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 November 30, 2008





[  ]
            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 o





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 o
                  Accelerated
      filer oNon-accelerated
      filer o (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 o No x





Indicate
the number of shares outstanding of each of the Issuer's classes of common
stock, as of the latest practical date: 4,454,502 shares of Common Stock (par
value $0.02 per share) outstanding on January 7, 2009.










TABLE OF
CONTENTS




PagePART
      I.
                          FINANCIAL
      INFORMATIONItem
      1:
                          Financial
      Statements:Condensed
      Consolidated Balance Sheets as of November 30, 2008 (Unaudited) and May
      31, 2008 and November 30, 2007 (Unaudited)
                          3Condensed
      Consolidated Statements of Operations for the Three and Six Months Ended
      November 30, 2008 and 2007 (Unaudited)
                          4Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended November
      30, 2008 and 2007 (Unaudited)
                          5Notes
      to Condensed Consolidated Financial Statements
      (Unaudited)
                          6Item
      2:
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          9Item
      4(T):
                          Controls
      and Procedures
                          16PART
      II.
                          OTHER
      INFORMATIONItem
      1:
                          Legal
      Proceedings
                          17Item
      2:
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          17Item
      3:
                          Defaults
      Upon Senior Securities
                          17Item
      4:
                          Submission
      of Matters to a Vote of Security Holders
                          17Item
      5:
                          Other
      Information
                          17Item
      6:
                          Exhibits
                          17SIGNATURES
                          
                          18EXHIBITS
                          
                          19




2




Part I


Financial
Information





Item
1. Financial Statements




PEOPLES
      EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARYCONDENSED
      CONSOLIDATED BALANCE SHEETSUNAUDITED
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      UNAUDITED(In
      Thousands-Except Share Data)
                                                      
                                                      November
      30, 2008
                                                      
                                                      
                                                      May
      31, 2008
                                                      
                                                      
                                                      November
      30, 2007ASSETSCurrent AssetsCash
      and Cash Equivalents
                                                      
                                                      $
                                                      36
                                                      
                                                      
                                                      $
                                                      53
                                                      
                                                      
                                                      $
                                                      172Accounts
      Receivable Net of Allowances forDoubtful
      Accounts and Returns
                                                      
                                                      
                                                      2,816
                                                      
                                                      
                                                      
                                                      3,664
                                                      
                                                      
                                                      
                                                      2,726Inventory
                                                      
                                                      
                                                      4,009
                                                      
                                                      
                                                      
                                                      4,394
                                                      
                                                      
                                                      
                                                      4,769Prepaid
      Expenses and Other
                                                      
                                                      
                                                      401
                                                      
                                                      
                                                      
                                                      404
                                                      
                                                      
                                                      
                                                      443Prepaid
      Marketing Expenses
                                                      
                                                      
                                                      1,096
                                                      
                                                      
                                                      
                                                      829
                                                      
                                                      
                                                      
                                                      753Deferred
      Income Taxes
                                                      
                                                      
                                                      661
                                                      
                                                      
                                                      
                                                      1,024
                                                      
                                                      
                                                      
                                                      1,119Total
      Current Assets
                                                      
                                                      
                                                      9,019
                                                      
                                                      
                                                      
                                                      10,368
                                                      
                                                      
                                                      
                                                      9,982Equipment
      - At Cost, Less Accumulated Depreciationof
      $2,142, $1,994 and $1,843, respectively
                                                      
                                                      
                                                      511
                                                      
                                                      
                                                      
                                                      566
                                                      
                                                      
                                                      
                                                      634Other AssetsDeferred
      Prepublication Costs, Net
                                                      
                                                      
                                                      14,588
                                                      
                                                      
                                                      
                                                      15,200
                                                      
                                                      
                                                      
                                                      16,555Deferred
      Income Taxes
                                                      
                                                      
                                                      1,250
                                                      
                                                      
                                                      
                                                      1,536
                                                      
                                                      
                                                      
                                                      534Trademarks,
      Net
                                                      
                                                      
                                                      192
                                                      
                                                      
                                                      
                                                      191
                                                      
                                                      
                                                      
                                                      170Prepaid
      Expenses and Other
                                                      
                                                      
                                                      272
                                                      
                                                      
                                                      
                                                      263
                                                      
                                                      
                                                      
                                                      324Prepaid
      Marketing Expenses
                                                      
                                                      
                                                      247
                                                      
                                                      
                                                      
                                                      495
                                                      
                                                      
                                                      
                                                      765Total
      Other Assets
                                                      
                                                      
                                                      16,549
                                                      
                                                      
                                                      
                                                      17,685
                                                      
                                                      
                                                      
                                                      18,348Total Assets
                                                      
                                                      $
                                                      26,079
                                                      
                                                      
                                                      $
                                                      28,619
                                                      
                                                      
                                                      $
                                                      28,964LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent LiabilitiesCurrent
      Maturities of Long Term Obligations
                                                      
                                                      $
                                                      2,044
                                                      
                                                      
                                                      $
                                                      2,042
                                                      
                                                      
                                                      $
                                                      1,570Accounts
      Payable
                                                      
                                                      
                                                      6,980
                                                      
                                                      
                                                      
                                                      4,906
                                                      
                                                      
                                                      
                                                      6,406Accrued
      Compensation
                                                      
                                                      
                                                      155
                                                      
                                                      
                                                      
                                                      247
                                                      
                                                      
                                                      
                                                      178Other
      Accrued Expenses
                                                      
                                                      
                                                      276
                                                      
                                                      
                                                      
                                                      347
                                                      
                                                      
                                                      
                                                      401Deferred
      Revenue
                                                      
                                                      
                                                      486
                                                      
                                                      
                                                      
                                                      475
                                                      
                                                      
                                                      
                                                      656Total
      Current Liabilities
                                                      
                                                      
                                                      9,941
                                                      
                                                      
                                                      
                                                      8,017
                                                      
                                                      
                                                      
                                                      9,211Long
      Term Obligations, Less Current Maturities
                                                      
                                                      
                                                      8,458
                                                      
                                                      
                                                      
                                                      14,046
                                                      
                                                      
                                                      
                                                      11,715Total Liabilities
                                                      
                                                      
                                                      18,399
                                                      
                                                      
                                                      
                                                      22,063
                                                      
                                                      
                                                      
                                                      20,926Commitments and
    ContingenciesStockholders' EquityPreferred
      Stock, authorized 1,500,000 shares; none issuedCommon
      Stock, $0.02 par value; authorized 8,500,000 shares;issued:
      4,470,734 shares for all periods
                                                      
                                                      
                                                      89
                                                      
                                                      
                                                      
                                                      89
                                                      
                                                      
                                                      
                                                      89Additional
      Paid In Capital
                                                      
                                                      
                                                      8,034
                                                      
                                                      
                                                      
                                                      8,013
                                                      
                                                      
                                                      
                                                      7,980Retained
      Earnings (Accumulated Deficit)
                                                      
                                                      
                                                      (379
                                                      )
                                                      
                                                      
                                                      (1,482
                                                      )
                                                      
                                                      
                                                      33Treasury
      Stock - 16,232 shares for all periods, at cost
                                                      
                                                      
                                                      (64
                                                      )
                                                      
                                                      
                                                      (64
                                                      )
                                                      
                                                      
                                                      (64
                                                      )Total Stockholders' Equity
                                                      
                                                      
                                                      7,680
                                                      
                                                      
                                                      
                                                      6,556
                                                      
                                                      
                                                      
                                                      8,038Total Liabilities and Stockholders'
      Equity
                                                      
                                                      $
                                                      26,079
                                                      
                                                      
                                                      $
                                                      28,619
                                                      
                                                      
                                                      $
                                                      28,964See
      Notes to Condensed Consolidated Financial Statements





3
 
  PEOPLES
      EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARYCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(In
      Thousands, Except Per Share Data)Three
      Months Ended
                                        
                                        
                                        Six
      Months EndedNovember
      30,
                                        
                                        
                                        November
      30,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2008
                                        
                                        
                                        2007Revenue,
      Net
                                        
                                        $
                                        8,279
                                        
                                        
                                        $
                                        8,502
                                        
                                        
                                        $
                                        24,276
                                        
                                        
                                        $
                                        25,369Cost
      of RevenueDirect
      Costs
                                        
                                        
                                        3,102
                                        
                                        
                                        
                                        3,036
                                        
                                        
                                        
                                        11,509
                                        
                                        
                                        
                                        11,739Prepublication
      Cost Amortization
                                        
                                        
                                        1,694
                                        
                                        
                                        
                                        1,692
                                        
                                        
                                        
                                        3,352
                                        
                                        
                                        
                                        3,395Total
                                        
                                        
                                        4,796
                                        
                                        
                                        
                                        4,728
                                        
                                        
                                        
                                        14,861
                                        
                                        
                                        
                                        15,134Gross
      Profit
                                        
                                        
                                        3,483
                                        
                                        
                                        
                                        3,774
                                        
                                        
                                        
                                        9,415
                                        
                                        
                                        
                                        10,235Selling,
      General and Administrative Expenses
                                        
                                        
                                        3,629
                                        
                                        
                                        
                                        4,226
                                        
                                        
                                        
                                        7,219
                                        
                                        
                                        
                                        8,355Income
      (Loss) from Operations
                                        
                                        
                                        (146
                                        )
                                        
                                        
                                        (452
                                        )
                                        
                                        
                                        2,196
                                        
                                        
                                        
                                        1,880Other
      Expenses, Net
                                        
                                        
                                        9
                                        
                                        
                                        
                                        12
                                        
                                        
                                        
                                        17
                                        
                                        
                                        
                                        24Interest
      Expense
                                        
                                        
                                        208
                                        
                                        
                                        
                                        354
                                        
                                        
                                        
                                        437
                                        
                                        
                                        
                                        742Income
      (Loss) Before Income Taxes
                                        
                                        
                                        (363
                                        )
                                        
                                        
                                        (818
                                        )
                                        
                                        
                                        1,742
                                        
                                        
                                        
                                        1,114Income
      Tax Expense (Benefit)
                                        
                                        
                                        (143
                                        )
                                        
                                        
                                        (396
                                        )
                                        
                                        
                                        639
                                        
                                        
                                        
                                        373Net
      Income (Loss)
                                        
                                        $
                                        (220
                                        )
                                        
                                        $
                                        (422
                                        )
                                        
                                        $
                                        1,103
                                        
                                        
                                        $
                                        741Net
      Income (Loss) per Common Share:Basic
                                        
                                        $
                                        (0.05
                                        )
                                        
                                        $
                                        (0.09
                                        )
                                        
                                        $
                                        0.25
                                        
                                        
                                        $
                                        0.17Diluted
                                        
                                        $
                                        (0.05
                                        )
                                        
                                        $
                                        (0.09
                                        )
                                        
                                        $
                                        0.25
                                        
                                        
                                        $
                                        0.16Weighted-average
      Number ofCommon
      Shares Outstanding:Basic
                                        
                                        
                                        4,455
                                        
                                        
                                        
                                        4,443
                                        
                                        
                                        
                                        4,455
                                        
                                        
                                        
                                        4,434Diluted
                                        
                                        
                                        4,455
                                        
                                        
                                        
                                        4,443
                                        
                                        
                                        
                                        4,455
                                        
                                        
                                        
                                        4,491See
      Notes to Condensed Consolidated Financial Statements




4




PEOPLES
      EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARYCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In
      Thousands)
                                    
                                    Six
      Months EndedNovember
      30,2008
                                    
                                    
                                    2007Cash
      Flows From Operating ActivitiesNet
      Income
                                    
                                    $
                                    1,103
                                    
                                    
                                    $
                                    741Adjustments
      to Reconcile Net Income to Net CashProvided
      by Operating ActivitiesDepreciation
                                    
                                    
                                    148
                                    
                                    
                                    
                                    151Amortization
      of Prepublication Costs and Intangible Assets
                                    
                                    
                                    3,357
                                    
                                    
                                    
                                    3,412Stock-Based
      Compensation
                                    
                                    
                                    21
                                    
                                    
                                    
                                    17Market
      Value Adjustment of Interest Rate Swap
                                    
                                    
                                    25
                                    
                                    
                                    
                                    136Deferred
      Income Taxes
                                    
                                    
                                    649
                                    
                                    
                                    
                                    373Changes
      in Assets and LiabilitiesAccounts
      Receivable
                                    
                                    
                                    848
                                    
                                    
                                    
                                    1,235Inventory
                                    
                                    
                                    385
                                    
                                    
                                    
                                    501Prepaid
      Expenses and Other
                                    
                                    
                                    (6
                                    )
                                    
                                    
                                    (63
                                    )Prepaid
      Marketing Expenses
                                    
                                    
                                    (19
                                    )
                                    
                                    
                                    156Accounts
      Payable and Accrued Expenses
                                    
                                    
                                    1,911
                                    
                                    
                                    
                                    (329
                                    )Deferred
      Revenue
                                    
                                    
                                    11
                                    
                                    
                                    
                                    329Net
      Cash Provided By Operating Activities
                                    
                                    
                                    8,433
                                    
                                    
                                    
                                    6,659Cash
      Flows From Investing ActivitiesPurchases
      of Equipment
                                    
                                    
                                    (93
                                    )
                                    
                                    
                                    (88
                                    )Expenditures
      for Intangibles
                                    
                                    
                                    (6
                                    )
                                    
                                    
                                    (46
                                    )Expenditures
      for Prepublication Costs
                                    
                                    
                                    (2,740
                                    )
                                    
                                    
                                    (2,770
                                    )Net
      Cash Used In Investing Activities
                                    
                                    
                                    (2,839
                                    )
                                    
                                    
                                    (2,904
                                    )Cash
      Flows From Financing ActivitiesNet
      Payments Under Line of Credit
                                    
                                    
                                    (4,591
                                    )
                                    
                                    
                                    (3,669
                                    )Proceeds
      From the Exercise of Stock Options
                                    
                                    
                                    -
                                    
                                    
                                    
                                    88Principal
      Payments On Long-Term Debt
                                    
                                    
                                    (1,020
                                    )
                                    
                                    
                                    (100
                                    )Net
      Cash Used In Financing Activities
                                    
                                    
                                    (5,611
                                    )
                                    
                                    
                                    (3,681
                                    )Net
      Increase (Decrease) in Cash and Cash Equivalents
                                    
                                    
                                    (17
                                    )
                                    
                                    
                                    74Cash
      and Cash EquivalentsBeginning
      of Period
                                    
                                    
                                    53
                                    
                                    
                                    
                                    98End
      of Period
                                    
                                    $
                                    36
                                    
                                    
                                    $
                                    172Supplemental
      Cash Flow InformationCash
      Payments for:Interest
                                    
                                    $
                                    410
                                    
                                    
                                    $
                                    633See
      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 six month periods
ended November 30, 2008, 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.





Reclassifications:Certain
amounts on the consolidated balance sheet as of November 30, 2007 have been
reclassified, with no effect on net earnings or stockholders equity, to be
consistent with classifications adopted as of May 31, 2008.





NOTE 2 – Revenue Recognition
and Accounts Receivable




Revenue
is recognized when products are shipped, the customer takes title and assumes
risk of loss, and collection of related receivable is probable. The allowances
for returns as of November 30, 2008, May 31, 2008 and November 30, 2007 were
approximately $776,000, $528,000 and $675,000, 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® 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 November 30, 2008, May 31, 2008
and November 30, 2007.





6





Peoples
Educational Holdings, Inc., and Subsidiary


Notes
to Condensed Consolidated Financial Statements (UNAUDITED)





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.  Due to the
Company’s net losses for the three months ended November 30, 2008 and 2007, -0-
shares and 70,313 shares respectively were excluded from the diluted shares
calculation as their impact was antidilutive.  The dilutive effect of
these additional shares for the six months ended November 30, 2008 and 2007 was
to increase the weighted average common shares outstanding by -0- shares and
57,161 shares respectively.





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 and the balances as of November 30,
2008 and November 30, 2007 are as follows:




(In
      Thousands)Three
      Months Ended
                        
                        
                        Six
      Months EndedNovember
      30,
                        
                        
                        November
      30,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Balances,
      Beginning
                        
                        $
                        14,857
                        
                        
                        $
                        17,080
                        
                        
                        $
                        15,200
                        
                        
                        $
                        17,180Prepublication
      Cost Additions
                        
                        
                        1,425
                        
                        
                        
                        1,167
                        
                        
                        
                        2,740
                        
                        
                        
                        2,770Amortization
      Expense
                        
                        
                        (1,694
                        )
                        
                        
                        (1,692
                        )
                        
                        
                        (3,352
                        )
                        
                        
                        (3,395
                        )Balances,
      Ending
                        
                        $
                        14,588
                        
                        
                        $
                        16,555
                        
                        
                        $
                        14,588
                        
                        
                        $
                        16,555





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




For
      the remainder of fiscal 2009
                          
                          $
                          3,112For
      the year ended May 31, 2010
                          
                          
                          5,045For
      the year ended May 31, 2011
                          
                          
                          3,498For
      the year ended May 31, 2012
                          
                          
                          2,027For
      the year ended May 31, 2013 and thereafter
                          
                          
                          906$
                          14,588





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)November
      30,
                        
                        
                        May
      31,
                        
                        
                        November
      30,2008
                        
                        
                        2008
                        
                        
                        2007Total
      Prepaid Balance
                        
                        $
                        1,343
                        
                        
                        $
                        1,324
                        
                        
                        $
                        1,518Less
      current portion
                        
                        
                        1,096
                        
                        
                        
                        829
                        
                        
                        
                        753Long-term
      balance
                        
                        $
                        247
                        
                        
                        $
                        495
                        
                        
                        $
                        765




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
                                    $
                                    848For
      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 November 30, 2008,
      $1.8 million was outstanding under this facility, and $8.2 million was
      available for borrowing.





·
            The
      term loan is for $10 million and matures in December 2012.  The
      term loan provides for payments of interest only for the first twelve
      months and 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 $4.25 million of the $8.5
      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 the three-year period, the
      interest rate reverts back 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 six
      month periods ended November 30, 2008, the Company recorded $37,000 and
      $25,000 of interest expense as a result of the mark-to-market interest
      rate adjustment.





In May
2008, the Company entered into a $1.5 million letter of credit agreement with
Sovereign Bank.  The interest rate on the letter of credit is LIBOR
plus 2.5%, or prime rate plus 0.5%.  Amounts borrowed under the
agreement are secured by substantially all of the assets of the Company. At
November 30, 2008, no amounts were outstanding under this agreement. This
agreement was terminated in December 2008.





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, we estimate what our effective tax rate will be for the full
fiscal year and record a quarterly income tax provision based on the anticipated
rate. As the year progresses, we refine our estimate based on the facts and
circumstances by each tax jurisdiction. The effective tax rate for the six
months ended November 30, 2008 and 2007 were approximately 37% and 33%,
respectively.





We are
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)





NOTE8 – Recently Issued Accounting
Standards




Effective
June 1, 2008, we adopted FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”) for financial instruments. SFAS 157 defines fair value, establishes
a framework and gives guidance regarding the methods used for measuring fair
value, and expands disclosures about fair


value
measurements. The adoption of SFAS 157 did not have any impact to our financial
statements. SFAS 157 will become effective for non-financial measurements for
the Company on June 1, 2009 and is not expected to have a significant impact on
the Company’s financial position or results of operations.





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.





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%





9





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.





·
            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, allows 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.





10





RESULTS
OF OPERATIONS





Three Months Ended November
30, 2008 vs. Three Months Ended November 30, 2007





(Amounts
      in Thousands - Except Per Share Data)
                                      
                                      Three
      Months Ended November 30,2008
                                      
                                      
                                      2007RevenueTest
      Preparation, Assessment and Instruction
                                      
                                      $
                                      6,090
                                      
                                      
                                      
                                      73.6%
                                      
                                      
                                      $
                                      6,498
                                      
                                      
                                      
                                      76.4%College
      Preparation
                                      
                                      
                                      2,189
                                      
                                      
                                      
                                      26.4%
                                      
                                      
                                      
                                      2,004
                                      
                                      
                                      
                                      23.6%Total
      Revenue
                                      
                                      
                                      8,279
                                      
                                      
                                      
                                      100.0%
                                      
                                      
                                      
                                      8,502
                                      
                                      
                                      
                                      100.0%Cost
      of RevenueDirect
      Costs
                                      
                                      
                                      3,102
                                      
                                      
                                      
                                      37.5%
                                      
                                      
                                      
                                      3,036
                                      
                                      
                                      
                                      35.7%Prepublication
      Cost Amortization
                                      
                                      
                                      1,694
                                      
                                      
                                      
                                      20.5%
                                      
                                      
                                      
                                      1,692
                                      
                                      
                                      
                                      19.9%Total
      Cost Of Revenue
                                      
                                      
                                      4,796
                                      
                                      
                                      
                                      58.0%
                                      
                                      
                                      
                                      4,728
                                      
                                      
                                      
                                      55.6%Gross
      Profit
                                      
                                      
                                      3,483
                                      
                                      
                                      
                                      42.0%
                                      
                                      
                                      
                                      3,774
                                      
                                      
                                      
                                      44.4%Selling,
      General and Administrative ExpensesMarketing
      and Selling
                                      
                                      
                                      2,571
                                      
                                      
                                      
                                      31.1%
                                      
                                      
                                      
                                      3,158
                                      
                                      
                                      
                                      37.1%General
      and Administrative
                                      
                                      
                                      1,058
                                      
                                      
                                      
                                      12.8%
                                      
                                      
                                      
                                      1,068
                                      
                                      
                                      
                                      12.6%Total
      Selling, General and Administrative Expenses
                                      
                                      
                                      3,629
                                      
                                      
                                      
                                      43.9%
                                      
                                      
                                      
                                      4,226
                                      
                                      
                                      
                                      49.7%Operating
      Loss
                                      
                                      
                                      (146)
                                      
                                      
                                      
                                      -1.9%
                                      
                                      
                                      
                                      (452)
                                      
                                      
                                      
                                      -5.3%Other
      Expenses, Net
                                      
                                      
                                      9
                                      
                                      
                                      
                                      0.1%
                                      
                                      
                                      
                                      12
                                      
                                      
                                      
                                      0.1%Interest
      Expense
                                      
                                      
                                      208
                                      
                                      
                                      
                                      2.5%
                                      
                                      
                                      
                                      354
                                      
                                      
                                      
                                      4.2%Loss
      Before Taxes
                                      
                                      
                                      (363)
                                      
                                      
                                      
                                      -4.5%
                                      
                                      
                                      
                                      (818)
                                      
                                      
                                      
                                      -9.6%Income
      Tax Benefit
                                      
                                      
                                      (143)
                                      
                                      
                                      
                                      -1.7%
                                      
                                      
                                      
                                      (396)
                                      
                                      
                                      
                                      -4.6%Net
      Loss
                                      
                                      $
                                      (220)
                                      
                                      
                                      
                                      -2.8%
                                      
                                      
                                      $
                                      (422)
                                      
                                      
                                      
                                      -5.0%Net
      Loss per Common Share:Basic
      and Diluted
                                      
                                      $
                                      (0.05)
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      (0.09)




Overview





Net
revenue for the three months ended November 30, 2008 was $8.3 million, compared
to $8.5 million during the same period in the prior year. Test Preparation,
Assessment, and Instruction revenue decreased 6.3%, and College Preparation
revenue increased 9.2% for the quarter as compared to the same period in the
prior year.  Net loss for the quarter was $220,000, a $202,000 and
47.9% improvement over the prior year.  Basic and diluted loss per
common share were ($0.05) for the quarter, compared to ($0.09) for the same
period last year.





11





REVENUE





Test Preparation,
Assessment, and Instruction





Test
Preparation, Assessment, and Instruction revenue for the quarter was $6.1
million, compared to $6.5 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.





College
Preparation





College
Preparation revenue for the quarter was $2.2 million, compared to $2.0 million
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 11% compared to the
prior year, primarily due to the timing of the orders.  Revenue from
other distribution agreements and from our proprietary products decreased 11%
from the prior year.





COST OF REVENUE





Cost of
Revenue for the three months ended November 30, 2008 was $4.8 million (58.0% of
revenue) compared to $4.7 million (55.6% 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 37.5% for the quarter ended November
      30, 2008 compared to 35.7% 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 23.6% of the total
      revenue in the prior year, to 26.4% 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 November 30, 2008 we amortized $1.7 million of prepublication costs,
      which was consistent with the same period in the prior
    year.





MARKETING
AND SELLING





Marketing
and Selling expenses decreased by $587,000 compared to the prior year. The
expense as a percent of revenue decreased from 37.1% in the prior year to 31.1%
in the current period due to revenue mix, and overall expense
reductions.





Marketing
expense within this category decreased $300,000 for the quarter primarily due to
a decrease in exhibit, catalog and promotional
expenses.   Selling expenses within this category decreased
$287,000 from the prior year and decreased as a percentage of revenue from 22.4%
in the prior year to 19.5% in the current year due to expenses associated with
the revenue mix and overall cost containment efforts.





GENERAL
AND ADMINISTRATIVE





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




12





INTEREST
EXPENSE





Interest
expense for the quarter was $208,000, compared to $354,000 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 $99,000 reduction in the
mark-to-market interest rate adjustment on the swap portion of our term
loan.





Six Months Ended November
30, 2008 vs. Six Months Ended November 30, 2007





(Amounts
      in Thousands - Except Per Share Data)
                                                
                                                Six
      Months Ended November 30,2008
                                                
                                                
                                                2007RevenueTest
      Preparation, Assessment and Instruction
                                                
                                                $
                                                12,741
                                                
                                                
                                                
                                                52.5%
                                                
                                                
                                                $
                                                13,844
                                                
                                                
                                                
                                                54.6%College
      Preparation
                                                
                                                
                                                11,535
                                                
                                                
                                                
                                                47.5%
                                                
                                                
                                                
                                                11,525
                                                
                                                
                                                
                                                45.4%Total
      Revenue
                                                
                                                
                                                24,276
                                                
                                                
                                                
                                                100.0%
                                                
                                                
                                                
                                                25,369
                                                
                                                
                                                
                                                100.0%Cost
      of RevenueDirect
      Costs
                                                
                                                
                                                11,509
                                                
                                                
                                                
                                                47.4%
                                                
                                                
                                                
                                                11,739
                                                
                                                
                                                
                                                46.3%Prepublication
      Cost Amortization
                                                
                                                
                                                3,352
                                                
                                                
                                                
                                                13.8%
                                                
                                                
                                                
                                                3,395
                                                
                                                
                                                
                                                13.4%Total
      Cost Of Revenue
                                                
                                                
                                                14,861
                                                
                                                
                                                
                                                61.2%
                                                
                                                
                                                
                                                15,134
                                                
                                                
                                                
                                                59.7%Gross
      Profit
                                                
                                                
                                                9,415
                                                
                                                
                                                
                                                38.8%
                                                
                                                
                                                
                                                10,235
                                                
                                                
                                                
                                                40.3%Selling,
      General and Administrative ExpensesMarketing
      and Selling
                                                
                                                
                                                4,817
                                                
                                                
                                                
                                                19.8%
                                                
                                                
                                                
                                                6,078
                                                
                                                
                                                
                                                24.0%General
      and Administrative
                                                
                                                
                                                2,402
                                                
                                                
                                                
                                                9.9%
                                                
                                                
                                                
                                                2,277
                                                
                                                
                                                
                                                9.0%Total
      Selling, General and Administrative Expenses
                                                
                                                
                                                7,219
                                                
                                                
                                                
                                                29.7%
                                                
                                                
                                                
                                                8,355
                                                
                                                
                                                
                                                33.0%Operating
      Income
                                                
                                                
                                                2,196
                                                
                                                
                                                
                                                9.1%
                                                
                                                
                                                
                                                1,880
                                                
                                                
                                                
                                                7.3%Other
      Expenses, Net
                                                
                                                
                                                17
                                                
                                                
                                                
                                                0.1%
                                                
                                                
                                                
                                                24
                                                
                                                
                                                
                                                0.1%Interest
      Expense
                                                
                                                
                                                437
                                                
                                                
                                                
                                                1.8%
                                                
                                                
                                                
                                                742
                                                
                                                
                                                
                                                2.9%Income
      Before Taxes
                                                
                                                
                                                1,742
                                                
                                                
                                                
                                                7.2%
                                                
                                                
                                                
                                                1,114
                                                
                                                
                                                
                                                4.3%Income
      Tax Expense
                                                
                                                
                                                639
                                                
                                                
                                                
                                                2.6%
                                                
                                                
                                                
                                                373
                                                
                                                
                                                
                                                1.5%Net
      Income
                                                
                                                $
                                                1,103
                                                
                                                
                                                
                                                4.6%
                                                
                                                
                                                $
                                                741
                                                
                                                
                                                
                                                2.8%Net
      Income per Common Share:Basic
                                                
                                                $
                                                0.25
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                0.17Diluted
                                                
                                                $
                                                0.25
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                0.16


Overview





Net
revenue for the six months ended November 30, 2008 was $24.3 million, a decrease
of 4.3% from the  prior year.  Test Preparation, Assessment,
and Instruction revenue decreased 8% from the prior year, while College
Preparation revenue remained consistent with prior year.  Net income
for the six month period was $1.1 million, an increase of 48.9% over the prior
year.  Basic and diluted earnings per common share were $0.25,
compared to a basic and diluted earnings of $0.17 and $0.16 respectively, for
the same period last year.




13





REVENUE





Test Preparation,
Assessment, and Instruction





Revenue
for this product group for the six months ended November 30, 2008 was $12.7
million, an 8% 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 six months ended November 30, 2008 was $11.5
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, was $11.0 million, which remained consistent with the same period in
the prior year.  Revenue from other distribution agreements and from
our proprietary products increased 14% from the prior year  Revenue
for this product group is extremely seasonal; as historically over 79% of the
annual revenue is derived in the six months ended November 30,
2008.





COST OF REVENUE





Cost of
Revenue for the six months ended November 30, 2008 was $14.9 million (61.2% of
revenue) compared to $15.1 million (59.7% 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 47.4% compared to 46.3% in the prior
      year.  The percentage increase is due to revenue mix, as College
      Preparation revenue for the period increased from 45.4% of the total
      revenue in the prior year, to 47.5% 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 six months ended
      November 30, 2008 we amortized $3.4 million of prepublication costs, which
      was consistent with the prior year.





MARKETING
AND SELLING





Marketing
and Selling expenses decreased by $1.3 million on a year-over-year basis. As a
percent of revenue, the expense decreased from 24.0% to 19.8% in the current
year due to revenue mix and overall expense reductions.





Marketing
expense within this category decreased $471,000 for the period primarily due to
a decrease in sampling, exhibit, catalog and promotional
expenses.  Selling expenses within this category decreased $791,000
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 16.7% in the prior year to 14.2%.




14





GENERAL
AND ADMINISTRATIVE





General
and administrative expenses increased $125,000 or 5.5% compared to the prior
year.  This fluctuation is due to higher accounting fees and severance
payments associated with headcount reductions.





INTEREST
EXPENSE





Interest
expense for the six months ended November 30, 2008 was $437,000, a decrease of
$305,000 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 $111,000 in the mark-to-market interest rate adjustment related to the swap
portion of our term loan.





LIQUIDITY AND CAPITAL
RESOURCES





Net cash
provided by operating activities for the six months ended November 30, 2008 was
$8.4 million.  Cash was primarily provided by our net income before
depreciation, amortization and deferred income taxes, as well as decreases in
accounts receivable and inventory and an increase in accounts
payable.





Net cash
used in investing activities was $2.8 million, consisting primarily of
prepublication cost expenditures of $2.7 million.  Prepublication
expenditures for the six months ended November 30, 2008 were consistent with the
prior year.





Net cash
used in financing activities was $5.6 million, consisting of $4.6 million 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 November 30, 2008,
      $1.8 million was outstanding under this facility, and $8.2 million was
      available for borrowing.





·
            The
      term loan is for $10 million and matures in December 2012.  The
      term loan provided for payments of interest only for the first twelve
      months and 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 $4.25 million of the $8.5
      million outstanding.  We 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 the three-year period, the
      interest rate reverts back 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 six month
      period ended November 30, 2008, we have recorded $25,000 of interest
      expense as a result of the mark-to-market interest rate
      adjustment.





In May
2008, we entered into a $1.5 million letter of credit agreement with Sovereign
Bank.  The interest rate on the letter of credit is LIBOR plus 2.5%,
or prime rate plus 0.5%.  Amounts borrowed under the agreement are
secured by substantially all of the assets of the Company. At November 30, 2008,
no amounts were outstanding under this agreement. This agreement was terminated
in December 2008.





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.




15





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:





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.  On November 30, 2008, 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 $502,000 at November 30, 2008 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.





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.




16




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 Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





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 November 30, 2008, we did not issue any securities
without registration under the Securities Act of 1933.





In
      October 2005, our Board of Directors had 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 November 30, 2008.  At November 30, 2008, 83,768 shares
      remained that could be purchased under the plan or programs.  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.




17





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:
      January
      13, 2009
                
                PEOPLES
      EDUCATIONAL HOLDINGS, INC.By:
      /s/ Brian T.
      BeckwithBrian
      T. BeckwithPresident
      and Chief Executive
Officer




18