##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 For the quarterly period ended February 29, 2008
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
 For the transition period from  to .
 Commission File No. 000-50916
 Peoples Educational Holdings, Inc.
  Delaware
    
    41-1368898(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 (Address of principal executive offices) (Zip Code)
 (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer o

    Non-accelerated filer o (Do not check if a smaller reporting company)

    Smaller reporting company þ
 o þ




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##### 



PagePART I. FINANCIAL INFORMATIONItem 1: Financial Statements:Consolidated Balance Sheets as of February 29, 2008 (Unaudited), May 31, 2007 and February 28, 2007 (Unaudited)
    
    
    3Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended February 29, 2008 and 2007
    
    
    4Unaudited Consolidated Statement of Changes in Stockholders Equity for the Nine Months Ended February 29, 2008
    
    
    5Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended February 29, 2008 and 2007
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4: Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    21Item 1A: Risk Factors
    
    
    21Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3: Defaults Upon Senior Securities
    
    
    21Item 4: Submission of Matters to a Vote of Security Holders
    
    
    21Item 5: Other Information
    
    
    21Item 6: Exhibits
    
    
    22SIGNATURES
    
    
    23EXHIBITS
    
    
    24CertificationCertificationCertificationCertification
  2




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##### Table of Contents



Part I
 
 Item 1. Financial Statements
 PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 UNAUDITED
    
    
    
    
    
    
    UNAUDITED(In Thousands-Except Share Data)
    
    February 29, 2008
    
    
    May 31, 2007
    
    
    February 28, 2007ASSETSCurrent AssetsCash
    
    $
    131
    
    
    $
    98
    
    
    $
    187Accounts Receivable Net of Allowances for
Doubtful Accounts and Returns
    
    
    2,625
    
    
    
    3,961
    
    
    
    2,139Inventory
    
    
    4,807
    
    
    
    5,270
    
    
    
    5,396Prepaid Expenses and Other
    
    
    431
    
    
    
    334
    
    
    
    350Prepaid Marketing Expenses
    
    
    735
    
    
    
    638
    
    
    
    412Deferred Income Taxes
    
    
    1,157
    
    
    
    871
    
    
    
    655Total Current Assets
    
    
    9,886
    
    
    
    11,172
    
    
    
    9,139Equipment and Leasehold Improvements- At Cost, Less Accumulated Depreciation of $1,917, $1,692 and $1,620, respectively
    
    
    634
    
    
    
    697
    
    
    
    745Other AssetsDeferred Prepublication Costs, Net
    
    
    16,003
    
    
    
    17,180
    
    
    
    17,540Deferred Income Taxes
    
    
    1,028
    
    
    
    1,155
    
    
    
    1,307Trademarks, Net
    
    
    167
    
    
    
    141
    
    
    
    135Prepaid Expenses and Other
    
    
    329
    
    
    
    370
    
    
    
    377Prepaid Marketing Expenses
    
    
    630
    
    
    
    1,036
    
    
    
    1,274Total Other Assets
    
    
    18,157
    
    
    
    19,882
    
    
    
    20,633Total Assets
    
    $
    28,677
    
    
    $
    31,751
    
    
    $
    30,517LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesCurrent Maturities of Long Term Obligations
    
    $
    2,048
    
    
    $
    649
    
    
    $
    187Accounts Payable
    
    
    3,228
    
    
    
    6,304
    
    
    
    7,831Accrued Compensation
    
    
    322
    
    
    
    547
    
    
    
    313Other Accrued Expenses
    
    
    555
    
    
    
    327
    
    
    
    306Deferred Revenue
    
    
    634
    
    
    
    327
    
    
    
    372Total Current Liabilities
    
    
    6,787
    
    
    
    8,154
    
    
    
    9,009Long Term Obligations, Less Current Maturities
    
    
    14,696
    
    
    
    16,405
    
    
    
    14,358Total Liabilities
    
    
    21,483
    
    
    
    24,559
    
    
    
    23,367Commitments 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 as of February 2008
and 4,441,173 as of May 2007 & February 2007
    
    
    89
    
    
    
    89
    
    
    
    89Additional Paid In Capital
    
    
    7,989
    
    
    
    7,875
    
    
    
    7,864Accumulated Deficit
    
    
    (820
    )
    
    
    (708
    )
    
    
    (739
    )Treasury Stock - 16,232 shares as for all periods, at cost
    
    
    (64
    )
    
    
    (64
    )
    
    
    (64
    )Total Stockholders Equity
    
    
    7,194
    
    
    
    7,192
    
    
    
    7,150Total Liabilities and Stockholders Equity
    
    $
    28,677
    
    
    $
    31,751
    
    
    $
    30,517
  3




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PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended
    
    Nine Months EndedFebruary
    
    February(In Thousands, Except Per Share Data)
    
    2008
    
    2007
    
    2008
    
    2007Revenue, Net
    
    $
    6,390
    
    
    $
    5,934
    
    
    $
    31,759
    
    
    $
    29,520Cost of RevenueDirect Costs
    
    
    2,086
    
    
    
    1,994
    
    
    
    13,825
    
    
    
    12,561Prepublication Cost Amortization
    
    
    1,671
    
    
    
    1,498
    
    
    
    5,066
    
    
    
    4,390Total
    
    
    3,757
    
    
    
    3,492
    
    
    
    18,891
    
    
    
    16,951Gross Profit
    
    
    2,633
    
    
    
    2,442
    
    
    
    12,868
    
    
    
    12,569Selling, General and Administrative Expenses
    
    
    3,611
    
    
    
    3,853
    
    
    
    11,967
    
    
    
    12,224Income (Loss) from Operations
    
    
    (978
    )
    
    
    (1,411
    )
    
    
    901
    
    
    
    345Other Expenses, Net
    
    
    18
    
    
    
    2
    
    
    
    42
    
    
    
    22Interest Expense
    
    
    392
    
    
    
    212
    
    
    
    1,134
    
    
    
    781Net Loss Before Income Taxes
    
    
    (1,388
    )
    
    
    (1,625
    )
    
    
    (275
    )
    
    
    (458
    )Income Tax Benefit
    
    
    (536
    )
    
    
    (618
    )
    
    
    (163
    )
    
    
    (151
    )Net Loss
    
    $
    (852
    )
    
    $
    (1,007
    )
    
    $
    (112
    )
    
    $
    (307
    )Net Loss per Common Share:Basic and Diluted
    
    $
    (0.19
    )
    
    $
    (0.23
    )
    
    $
    (0.03
    )
    
    $
    (0.07
    )Weighted-average Number of
Common Shares Outstanding:Basic and Diluted
    
    
    4,455
    
    
    
    4,425
    
    
    
    4,441
    
    
    
    4,431
  4




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PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
 AdditionalCommon
    
    Paid-In
    
    Accumulated
    
    Treasury(In Thousands)
    
    Stock
    
    Capital
    
    Deficit
    
    Stock
    
    TotalBalance at May 31, 2007
    
    $
    89
    
    
    $
    7,875
    
    
    $
    (708
    )
    
    $
    (64
    )
    
    $
    7,192Stock Options Exercised
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    88Stock-Based Compensation
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    26Net Loss
    
    
    
    
    
    
    
    
    
    
    (112
    )
    
    
    
    
    
    
    (112
    )Balance at February 29, 2008
    
    $
    89
    
    
    $
    7,989
    
    
    $
    (820
    )
    
    $
    (64
    )
    
    $
    7,194
  5




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##### Table of Contents



PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine Months EndedFebruary(In Thousands)
    
    2008
    
    
    2007Cash Flows From Operating ActivitiesNet Loss
    
    $
    (112
    )
    
    $
    (307
    )Adjustments
to Reconcile Net Loss to Net Cash Provided by Operating ActivitiesDepreciation
    
    
    232
    
    
    
    244Amortization of Prepublication Costs and Intangible Assets
    
    
    5,092
    
    
    
    4,407Stock-Based Compensation
    
    
    26
    
    
    
    77Market Value Adjustment of Interest Rate Swap
    
    
    238
    
    
    
    Deferred Income Taxes
    
    
    (159
    )
    
    
    (160
    )Changes in Assets and LiabilitiesAccounts Receivable
    
    
    1,336
    
    
    
    1,213Inventory
    
    
    463
    
    
    
    (1,504
    )Prepaid Expenses and Other
    
    
    (56
    )
    
    
    (301
    )Prepaid Marketing Expenses
    
    
    309
    
    
    
    (787
    )Accounts Payable and Accrued Expenses
    
    
    (3,311
    )
    
    
    (298
    )Deferred Revenue
    
    
    307
    
    
    
    115Income Taxes Payable or Refundable
    
    
    
    
    
    
    667Net Cash Provided By Operating Activities
    
    
    4,365
    
    
    
    3,366Cash Flows From Investing ActivitiesPurchases of Equipment and Leasehold Improvements
    
    
    (169
    )
    
    
    (160
    )Expenditures for Intangibles
    
    
    (52
    )
    
    
    (26
    )Expenditures for Prepublication Costs
    
    
    (3,889
    )
    
    
    (5,324
    )Net Cash Used In Investing Activities
    
    
    (4,110
    )
    
    
    (5,510
    )Cash Flows From Financing ActivitiesNet Payments Under Line of Credit
    
    
    (178
    )
    
    
    (2,164
    )Purchases of Treasury Stock
    
    
    
    
    
    
    (56
    )Proceeds From the Exercise of Stock Options
    
    
    88
    
    
    
    Principal Payments On Short Term Loan
    
    
    
    
    
    
    (1,000
    )Net (Payments) Borrowings On Long-Term Debt
    
    
    (132
    )
    
    
    4,801Net Cash Provided By (Used In) Financing Activities
    
    
    (222
    )
    
    
    1,581Net Increase (Decrease) in Cash
    
    
    33
    
    
    
    (563
    )CashBeginning of Period
    
    
    98
    
    
    
    750End of Period
    
    $
    131
    
    
    $
    187Supplemental Cash Flow InformationCash Payments for:Interest
    
    $
    929
    
    
    $
    737
  6




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Peoples Educational Holdings, Inc., and Subsidiary
 
 Notes to Condensed Consolidated Financial Statements (UNAUDITED)
 NOTE 1
    NOTE 2
   NOTE 3
   7




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NOTE 4
  Three Months Ended
    
    Nine Months EndedFebruary
    
    February(In Thousands)
    
    2008
    
    2007
    
    2008
    
    2007Balances, Beginning
    
    $
    16,555
    
    
    $
    17,518
    
    
    $
    17,180
    
    
    $
    16,606Prepublication Cost Additions
    
    
    1,119
    
    
    
    1,520
    
    
    
    3,889
    
    
    
    5,324Amortization Expense
    
    
    (1,671
    )
    
    
    (1,498
    )
    
    
    (5,066
    )
    
    
    (4,390
    )Balances, Ending
    
    $
    16,003
    
    
    $
    17,540
    
    
    $
    16,003
    
    
    $
    17,540
  For the remainder of fiscal 2008
    
    $
    1,630For the year ended May 31, 2009
    
    
    6,191For the year ended May 31, 2010
    
    
    4,080For the year ended May 31, 2011
    
    
    2,534For the year ended May 31, 2012
    
    
    1,287Thereafter
    
    
    281$
    16,003
  NOTE 5
 Three Months Ended
    
    Nine Months EndedFebruary
    
    February(In Thousands)
    
    2008
    
    2007
    
    2008
    
    2007Balances, Beginning
    
    $
    170
    
    
    $
    136
    
    
    $
    141
    
    
    $
    126Additions
    
    
    6
    
    
    
    2
    
    
    
    52
    
    
    
    26Amortization Expense
    
    
    (9
    )
    
    
    (3
    )
    
    
    (26
    )
    
    
    (17
    )Balances, Ending
    
    $
    167
    
    
    $
    135
    
    
    $
    167
    
    
    $
    135
  NOTE 6
  8




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##### Table of Contents



February 29,
    
    
    May 31,
    
    
    February 28,(In Thousands)
    
    2008
    
    
    2007
    
    
    2007Total Prepaid Balance
    
    $
    1,365
    
    
    $
    1,674
    
    
    $
    1,686Less current portion
    
    
    735
    
    
    
    638
    
    
    
    412Long-term balance
    
    $
    630
    
    
    $
    1,036
    
    
    $
    1,274
  (In Thousands)For the remainder of fiscal 2008
    
    $
    329For the year ended May 31, 2009
    
    
    541For the year ended May 31, 2010
    
    
    495
 NOTE 7
  
    
    The revolving line of credit provides for advances up to $10 million and expires in
March 2012. The interest rate on the revolving line of credit is in a range from LIBOR
plus 2.0% to LIBOR plus 2.25%, or prime to prime plus 0.5%, with the exact interest rate
based on the ratio of the Companys Total Funded Debt to EBITDA. At February 29, 2008,
$6.7 million was outstanding under this facility, and $3.3 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 thereafter until maturity, beginning on March 31, 2008.
The term loan bears interest at the same rate as the revolving line of credit for $5
million of the $10 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 three and nine month periods ended February 29, 2008, we
have recorded $102,000 and $238,000 of interest expense as a result of the mark-to-market
interest rate adjustment.
  NOTE 8
  9




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedFebruary
    
    February(Amounts in Thousands)
    
    2008
    
    2007
    
    2008
    
    2007Stock Based Compensation Expense
    
    $
    9
    
    
    $
    32
    
    
    $
    26
    
    
    $
    77
   WeightedWeighted
    
    AverageAverage
    
    RemainingNumber
    
    Exercise
    
    Contractof Shares
    
    Price
    
    LifeOutstanding options at 5/31/07
    
    
    856,036
    
    
    $
    3.44Granted
    
    
    10,000
    
    
    $
    4.05Exercised
    
    
    (29,561
    )
    
    $
    3.00Canceled
    
    
    (75,439
    )
    
    $
    3.15Outstanding options at 2/29/08
    
    
    761,036
    
    
    $
    3.49
    
    
    3.75 Yrs.Outstanding exercisable at 2/29/08
    
    
    735,915
    
    
    $
    3.46
    
    
    3.56 Yrs.
   NOTE 9
  Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109
 10




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##### Table of Contents



NOTE 10
 Fair Value Measurements"
 The Fair Value Option for Financial Assets and
Financial Liabilities
   NOTE 11
  11




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedFebruary
    
    February2008
    
    2007
    
    2008
    
    2007Casabonne Associates
    
    $
    
    
    
    $
    
    
    
    $
    10
    
    
    $
    19Marketing Works (1)
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    36Total Payments
    
    $
    
    
    
    $
    4
    
    
    $
    10
    
    
    $
    55
 
 (1)
    
    As Mr. Casabonne is no longer a related party of the organization. NOTE 12
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARDLOOKING STATEMENTS
  SEASONALITY
  Jun - Aug
    
    
    Sep - Nov
    
    
    Dec - Feb
    
    
    Mar - May1st Quarter
    
    
    2nd Quarter
    
    
    3rd Quarter
    
    
    4th QuarterTest Preparation, Assessment, and Instruction
    
    
    27
    %
    
    
    27
    %
    
    
    20
    %
    
    
    26
    %College Preparation
    
    
    64
    %
    
    
    15
    %
    
    
    7
    %
    
    
    14
    %Total Revenue
    
    
    39
    %
    
    
    23
    %
    
    
    16
    %
    
    
    22
    %
 OVERVIEW
  12




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##### Table of Contents



Test Preparation, Assessment, and Instruction Product Group
 Test Preparation, Assessment
 
    
    We create and sell print and web-based materials targeted to grades 2-12 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-Pathä, 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-Pathä 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 text 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.
 13




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##### Table of Contents



RESULTS OF OPERATIONS
 Three Months Ended February 29, 2008 vs. Three Months Ended February 28, 2007
 Three Months Ended February(Amounts in Thousands)
    
    2008
    
    2007RevenueTest Preparation, Assessment and Instruction
    
    $
    5,619
    
    
    
    87.9
    %
    
    $
    5,150
    
    
    
    86.8
    %College Preparation
    
    
    771
    
    
    
    12.1
    %
    
    
    784
    
    
    
    13.2
    %Total Revenue
    
    
    6,390
    
    
    
    100.0
    %
    
    
    5,934
    
    
    
    100.0
    %Cost of RevenueDirect Costs
    
    
    2,086
    
    
    
    32.6
    %
    
    
    1,994
    
    
    
    33.6
    %Prepublication Cost Amortization
    
    
    1,671
    
    
    
    26.2
    %
    
    
    1,498
    
    
    
    25.2
    %Total Cost Of Revenue
    
    
    3,757
    
    
    
    58.8
    %
    
    
    3,492
    
    
    
    58.8
    %Selling, General and Administrative ExpensesMarketing and Selling
    
    
    2,405
    
    
    
    37.6
    %
    
    
    2,697
    
    
    
    45.4
    %General and Administrative
    
    
    1,206
    
    
    
    18.9
    %
    
    
    1,156
    
    
    
    19.5
    %Total Selling, General and Administrative Expenses
    
    
    3,611
    
    
    
    56.5
    %
    
    
    3,853
    
    
    
    64.9
    %Operating Loss
    
    
    (978
    )
    
    
    -15.3
    %
    
    
    (1,411
    )
    
    
    -23.7
    %Other Expenses
    
    
    18
    
    
    
    0.3
    %
    
    
    2
    
    
    
    0.0
    %Interest Expense
    
    
    392
    
    
    
    6.1
    %
    
    
    212
    
    
    
    3.6
    %Income Tax Benefit
    
    
    (536
    )
    
    
    -8.3
    %
    
    
    (618
    )
    
    
    -10.4
    %Net Loss
    
    $
    (852
    )
    
    
    -13.3
    %
    
    $
    (1,007
    )
    
    
    -16.9
    %EPS Basic and Diluted
    
    $
    (0.19
    )
    
    
    
    
    
    $
    (0.23
    )
 Overview
  REVENUE
 Test Preparation, Assessment, and Instruction
  14




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##### Table of Contents



College Preparation
  COST OF REVENUE
   
    
    Direct costs as a percentage of revenue for the quarter decreased from 33.6% in the
prior year to 32.6%. The decrease as a percent of revenue is primarily due to a reduction
in product costs.
    
    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. These prepublication costs also include expenses
incurred for other forms of product development. Prepublication costs are capitalized and
expensed on a straight-line basis over a three- or five-year period, based upon the
product. We believe our amortization policy is in line with industry practice. For the
three-month period ending February, 29, 2008 we amortized $1.7 million of prepublication
costs, compared to $1.5 million in the prior year.
 MARKETING AND SELLING
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##### Table of Contents



GENERAL AND ADMINISTRATIVE
  INTEREST EXPENSE
  Nine Months Ended February 29, 2008 vs. Nine Months Ended February 28, 2007
 Nine Months Ended February(Amounts in Thousands)
    
    2008
    
    2007RevenueTest Preparation, Assessment and Instruction
    
    $
    19,463
    
    
    
    61.3
    %
    
    $
    18,826
    
    
    
    63.8
    %College Preparation
    
    
    12,296
    
    
    
    38.7
    %
    
    
    10,694
    
    
    
    36.2
    %Total Revenue
    
    
    31,759
    
    
    
    100.0
    %
    
    
    29,520
    
    
    
    100.0
    %Cost of RevenueDirect Costs
    
    
    13,825
    
    
    
    43.5
    %
    
    
    12,561
    
    
    
    42.6
    %Prepublication Cost Amortization
    
    
    5,066
    
    
    
    16.0
    %
    
    
    4,390
    
    
    
    14.9
    %Total Cost Of Revenue
    
    
    18,891
    
    
    
    59.5
    %
    
    
    16,951
    
    
    
    57.5
    %Selling, General and Administrative ExpensesMarketing and Selling
    
    
    8,484
    
    
    
    26.7
    %
    
    
    8,653
    
    
    
    29.3
    %General and Administrative
    
    
    3,483
    
    
    
    11.0
    %
    
    
    3,571
    
    
    
    12.1
    %Total Selling, General and Administrative Expenses
    
    
    11,967
    
    
    
    37.7
    %
    
    
    12,224
    
    
    
    41.4
    %Operating Income
    
    
    901
    
    
    
    2.8
    %
    
    
    345
    
    
    
    1.1
    %Other Expenses
    
    
    42
    
    
    
    0.1
    %
    
    
    22
    
    
    
    0.1
    %Interest Expense
    
    
    1,134
    
    
    
    3.6
    %
    
    
    781
    
    
    
    2.6
    %Income Tax Expense
    
    
    (163
    )
    
    
    -0.5
    %
    
    
    (151
    )
    
    
    -0.5
    %Net Loss
    
    $
    (112
    )
    
    
    -0.5
    %
    
    $
    (307
    )
    
    
    -1.1
    %EPS Basic and Diluted
    
    $
    (0.03
    )
    
    
    
    
    
    $
    (0.07
    )
 Overview
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##### Table of Contents



REVENUE
 Test Preparation, Assessment, and Instruction
  College Preparation
  COST OF REVENUE
   
    
    Direct costs as a percentage of revenue for the nine months ended February 29, 2008 was
43.5%, an increase from 42.6% in the prior year. The percentage increase is due to revenue
mix, as College Preparation revenue increased from 36.2% to 38.7% of the total revenue. 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. These prepublication costs also include expenses
incurred for other forms of product development. Prepublication costs are capitalized and
expensed on a straight-line basis over a three or five-year period, based upon the product.
We believe our amortization policy is in line with industry practice. For the nine month
period ending February 29, 2008 we amortized $5.1 million of prepublication costs, compared
to $4.4 million during the same period in the prior year.
 MARKETING AND SELLING
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##### Table of Contents



GENERAL AND ADMINISTRATIVE
  INTEREST EXPENSE
  LIQUIDITY AND CAPITAL RESOURCES
     
    
    The revolving line of credit provides for advances up to $10 million and expires in
March 2012. The interest rate on the revolving line of credit is in a range from LIBOR
plus 2.0% to LIBOR plus 2.25%, or prime to prime plus 0.5%, with the exact interest rate
based on the ratio of the Companys Total Funded Debt to EBITDA. At February 29, 2008,
$6.7 million was outstanding under this facility, and $3.3 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 thereafter until maturity, beginning on March 31, 2008.
The term loan bears interest at the same rate as the revolving line of credit for $5
million of the $10 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 three and nine month periods ended February 29, 2008, we
have recorded $102,000 and $238,000 of interest expense as a result of the mark-to-market
interest rate adjustment.
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##### Table of Contents



OFF-BALANCE SHEET ARRANGEMENTS
  CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
  Revenue Recognition and Allowance for Returns
  Deferred Prepublication Costs
  Allowance for Doubtful Accounts
  Allowance for Excess and Slow-Moving Inventory
  19




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##### Table of Contents



Stock-Based Compensation
 Share-Based Payment,
 Income Taxes
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of Controls and Procedures
   Changes in Internal Control over Financial Reporting
  20




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##### Table of Contents



PART
II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
 None.
 
 Item 1A. Risk Factors
 There has not been a material change to the risk factors set forth in our Annual Report on
Form 10-K for the fiscal year ended May 31, 2007.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 During the three-months ended February 29, 2008, we did not issue any securities without
registration under the Securities Act of 1933.On October 5, 2005, we announced that 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 nine months ended February 29, 2008. At February 29, 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.
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##### Table of Contents



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 32.1
    
    CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 22




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##### Table of Contents



SIGNATURES
  Dated:  April 11, 2008
    PEOPLES EDUCATIONAL HOLDINGS,
INC.By:  /s/ Brian T. BeckwithBrian T. BeckwithPresident and Chief Executive Officer 23