
predominantly state-specific and standards-based, focused on state-required
tests.  PE distributes other publisher’s college textbooks and
supplements to the high school Advanced Placement market. In addition, PE also
publishes its own proprietary supplemental material for the Advanced Placement
market.  Marketing channels include direct and commission sales
representatives, telemarketing, direct mail, and catalogs.  PE and PEH
are together referred to herein as the Company.





The
accompanying condensed consolidated financial statements have been prepared by
the Company without audit and in accordance with the instructions to Form 10-Q
and therefore do not include all information and disclosures necessary for a
fair presentation of the consolidated financial position, results of operations,
and cash flows in conformity with accounting principles generally accepted in
the United States of America. These condensed consolidated financial statements
contain, in the opinion of management, all adjustments (consisting of normal
accruals and other recurring adjustments) necessary for a fair presentation of
the consolidated financial position, results of operations, and cash flows for
the periods presented. The operating results for the three and nine month
periods ended February 28, 2009, are not necessarily indicative of the operating
results to be expected for the full fiscal year. Accordingly, these condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the related notes included in our Annual
Report on Form 10-K for the year ended May 31, 2008.





Management
is required to make certain estimates and assumptions which affect the amounts
of assets, liabilities, revenue and expenses we have reported and our disclosure
of contingent assets and liabilities at the date of the financial
statements.  Actual results could differ materially from these
estimates and assumptions.





NOTE 2 – Revenue Recognition
and Accounts Receivable


Revenue
is recognized when products are shipped, the customer takes title and assumes
risk of loss, and the collection of related receivable is probable. The
allowances for returns as of February 28, 2009, May 31, 2008 and February 29,
2008 were approximately $625,000, $528,000 and $524,000, respectively. This
allowance is recorded at the time of revenue recognition, if the right of return
exists, and is recorded as a reduction of revenue and accounts receivable. The
Company recognizes shipping and handling revenues as part of net revenue, and
shipping and handling expenses as part of cost of revenue on the consolidated
statements of operations.  The Company recognizes subscription based
revenue on its Measuring Up e-Path® product prorata over the life of the
agreement.




The
Company provides credit to its customers determined on a customer-by-customer
basis. Trade receivables are carried at original invoice amount less an estimate
made for doubtful accounts based on a review of all outstanding amounts on a
monthly basis.  Management determines the allowance for doubtful
accounts after reviewing individual customer accounts as well as considering
both historical and expected credit loss experience. Trade receivables are
written off when deemed uncollectible.  Recoveries of trade
receivables previously written off are recorded when received.  The
allowance for doubtful accounts was $40,000 at February 28, 2009, May 31, 2008
and February 29, 2008.





NOTE 3 – Basic and Diluted Per
Share Amounts


Basic per
share amounts are computed, generally, by dividing net income or loss by the
weighted average number of common shares outstanding.  Diluted per
share amounts assume the conversion, exercise or issuance of all potential
common stock instruments, unless their effect is anti-dilutive thereby reducing
the loss or increasing the income per common share.  The dilutive
effect of these additional shares for the nine months ended February 28, 2009,
was to increase the weighted average common shares outstanding by 222
shares.


6


Peoples
Educational Holdings, Inc., and Subsidiary


Notes
to Condensed Consolidated Financial Statements (UNAUDITED)





NOTE 4– Deferred
Prepublication Costs


Deferred
prepublication costs are capitalized and amortized over a three or five-year
period (the estimated lives of the related publications) using the straight-line
method beginning on the in-stock date of the publication.  The
activity in deferred prepublication costs for the three and nine month periods
ended and the balances as of February 28, 2009 and February 29, 2008 are as
follows:





(In
      Thousands)Three
      Months Ended
                      
                      
                      Nine
      Months EndedFebruary
                      
                      
                      February2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Balances,
      Beginning
                      
                      $
                      14,588
                      
                      
                      $
                      16,555
                      
                      
                      $
                      15,200
                      
                      
                      $
                      17,180Prepublication
      Cost Additions
                      
                      
                      926
                      
                      
                      
                      1,119
                      
                      
                      
                      3,666
                      
                      
                      
                      3,889Amortization
      Expense
                      
                      
                      (1,688
                      )
                      
                      
                      (1,671
                      )
                      
                      
                      (5,040
                      )
                      
                      
                      (5,066
                      )Balances,
      Ending
                      
                      $
                      13,826
                      
                      
                      $
                      16,003
                      
                      
                      $
                      13,826
                      
                      
                      $
                      16,003








The
estimated future amortization expense over the next five years as related to the
above deferred prepublication costs is as follows:





(In
      Thousands)For
      the remainder of fiscal 2009
                    
                    $
                    1,490For
      the year ended May 31, 2010
                    
                    
                    5,254For
      the year ended May 31, 2011
                    
                    
                    3,707For
      the year ended May 31, 2012
                    
                    
                    2,205For
      the year ended May 31, 2013 and thereafter
                    
                    
                    1,170Total
                    
                    $
                    13,826





NOTE 5 – Prepaid Marketing
Expense


The costs
of catalogs and promotional materials that have not been completed or delivered
to customers are carried as a prepaid expense until the actual date of
completion and mailing. Prepaid samples consist of materials that will be
distributed to educators over the next two years and are expensed as they are
distributed.  Prepaid marketing expenses include samples, catalogs and
promotional materials.





Prepaid
marketing expenses are presented in the balance sheets as follows:





(In
      Thousands)February
      28,
                    
                    
                    May
      31,
                    
                    
                    February
      29,2009
                    
                    
                    2008
                    
                    
                    2008Total
      Prepaid Balance
                    
                    $
                    1,087
                    
                    
                    $
                    1,324
                    
                    
                    $
                    1,365Less
      current portion
                    
                    
                    964
                    
                    
                    
                    829
                    
                    
                    
                    735Long-term
      balance
                    
                    $
                    123
                    
                    
                    $
                    495
                    
                    
                    $
                    630


7





Peoples
Educational Holdings, Inc., and Subsidiary


Notes
to Condensed Consolidated Financial Statements (UNAUDITED)





The
estimated recognition of prepaid marketing expense is expected to be as
follows:





(In
      Thousands)For
      the remainder of fiscal 2009
                    
                    $
                    592For
      the year ended May 31, 2010
                    
                    
                    495





NOTE 6 – Financing
Arrangements


The
Company has a $20 million credit agreement with Sovereign
Bank.  Amounts borrowed under the agreement are secured by
substantially all of the assets of the Company.   The agreement
provides for a $10 million revolving line of credit and a $10 million term loan
as follows:





·
            The
      revolving line of credit provides for advances up to $10 million and
      expires in March 2012.  The interest rate on the revolving line
      of credit is in a range from LIBOR plus 2.0% to LIBOR plus 2.25%, or prime
      to prime plus 0.5%, with the exact interest rate based on the ratio of the
      Company’s total funded debt to EBITDA.  At February 28, 2009,
      $5.7 million was outstanding under this facility, and $4.3 million was
      available for borrowing.





·
            The
      term loan is for $10 million and matures in December 2012.  The
      term loan provides for  20 equal quarterly payments of principal
      and interest which began on March 31, 2008.  The term loan bears
      interest at the same rate as the revolving line of credit for $4.0 million
      of the $8.0 million outstanding.  The Company entered into a
      swap agreement to fix the interest rate on the balance of the term loan
      for three years at a rate of 5.3% plus an interest spread of 2.00% to
      2.25% based upon our total funded debt to EBITDA ratio. After May 31,
      2010, the interest rate reverts to a variable rate.  The change
      in the fair value of the interest rate swap is recognized as interest
      expense or income during each reporting period.  For the three
      and nine month periods ended February 28, 2009, the Company recorded
      $11,000 and $36,000 of interest expense as a result of the mark-to-market
      interest rate adjustment.





The
credit agreement contains certain financial covenants, calculated on a
consolidated basis for the Company and its subsidiary, which, among other
things, impose a maximum ratio of total funded debt to EBITDA, and a minimum
fixed charge coverage ratio.  These financial covenants also restrict
the payment of dividends on the Company’s common stock.





NOTE 7 – Income
Taxes


On a
quarterly basis, the Company estimates what its effective tax rate will be for
the full fiscal year and records a quarterly income tax provision based on the
anticipated rate. As the year progresses, the Company refines its estimate based
on the facts and circumstances by each tax jurisdiction. The effective tax rates
for the quarters ended February 28, 2009 and February 29, 2008 were
approximately 37% and 40%, respectively.





The
Company is subject to income taxes in the U.S. federal jurisdiction and various
state jurisdictions.  Tax regulations within each jurisdiction are subject
to the interpretation of the related tax laws and regulations and require
significant judgment to apply.  With few exceptions, we are no longer
subject to U.S. federal, state or local income tax examinations by tax
authorities for the years before 2004.  We are not currently under
examination by any taxing jurisdiction.


8


Peoples
Educational Holdings, Inc., and Subsidiary


Notes
to Condensed Consolidated Financial Statements (UNAUDITED)




NOTE 8 – Recently Issued
Accounting Standards


In
September 2006 the Financial Accounting Standards Board (FASB) issued
SFAS 157, "Fair Value
Measurements". SFAS 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurement.
SFAS 157 also emphasizes that fair value is a market-based measurement, not
an entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets. Under SFAS 157,
fair value measurements are disclosed by level within that hierarchy. The FASB
approved a one-year deferral for the implementation of SFAS 157 with regard
to nonfinancial assets and liabilities that are not recognized or disclosed at
fair value in the financial statements on a recurring basis.




The
adoption of SFAS 157 for financial assets and financial liabilities did not
have a significant impact on our consolidated financial position and results of
operations. We are currently assessing the potential effect of the adoption of
the remaining provisions of SFAS 157 on our financial position, results of
operations and cash flows.




The
fair value framework requires the categorization of assets and liabilities into
one of three levels based on the assumptions (inputs) used in valuing the asset
or liability. Level 1 provides the most reliable measure of fair value,
while Level 3 generally requires significant management judgment. The three
levels are defined as follows:




Level 1:    Unadjusted
quoted prices in active markets for identical assets or
liabilities.




Level 2:    Observable
inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets or liabilities in active markets or quoted prices for
identical assets or liabilities in inactive markets.




Level 3:    Unobservable
inputs reflecting management's own assumptions about the inputs used in pricing
the asset or liability.




We
endeavor to use the best available information in measuring fair value.
Financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement. As of
February 28, 2009, our only financial liability accounted for at fair value on a
recurring basis is our interest rate swap included in other long-term
liabilities. We have determined that the fair value of the swap, based on LIBOR
and swap rates, falls within Level 2 in the fair value hierarchy. The
application of SFAS 157 did not change our valuation techniques from prior
periods.





Effective
June 1, 2008, we adopted FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”). SFAS No. 159 gives
entities the option to measure eligible financial assets and financial
liabilities at fair value on an instrument by instrument basis, that are
otherwise not permitted to be accounted for at fair value under other accounting
standards. The election to use the fair value option is available when an entity
first recognizes a financial asset or financial liability. Subsequent changes in
fair value must be recorded in earnings. SFAS 159 became effective
with no impact to the Company’s financial position or results of operations,
since it chose not  to report any additional items at fair
value.





NOTE 9-Subsequent
Event


On
March 10, 2009, the Company completed an agreement with Learning Media
Limited to become the exclusive distributor of existing Learning Media products
for the supplemental education market in the United States of America and Puerto
Rico.  In addition, the Company also completed agreements
to


9


Peoples
Educational Holdings, Inc., and Subsidiary


Notes
to Condensed Consolidated Financial Statements (UNAUDITED)





become
the exclusive distributor for certain products published by Rubicon, Inc. and
Nelson Education, Ltd.  All of these products were formerly
distributed by Nelson Education, USA. In connection with these distribution
agreements, the Company acquired all of the existing inventory held by
Nelson Education USA for $700,000.





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





FORWARD–LOOKING
STATEMENTS





This Form
10-Q contains “forward-looking statements” (as defined in section 21E of the
Securities Exchange Act of 1934) regarding our business and our markets. These
forward-looking statements involve a number of risks and uncertainties,
including (1) changes in demand from customers, (2) changes in product or
customer mix or revenues and in the level of operating expenses, (3) rapidly
changing technologies and our ability to respond thereto, (4) the impact of
competitive products and pricing, (5) federal, state and local levels of
educational spending, (6) our ability to retain qualified personnel, (7) our
ability to retain its distribution agreements in the College Preparation market,
(8) the sufficiency of our copyright protection, and (9) our ability to continue
to rely on the services of a third-party warehouse, and other factors disclosed
below and throughout this report. The actual results that we achieve may differ
materially from any forward-looking statements due to such risks and
uncertainties. We undertake no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may arise after the
date of this report. Readers are urged to carefully review and consider the
various disclosures made by us in this report, including the discussion set
forth below, and in our other reports filed with the Securities and Exchange
Commission from time to time that attempt to advise interested parties of the
risks and factors that may affect our business and results of
operations.





SEASONALITY





Each of
our product lines has its own seasonality. The average revenue percentage by
product line and in total by quarter for the last two full fiscal years is
summarized in the table below.





Jun
      - Aug
                      
                      
                      Sep
      - Nov
                      
                      
                      Dec
      - Feb
                      
                      
                      Mar
      - May1st Quarter
                      
                      
                      2nd Quarter
                      
                      
                      3rd Quarter
                      
                      
                      4th QuarterTest
      Preparation, Assessment, and Instruction
                      
                      
                      28%
                      
                      
                      
                      25%
                      
                      
                      
                      21%
                      
                      
                      
                      26%College
      Preparation
                      
                      
                      65%
                      
                      
                      
                      14%
                      
                      
                      
                      6%
                      
                      
                      
                      15%Total
      Revenue
                      
                      
                      41%
                      
                      
                      
                      21%
                      
                      
                      
                      16%
                      
                      
                      
                      22%





PRODUCT
OVERVIEW





We
develop and sell our own proprietary products and distribute other publishers’
products. Our products are organized in two product groups, one designated as
Test Preparation, Assessment, and Instruction, and the other as College
Preparation. The Test Preparation, Assessment, and Instruction materials are
almost exclusively proprietary products, while the College Preparation materials
are mainly distributed products accompanied by a limited number of proprietary
titles.





Test
Preparation, Assessment, and Instruction Product Group





Test Preparation,
Assessment


·
            We
      create and sell print and web-based materials targeted to grades 1-12 to
      help students prepare for state proficiency tests. The Measuring Up®Test Preparation and Assessment print products are sold in twelve
      states. MeasuringUp® is
      positioned as standards-based, state customized instruction and classroom
      assessment, designed to be an integral part of a school’s instructional
      program throughout the school
year.


10


·
            Measuring
      Up e-Path®, a
      web-based assessment product developed in conjunction with Cisco Learning
      Systems, provides schools and districts the ability to provide formative
      classroom level assessments, which, in turn, allow for informed
      instruction relative to state standards. Measuring Up e-Path®
      delivers a detailed prescriptive instructional path for individual
      students tied into our instructional materials or to other products in use
      within a school or district. The strategy is to help educators assess a
      child’s strengths and weaknesses relative to the state standards and then
      provide a Personal Prescriptive Path®
      for remediation. The assessment data can be aggregated using
      NCLB-compliant reporting at the class, school and district level and can
      be used to drive not only student learning, but teacher professional
      development as well.





Instruction


·
            We
      have two product lines within this grouping: Focused Instruction and
      remedial, multicultural  and professional development related
      materials. Focused Instruction materials provide standards–based,
      state-specific supplemental instruction on particular subject areas such
      as reading comprehension, mathematics problem solving, and vocabulary
      development.  Essential to this strategy is the market alignment
      of the Focused Instruction and Test Preparation and Assessment products so
      that both product lines are suitable for sale to an identical customer
      base with an identical sales force.  We continue to sell our
      backlist remedial, multicultural and professional development materials,
      but we are not investing in new development for these
      products.





College
Preparation Product Group





·
            We
      have the exclusive U.S. high school distribution rights for college
      textbooks and related instruction materials published by two major college
      publishers.  In addition to these distributed products, we also
      publish our own proprietary products for the college preparation
      market.  The college preparation products that we offer are
      utilized in a wide range of Advanced Placement, honors, electives and
      other high-level high school courses.Distribution
      revenue consists of direct billings to customers, as well as commissions
      earned on sales generated by our marketing efforts though billed directly
      by the college publishers.  Such sales, for which the commission
      rate varies, include purchases by schools through online bookstores and
      sales derived as a result of purchases made through state adoption
      contracts.


11


RESULTS
OF OPERATIONS


Three Months Ended February
28, 2009 vs. Three Months Ended February 29, 2008





(Amounts
      in Thousands - Except Per Share Data)
                  
                  Three
      Months Ended February2009
                  
                  
                  2008RevenueTest
      Preparation, Assessment and Instruction
                  
                  $
                  4,398
                  
                  
                  
                  84.5
                  %
                  
                  $
                  5,619
                  
                  
                  
                  87.9
                  %College
      Preparation
                  
                  
                  806
                  
                  
                  
                  15.5
                  %
                  
                  
                  771
                  
                  
                  
                  12.1
                  %Total
      Revenue
                  
                  
                  5,204
                  
                  
                  
                  100.0
                  %
                  
                  
                  6,390
                  
                  
                  
                  100.0
                  %Cost
      of RevenueDirect
      Costs
                  
                  
                  1,733
                  
                  
                  
                  33.3
                  %
                  
                  
                  2,086
                  
                  
                  
                  32.6
                  %Prepublication
      Cost Amortization
                  
                  
                  1,688
                  
                  
                  
                  32.4
                  %
                  
                  
                  1,671
                  
                  
                  
                  26.2
                  %Total
      Cost Of Revenue
                  
                  
                  3,421
                  
                  
                  
                  65.7
                  %
                  
                  
                  3,757
                  
                  
                  
                  58.8
                  %Gross
      Profit
                  
                  
                  1,783
                  
                  
                  
                  34.3
                  %
                  
                  
                  2,633
                  
                  
                  
                  41.2
                  %Selling,
      General and Administrative ExpensesMarketing
      and Selling
                  
                  
                  2,061
                  
                  
                  
                  39.6
                  %
                  
                  
                  2,405
                  
                  
                  
                  37.6
                  %General
      and Administrative
                  
                  
                  1,085
                  
                  
                  
                  20.8
                  %
                  
                  
                  1,206
                  
                  
                  
                  18.9
                  %Total
      Selling, General and Administrative Expenses
                  
                  
                  3,146
                  
                  
                  
                  60.5
                  %
                  
                  
                  3,611
                  
                  
                  
                  56.5
                  %Operating
      Loss
                  
                  
                  (1,363
                  )
                  
                  
                  -26.2
                  %
                  
                  
                  (978
                  )
                  
                  
                  -15.3
                  %Other
      Expenses, Net
                  
                  
                  2
                  
                  
                  
                  0.0
                  %
                  
                  
                  18
                  
                  
                  
                  0.3
                  %Interest
      Expense
                  
                  
                  126
                  
                  
                  
                  2.4
                  %
                  
                  
                  392
                  
                  
                  
                  6.1
                  %Loss
      Before Taxes
                  
                  
                  (1,491
                  )
                  
                  
                  -28.7
                  %
                  
                  
                  (1,388
                  )
                  
                  
                  -21.7
                  %Income
      Tax Benefit
                  
                  
                  (546
                  )
                  
                  
                  -10.5
                  %
                  
                  
                  (536
                  )
                  
                  
                  -8.4
                  %Net
      Loss
                  
                  $
                  (945
                  )
                  
                  
                  -18.2
                  %
                  
                  $
                  (852
                  )
                  
                  
                  -13.3
                  %Net
      Loss per Common Share:Basic
      and Diluted
                  
                  $
                  (0.21
                  )
                  
                  
                  
                  
                  
                  $
                  (0.19
                  )





Overview





Net
revenue for the three months ended February 28, 2009 was $5.2 million, compared
to $6.4 million during the same period in the prior year. Test Preparation,
Assessment, and Instruction revenue decreased 21.7%, and College Preparation
revenue increased 4.5% for the quarter as compared to the same period in the
prior year. Net loss for the quarter was $945,000, as compared to $852,000 in
the prior year. Basic and diluted loss per common share were ($0.21), compared
to ($0.19) for the same period last year.





REVENUE





Test Preparation,
Assessment, and Instruction




Test
Preparation, Assessment, and Instruction revenue for the quarter was $4.4
million, compared to $5.6 million during the same period in the prior year. Due
to the current state of the economy, many schools are reacting to budgetary
pressures and have been holding back or delaying orders. These circumstances
have had an adverse impact on our revenue for the period.


12





College
Preparation





College
Preparation revenue for the quarter was $806,000, compared to $771,000 during
the same period in the prior year. Revenue from the sale of products offered
from the two major college publishers, which represents over 90% of the revenue
within this product group, increased 5% compared to the prior year, primarily
due to the timing of the orders.





COST OF REVENUE





Cost of
Revenue for the three months ended February 28, 2009 was $3.4 million (65.7% of
revenue) compared to $3.8 million (58.8% of revenue) during the same period in
the prior year.





Cost of
Revenue consists of two components: direct costs and amortization of
prepublication costs. Direct
costs consist of (1) product cost, which includes paper, printing, binding, and
prepress costs for proprietary products and product purchases for nonproprietary
products, (2) royalties on proprietary products, and (3) warehousing and
shipping costs for all products.





·
            Direct
      costs as a percentage of revenue were 33.3% for the quarter ended February
      28, 2009 compared to 32.6% during the same period in the prior year. The
      percentage increase is due to revenue mix, as College Preparation revenue
      for the quarter increased from 12.1% of the total revenue in the prior
      year, to 15.5% in the current year. College Preparation direct costs are
      substantially higher than the direct cost of Testing, Assessment and
      Instruction, as the majority of College Preparation revenue consists of
      non-proprietary products.





·
            Prepublication
      costs include one-time expenses associated with developing and producing
      new or revised proprietary products. It includes all editorial expenses,
      writing, page design and makeup, art and other permissions, prepress, and
      any other costs incurred up to the print/bind stage of the books.
      Prepublication costs are capitalized and expensed on a straight-line basis
      over a three- or five-year period, based upon the product’s estimated
      useful life cycle. For the three months ended February 28, 2009 we
      amortized $1.7 million of prepublication costs, which was consistent with
      the same period in the prior year. As a percentage of revenue the
      amortization expense increased from 26.2% to 32.4% due to a decrease in
      revenue.





MARKETING
AND SELLING





Marketing
and Selling expenses decreased by $344,000 compared to the prior year. The
expense as a percent of revenue increased from 37.6% in the prior year to
39.6%.





Marketing
expense within this category increased $71,000 for the quarter primarily due to
an increase in sample expenses. Selling expenses within this category decreased
$415,000 from the same period in the prior year and decreased as a percentage of
revenue from 25.8% in the prior year to 23.8% primarily due to expenses
associated with the revenue mix and overall cost containment
efforts.





GENERAL
AND ADMINISTRATIVE





General
and administrative expenses within this category decreased $121,000 or 10.0%
from the prior year. The decrease is primarily due to a reduction in salary and
related expenses and overall cost containment.





INTEREST
EXPENSE





Interest
expense for the quarter was $126,000, compared to $392,000 for the same period
in the prior year. The change is primarily due to lower average outstanding debt
on a year-over-year basis and a $91,000 reduction in the mark-to-market interest
expense adjustment on the swap portion of our term loan.


13





Nine Months Ended February
28, 2009 vs. Nine Months Ended February 29, 2008





(Amounts
      in Thousands - Except Per Share Data)
                  
                  Nine
      Months Ended February2009
                  
                  
                  2008RevenueTest
      Preparation, Assessment and Instruction
                  
                  $
                  17,140
                  
                  
                  
                  58.1
                  %
                  
                  $
                  19,463
                  
                  
                  
                  61.3
                  %College
      Preparation
                  
                  
                  12,341
                  
                  
                  
                  41.9
                  %
                  
                  
                  12,296
                  
                  
                  
                  38.7
                  %Total
      Revenue
                  
                  
                  29,481
                  
                  
                  
                  100.0
                  %
                  
                  
                  31,759
                  
                  
                  
                  100.0
                  %Cost
      of RevenueDirect
      Costs
                  
                  
                  13,242
                  
                  
                  
                  44.9
                  %
                  
                  
                  13,825
                  
                  
                  
                  43.5
                  %Prepublication
      Cost Amortization
                  
                  
                  5,040
                  
                  
                  
                  17.1
                  %
                  
                  
                  5,066
                  
                  
                  
                  16.0
                  %Total
      Cost Of Revenue
                  
                  
                  18,282
                  
                  
                  
                  62.0
                  %
                  
                  
                  18,891
                  
                  
                  
                  59.5
                  %Gross
      Profit
                  
                  
                  11,199
                  
                  
                  
                  38.0
                  %
                  
                  
                  12,868
                  
                  
                  
                  40.5
                  %Selling,
      General and Administrative ExpensesMarketing
      and Selling
                  
                  
                  6,879
                  
                  
                  
                  23.3
                  %
                  
                  
                  8,484
                  
                  
                  
                  26.7
                  %General
      and Administrative
                  
                  
                  3,487
                  
                  
                  
                  11.8
                  %
                  
                  
                  3,483
                  
                  
                  
                  11.0
                  %Total
      Selling, General and Administrative Expenses
                  
                  
                  10,366
                  
                  
                  
                  35.2
                  %
                  
                  
                  11,967
                  
                  
                  
                  37.7
                  %Operating
      Income
                  
                  
                  833
                  
                  
                  
                  2.8
                  %
                  
                  
                  901
                  
                  
                  
                  2.8
                  %Other
      Expenses, Net
                  
                  
                  18
                  
                  
                  
                  0.1
                  %
                  
                  
                  42
                  
                  
                  
                  0.1
                  %Interest
      Expense
                  
                  
                  564
                  
                  
                  
                  1.9
                  %
                  
                  
                  1,134
                  
                  
                  
                  3.6
                  %Income
      (Loss) Before Taxes
                  
                  
                  251
                  
                  
                  
                  0.9
                  %
                  
                  
                  (275
                  )
                  
                  
                  -0.9
                  %Income
      Tax Expense (Benefit)
                  
                  
                  93
                  
                  
                  
                  0.3
                  %
                  
                  
                  (163
                  )
                  
                  
                  -0.5
                  %Net
      Income (Loss)
                  
                  $
                  158
                  
                  
                  
                  0.5
                  %
                  
                  $
                  (112
                  )
                  
                  
                  -0.4
                  %Net
      Income (Loss) per Common Share:Basic
      and Diluted
                  
                  $
                  0.04
                  
                  
                  
                  
                  
                  
                  $
                  (0.03
                  )





Overview





Net
revenue for the nine months ended February 28, 2009 was $29.5 million, a
decrease of 7.2% from the prior year. Test Preparation, Assessment, and
Instruction revenue decreased 11.9% from the prior year, while College
Preparation revenue remained consistent with prior year. Net income for the nine
month period was $158,000, an improvement of $270,000 over the prior year. Basic
and diluted earnings per common share were $0.04, compared to a loss of $(0.03),
in the prior year.





REVENUE





Test Preparation,
Assessment, and Instruction




Revenue
for this product group for the nine months ended February 28, 2009 was $17.1
million, an 11.9% decrease compared to the prior year. Due to the current state
of the economy, many schools are reacting to budgetary pressures and have been
holding back or delaying orders. These circumstances have had an adverse impact
on our revenue for the period.




College
Preparation





College
Preparation revenue for the nine months ended February 28, 2009 was $12.3
million, which was consistent with the same period in the prior year. Revenue
from the sale of products offered from the two major college publishers, which
represents over 90% of the total revenue within this product group, was $11.6
million, which remained consistent with the same period in the prior
year.


14





COST OF REVENUE





Cost of
Revenue for the nine months ended February 28, 2009 was $18.3 million (62.0% of
revenue) compared to $18.9 million (59.5% of revenue) during the same period in
the prior year.





Cost of
Revenue consists of two components: direct costs and amortization of
prepublication costs. Direct
costs consist of (1) product cost, which includes paper, printing, binding, and
prepress costs for proprietary products and product purchases for nonproprietary
products, (2) royalties on proprietary products, and (3) warehousing and
shipping costs for all products.





·
            Direct
      costs as a percentage of revenue were 44.9% compared to 43.5% in the prior
      year. The percentage increase is due to revenue mix, as College
      Preparation revenue increased from 38.7% of the total revenue in the prior
      year, to 41.9% in the current year. College Preparation direct costs are
      substantially higher than the direct cost of Testing, Assessment and
      Instruction, as the majority of College Preparation revenue consists of
      non-proprietary products.





·
            Prepublication
      costs include one-time expenses associated with developing and producing
      new or revised proprietary products. It includes all editorial expenses,
      writing, page design and makeup, art and other permissions, prepress, and
      any other costs incurred up to the print/bind stage of the books.
      Prepublication costs are capitalized and expensed on a straight-line basis
      over a three- or five-year period, based upon the product’s estimated
      useful life cycle. For the nine months ended February 28, 2009 we
      amortized $5.0 million of prepublication costs, which was consistent with
      the prior year. As a percentage of revenue the amortization expense
      increased from 16.0% to 17.1% due to a decrease in
  revenue.





MARKETING
AND SELLING





Marketing
and Selling expenses decreased by $1.6 million on a year-over-year basis. As a
percent of revenue, the expense decreased from 26.7% to 23.3%.





Marketing
expense within this category decreased $400,000 for the period primarily due to
a decrease in exhibit, catalog and promotional expenses. Selling expenses within
this category decreased $1.2 million from the prior year due to expenses
associated with the revenue mix and overall cost containment efforts. As a
percentage of revenue, the selling expenses decreased from 18.5% in the prior
year to 15.9%.





GENERAL
AND ADMINISTRATIVE





General
and administrative expenses remained consistent with the same period in the
prior year.





INTEREST
EXPENSE





Interest
expense for the nine months ended February 28, 2009 was $564,000, a decrease of
$570,000 compared to the same period in the prior year. The change is due to
lower average outstanding debt on a year-over-year basis and a decrease of
$202,000 in the mark-to-market interest expense adjustment related to the swap
portion of our term loan.




LIQUIDITY AND CAPITAL
RESOURCES





Net cash
provided by operating activities for the nine months ended February 28, 2009 was
$5.9 million. Cash was primarily provided by our net income before depreciation,
amortization and deferred income taxes, as well as decreases in accounts
receivable, inventory, and prepaid expenses and offset by a decrease in accounts
payable and accrued expenses.


15





Net cash
used in investing activities was $3.8 million, consisting primarily of
prepublication cost expenditures of $3.7 million. Prepublication expenditures
for the nine months ended February 28, 2009 decreased $223,000, or 5.7% compared
to the same period in the prior year. The decrease in expenditures is primarily
due to efficiencies realized within our production and editorial departments
which allowed us to reduce the development costs of new and revised
titles.





Net cash
used in financing activities was $2.2 million, consisting of net payments on our
revolving line of credit and payments on our term loan and capital
leases.





We have a
$20 million credit agreement with Sovereign Bank. Amounts borrowed under the
agreement are secured by substantially all of the assets of the Company. The
agreement provides for a $10 million revolving line of credit and a $10 million
term loan as follows:





·
            The
      revolving line of credit provides for advances up to $10 million and
      expires in March 2012. The interest rate on the revolving line of credit
      is in a range from LIBOR plus 2.0% to LIBOR plus 2.25%, or prime to prime
      plus 0.5%, with the exact interest rate based on the ratio of the
      Company’s total funded debt to EBITDA. At February 28, 2009, $5.7 million
      was outstanding under this facility, and $4.3 million was available for
      borrowing.





·
            The
      term loan is for $10 million and matures in December 2012. The term loan
      provides for 20 equal quarterly payments of principal and interest which
      began on March 31, 2008. The term loan bears interest at the same rate as
      the revolving line of credit for $4.0 million of the $8.0 million
      outstanding. The Company entered into a swap agreement on May 31, 2007 to
      fix the interest rate on the balance of the term loan for three years at a
      rate of 5.3% plus an interest spread of 2.00% to 2.25% based upon our
      total funded debt to EBITDA ratio. After May 31, 2010, the interest rate
      reverts to a variable rate. The change in the fair value of the interest
      rate swap is recognized as interest expense or income during each
      reporting period. For the nine month period ended February 28, 2009, we
      have recorded $36,000 of interest expense as a result of the
      mark-to-market interest rate
adjustment.





The
credit agreement contains certain financial covenants, calculated on a
consolidated basis for the Company and its subsidiary, which, among other
things, impose a maximum ratio of total funded debt to EBITDA, and a minimum
fixed charge coverage ratio. These financial covenants restrict the payment of
dividends on the Company’s common stock.





We use
our cash and borrowing availability under our financing arrangements, together
with cash generated from operations, to meet our cash needs. We believe that our
borrowing capacity together with our existing sources of cash will be sufficient
to meet our anticipated cash needs for the balance of the fiscal year. We intend
to continue investing in prepublication costs for our proprietary products,
using cash generated from operations, and borrowings under financing
arrangements. As we develop more products, additional investments in inventory
will be required.




OFF-BALANCE
SHEET ARRANGEMENTS





None.




CRITICAL
ACCOUNTING ESTIMATES





The
Company’s significant accounting policies are summarized in the footnotes to our
financial statements included in our May 31, 2008 Form 10-K. Some of our
accounting policies require management to exercise significant judgment in
selecting the appropriate assumptions for calculating financial estimates. These
judgments are subject to an inherent degree of uncertainty. These judgments are
based on our historical experience, known trends in our industry, terms of
existing contracts and other information from outside sources, as appropriate.
Actual results may differ from these estimates under different assumptions and
conditions. Certain of the most critical estimates that require significant
judgment are as follows:


16





Deferred Prepublication
Costs


Deferred
prepublication costs are recorded at their original cost and amortized over a
three or five-year period, based on the estimated lives of the related
publications. The net carrying value of the deferred prepublication costs is
periodically reviewed and compared to an estimate of future net undiscounted
cash flows expected to result from the publications. On February 28, 2009, we
had a valuation allowance against this asset of $159,000. If future net
undiscounted cash flows are not sufficient to realize the net carrying value of
the asset, an impairment charge will be recognized.





Allowance for Excess and
Slow-Moving Inventory


The
Company continuously monitors its inventory on hand for salability. This
monitoring includes review of historical sales experience, projected sales
activity by title, and any planned changes to a title that are known by
management. Any slow-moving or non-salable inventory identified is reserved or
written down at that time. The reserve of $532,000 at February 28, 2009 is
believed to be adequate to cover potential inventory loss exposure.





Income
Taxes


The
carrying value of the Company’s net deferred tax assets assumes that the Company
will be able to generate sufficient taxable income in the United States, based
on estimates and assumptions. The Company records a valuation allowance to
reduce the carrying value of its net deferred tax asset to the amount that is
more likely than not to be realized based on management’s estimates of future
levels of taxable income. In the event the Company were to determine that it
would not be able to realize its deferred tax assets in the future, an
adjustment to the deferred tax asset would decrease net income in the period
such determination is made. On a quarterly basis, the Company evaluates the
realizability of its deferred tax assets and assesses the requirements for a
valuation allowance. As of February 28, 2009, the Company has not recorded a
valuation allowance against its deferred tax assets.





Item
4(T).  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures


Under the
supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer, we conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange
Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this
Quarterly Report on Form 10-Q (the “Evaluation Date”).




The
purpose of this evaluation is to determine if, as of the Evaluation Date, our
disclosure controls and procedures were operating effectively such that the
information relating to the Company, required to be disclosed in our Securities
and Exchange Commissions (“SEC”) reports (i) was recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms, and (ii) was accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosures.




Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were operating effectively.





Changes
in Internal Control over Financial Reporting


During
the fiscal quarter covered by this report, there has been no change in our
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


17





PART
II


OTHER
INFORMATION





Item
1.  Legal Proceedings





None.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





During
the three-months ended February 28, 2009, we did not issue any securities
without registration under the Securities Act of 1933.





In
October 2005, our Board of Directors approved a share repurchase program,
permitting us to repurchase up to 100,000 shares of our common stock. We did not
repurchase any shares during the three months ended February 28, 2009. At
February 28, 2009, 83,768 shares remained that could be repurchased under the
repurchase program. No share repurchase plan or program expired, or was
terminated, during the period covered by this report.





Item
3.  Defaults Upon Senior Securities





None.





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





None.




Item
5.  Other Information





None.




Item
6.  Exhibits





Exhibit
      31.1
            CEO
      Certification pursuant to Rule
13a-14(a).





Exhibit
      31.2
            CFO
      Certification pursuant to Rule
13a-14(a).





Exhibit
      32
            Certification
      of the CEO and the CFO pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.


18





SIGNATURES





In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.





Dated:  April
      9, 2009
                  PEOPLES
      EDUCATIONAL HOLDINGS, INC.By:
      /s/ Brian T. BeckwithBrian
      T. BeckwithPresident
      and Chief Executive OfficerBy:
      /s/ Michael L. DeMarcoMichael
      L. DeMarcoExecutive
      Vice President and Chief Financial
Officer


19