UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





xAnnual Report pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934


For
the fiscal year ended May 31, 2009





oTransition 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
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      No.)299
      Market Street, Saddle Brook, NJ
              07663(Address
      of principal executive offices)
              (Zip
      Code)





Registrant's
telephone number, including area code:  (201) 712-0090





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





Title of each class
                
                Name of each exchange on which
      registeredCommon
      Stock, $0.02 par value
                
                The
      NASDAQ Stock Market LLC





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


o Yes    x No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.





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.


x Yes   o No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


o Yes    o No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.    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
the definitions 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 Act).  o Yes  x No





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
November 30, 2008 (the last business day of the registrant’s most recently
completed second fiscal quarter) was $3,263,388.





The
number of shares outstanding of the issuer's common stock on August 10, 2009 was
4,462,202.





Documents
incorporated by reference:   None.





TABLE OF
CONTENTS





Page No.PART
      I
                                              
                                              1ITEM
      1.
                                              BUSINESS
                                              1ITEM
      2.
                                              PROPERTIES
                                              7ITEM
      3.
                                              LEGAL
      PROCEEDINGS
                                              8ITEM
      4.
                                              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                              8PART
      II
                                              
                                              8ITEM
      5.
                                              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                                              8ITEM
      7.
                                              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                              9ITEM
      8.
                                              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                                              15ITEM
      9.
                                              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                                              31ITEM
      9A(T).CONTROLS AND PROCEDURES
                                              31ITEM 9B.
                                              OTHER
      INFORMATION
                                              31PART
      III
                                              
                                              32ITEM
      10.
                                              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                              32ITEM
      11.
                                              EXECUTIVE
      COMPENSATION
                                              35ITEM
      12.
                                              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                                              38ITEM
      13.
                                              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                                              39ITEM 14.
                                              PRINCIPAL
      ACCOUNTING FEES AND SERVICES.
                                              39PART
      IV
                                              
                                              41ITEM
      15.
                                              EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                                              41SIGNATURES
                                              43





PART
I





ITEM
      1.
            BUSINESS




OVERVIEW
AND COMPANY HISTORY




Peoples
Educational Holdings, Inc. (PEH), through its wholly owned subsidiary, Peoples
Education, Inc. (PE),  develops and sells its own proprietary
education products which are predominantly state-specific and standards-based,
focused on state-required tests. We also distribute other publishers’ products.
Historically our products were organized into two product groups, one designated
as Test Preparation, Assessment, and Instruction, and the other as College
Preparation. In March 2009 we added a third product group, Literacy as we
entered into exclusive distribution agreements with three publishers to
distribute their Literacy products in the United States.  The Test
Preparation, Assessment, and Instruction materials are almost exclusively
proprietary products, while the College Preparation materials are mainly
nonproprietary products accompanied by a growing number of proprietary titles.
The Literacy products are exclusively nonproprietary. Marketing channels include
Company and independent sales representatives, telemarketing, direct mail, and
catalogs. Throughout this document PE and PEH will be collectively referred to
as “we”, “our” and “the Company”.





PE was
founded in 1989 by James J. Peoples, the current Chairman of the Board, and by
Diane M. Miller, the current Executive Vice President and Chief Creative
Officer. It began operations in 1990 with the acquisition of a small
supplementary product line. Effective November 1, 1998, PE merged into a
subsidiary of PEH. All of PEH’s operations are currently conducted through PE.
In November 2001, PEH reincorporated in Delaware. Effective June 1, 2005, the
common stock of PEH was approved for quotation and trading on the NASDAQ Capital
Market under the symbol PEDH.





Test Preparation,
Assessment, and Instruction Product Group


·
            Test
      Preparation and Assessment: We create and sell state-customized, print and
      electronic test preparation and assessment materials that help teachers
      prepare students for success in school and for required state proficiency
      tests, grades 2-12.





·
            Instruction:
      We produce and sell proprietary state-customized print worktexts and print
      and web-based delivered assessments, for grades 1-8. These products
      provide students with in-depth instruction and practice in reading,
      language arts, and mathematics. In addition, our backlist remedial and
      multicultural products are included in this
  group.





College Preparation Product
Group


·
            We
      distribute and publish instructional materials that meet the required
      academic standards for high schools honors, college preparation, and
      Advanced Placement courses. We are the exclusive high school distributor
      for two major college publishers. We also publish our own proprietary
      college preparation supplements and ancillary materials. These products do
      not compete with the products that we distribute for the two major college
      publishers.





Literacy Product
Group


·
            We
      distribute for three publishers, on an exclusive basis in the United
      States, supplemental literacy materials for grades K-8. These materials
      include an extensive selection of leveled reading materials, high interest
      engaging resources for striving readers, series that integrate reading,
      science and social studies, and selections and strategies for students who
      are in the process of learning
English.





The
Company is located at 299 Market Street, Saddle Brook, NJ 07663. The telephone
number is (201) 712-0090. The website is www.peopleseducation.com. The contents
of our website are not part of or incorporated into this
report.


1


INDUSTRY
BACKGROUND





School
Enrollment


The
National Center for Education Statistics (NCES) forecasts record public school
enrollment through 2017. The fall 2009 public school enrollment is estimated at
50.1 million students, and a small but steady annual growth is projected through
2017, when elementary and secondary enrollments are expected to increase to 54.1
million students. School publishers have shifted marketing and selling resources
to meet changes in regional enrollments. For example, between 2000–2008 the
South and the West enrollments increased 1.96 million and 1.16 million students,
respectively. During the same period the Midwest and Northeast school
enrollments decreased slightly. The most recent NCES estimate has K-12 private
school enrollment at 6.1 million students (projected 2008 enrollment) growing to
6.4 million students by 2014. Rising immigration and the baby boom echo that
began in the mid-1970s and peaked in 1990 are boosting school enrollments. As
school enrollments grow, the unit sales of instructional materials are also
expected to increase.





Educational
Funding


The
relationship between state and local school funding has been shifting over the
last 30 years, with local funding decreasing to 34.2% and state funding rising
to 46.5%. Federal funds for schools have grown to 9.1% and “other” funding
accounts for the balance. (National Center for Education
Statistics, 2007).





Recently,
states have been experiencing economic difficulties. Fiscal conditions
deteriorated for nearly every state during fiscal year 2009, and weak fiscal
conditions are expected to continue in fiscal 2010. The economic recession,
which began in December 2007, significantly changed the fiscal outlook,
resulting in more than half the states experiencing negative budget growth in
fiscal 2009, and nearly three quarters of states recommending fiscal 2010
budgets with negative growth.





Based on
the June 2009 Fiscal Survey of States, 42 states were forced to reduce enacted
budgets in fiscal 2009 by a combined $31.6 billion. This is a significant
increase in budget reductions from the thirteen states that had to reduce their
enacted budgets in fiscal 2008 and the three states that reduced their enacted
budgets during 2007. Thirty states are estimating negative growth for their
fiscal 2009 budgets, with spending levels at their lowest in thirty years.
Unlike the federal government, states can’t run deficit budgets so legislators
continue to seek new revenue sources and struggle with the increased costs of
health care and education, the two largest expenditures in the states’ general
fund budgets.





The
federal 2009 budget which began October 1, 2008 included discretionary
educational spending of $59.2 billion, an increase of 3.5% over the prior year.
Spending under Title I, a funding program under the Elementary and Secondary
Education Act, increased 2.9% to $14.3 billion from the 2008 level of $13.9
billion.





The
American Recovery and Reinvestment Act (ARRA) will help states avoid serious
cuts; however, it will not end the need for states to cut spending. The ARRA,
which President Obama signed into law on February 17, 2009, provided a total of
$98.2 billion in funding for the Department of Education, creating an
unprecedented opportunity for States and school districts to make significant
changes to strengthen and improve all levels of education. (From ed.gov FY 2010
Budget Summary)





The State
Fiscal Stabilization Fund, which is the largest pool of money for education in
the Recovery Act, has approved funding for 45 states and territories so far. At
this point, the first stage of funding - $27 billion (out of $53.6 billion
total) has been allocated to those states. The ARRA also provides an additional
$10 billion for Title I.





No Child Left
Behind


No Child
Left Behind (NCLB) may undergo changes under the new presidential administration
but as of now, the legislation is still in place. Even with changes, the areas
of accountability, assessment and standards based instruction will continue to
be at the center of NCLB. The 2005 through 2006 school year marked the first
year that all states were required to have reading and mathematics tests each
year in grade 3 through 8, and once during the span of grades 10 through 12. In
the 2007 through 2008 school year, all states were required to test twice in
science for grades 3 through 8, and once between grades 10 through 12.
State-specific, standards-based products and assessment tools such as those
created and sold by the Company play an important role in providing the
instruction students need to succeed in school and on the state
tests.


2


Common Core
Standards


The
Common Core Standards is an opportunity for states to collectively develop and
adopt a core set of academic standards in mathematics and English language arts.
Currently, fifty states and territories have joined the Common Core State
Standards initiative. This initiative is led by the National Governors
Association (NGA) and the Council of Chief State School Officers (CCSSO) in
partnership with Achieve, ACT and the College Board. The adoption of the Common
Core state standards is voluntary for states. States choosing to align their
standards to the Common Core state standards have agreed the common core will
represent at least 85% of the state’s standards in mathematics and English
language arts. However, many states are waiting to see what the Common Core
Standards will be before making any final decision of adoption. We anticipate
that states which adopt the standards will also enhance them with specific
details (grade level expectations) that are important to that state.
Additionally, some states will voluntarily come together to develop new,
innovative, common assessments in an effort to reduce costs. At this time, it is
unknown to what extent states will participate with this
initiative.





The draft
of the Common Core state standards for college and career readiness in English
language arts and mathematics was released July 2009. By August 2009, the
expectation is that the draft will be approved by the validation committee. The
draft of the Common Core Standards for K-12 in English language arts and
mathematics will be released publicly by December 2009 and is expected to be
approved by January 2010. States will submit their timeline and process for
adoption of the Common Core Standards by early 2010.





Supplementary Materials
Market


We do
business in the $4.4 billion pre K-12 supplementary materials market, which is a
subset of the larger instructional materials market (Simba 2008-2009). For 2008,
the Association of American Publishers (AAP) member companies reported an 11.4 %
decline in supplemental revenue. In this uncertain environment, many school
budgets have been reduced and school administrators have pulled back on spending
or postponed purchasing instructional materials. Many districts are holding
purchases and waiting for the ARRA funding.





We
believe that the supplemental market revenue performance will continue to
reflect the economic environment but see an upside to the market as schools
unify print and technology tools to pursue remediation, intervention, test
preparation and formative instruction.





Test Preparation,
Assessment, and Instruction Market


As
required by law, all states have developed state content standards and high
stakes state tests (tests that have major consequences, or are used as the basis
for promotion or graduation). State standards are not static and the states
frequently adjust and upgrade their standards. No states have identical
standards and there are significant differences from state to state in both
content standards and the tests used to assess student proficiency.





We
develop and sell Test Preparation materials in language arts, reading,
mathematics, science, and social studies. Our Test Preparation books are 100%
customized for each state. In practice, this means that no two of our Test
Preparation books are identical. State-specific customization, along with the
thoroughness and quality of our Test Preparation materials, provide us with a
unique sales and marketing position.





Like our
Test Preparation products, our Assessment products are also customized for each
state. The Assessment materials are available in both print and electronic form.
Diagnostic Practice Tests assess student proficiency and help teachers provide
tailored instruction and practice for individuals and groups. Our online
benchmarking/diagnostic system creates formative assessments for student
diagnosis and practice, and provides NCLB compliant student subgroup reports for
classrooms, schools, and school districts. Our assessments (both print and
online) also provide teachers with the ability to differentiate instruction as
described in the Response to Intervention (RTI) requirement of the Individuals
with Disabilities Education Act (IDEA).





Our
Focused Instruction materials are also customized to meet specific state
standards. Test preparation has a valuable place in the school, but student
instruction is considerably more than just test preparation. Our Focused
Instruction products are state-specific, standards-based materials that are used
by teachers to deliver explicit, in-depth instruction in the skills and
strategies essential to student proficiency in reading comprehension, critical
reading, basic mathematics skills, mathematics problem solving, and vocabulary
development. Online tests support Focused Instruction materials, providing both
formative assessment and targeted assessment.


3


The
accountability pressure NCLB placed on schools to make Adequate Yearly Progress
(AYP) has created a public window into our schools that is unprecedented.
Aligning standards with classroom instruction and holding schools accountable
has been permanently imprinted in our schools. The accountability pressure will
continue to fuel the market demand for supplemental test preparation,
assessment, and instruction materials like those produced and sold by the
Company. A recent survey of the K-12 test preparation market by Education Market
Research (2008) reported that 76.3% of the respondents use test preparation
materials, and of those respondents, 62.3% purchase test preparation materials
from commercial vendors. We believe that state-specific test preparation,
assessment, and instruction materials continue to be a strong niche in the
supplementary market. As such, schools and school districts are expected to
aggressively purchase these materials.





Literacy
Market


Literacy
is a new product niche for the Company as of March 2009 and serves the K-8
supplemental literacy market with a comprehensive selection of research-based,
cross-curricular leveled reading materials. All products support the
requirements of the No Child Left Behind legislation,  target specific
learning objectives to achieve adequate yearly progress (AYP) and provide
teachers with the ability to differentiate instruction as described in the
Response to Intervention (RTI) requirement of the Individuals with Disabilities
Education Act (IDEA).





The
unprecedented pressure on schools to show AYP for all students has increased the
need for schools to use materials that are aligned closely with students needs.
The Literacy product line includes an extensive selection of leveled reading
materials that provide teachers with the ability to differentiate instruction to
meet individual student needs. Teacher resources are built upon researched-based
effective practices while assessment products provide tools for measuring and
monitoring student achievement.





A recent
survey done by Education Market Research (2008) reported a significant number of
respondents (60%) used leveled reading books and 34% of the respondents are who
are currently using  basal reading programs (hardcover textbooks used in
classrooms) feel the most important improvement to their current program is more
leveled reading books. We believe that the increased accountability for
improving student performance aligns our products with this strong segment of
the supplementary market.





College Preparation
Market


College
Preparation materials are used in high school Advanced Placement (AP), honors,
and college preparation courses. Several factors support optimistic funding
predictions for the growth of college preparation instructional materials,
including competitive college entrance requirements, and strong annual growth in
the number of students taking the APexaminations.





According
to the College Board, the total number of AP test takers increased at an annual
compound growth rate of over 10% from 1997 to 2008, rising from 922,000 test
takers in 1997 to 2.7 million in 2008. In 2008, students from 17,032 secondary
schools took AP examinations. These schools offer, on average, eight different
AP courses from which their students can choose.





The
College Board offers AP exams in 34 content areas. High scores on the APexaminations
add to a school’s prestige and recognition as a quality school. Most colleges
and universities in the United States, as well as in 30 countries, recognize AP
examination results in the admission process as a sign of a student’s ability to
succeed in rigorous curricula. As the College Preparation market has grown, it
has become increasingly competitive. We have responded to this competition by
increasing marketing, adding inside and outside sales representatives, and by
utilizing sales and market data to guide our business decisions.





PRODUCTS





We
develop and sell proprietary products, including worktexts, assessment
materials, and web-based products. In addition, we also distribute other
publishers’ products. We operate as one business segment, with three product
groups.





Test Preparation,
Assessment, and Instruction





Test Preparation and
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.


4


Measuring
Up e-Path®(E-Path), our 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. E-Path delivers a detailed prescriptive
instructional path for individual students, tied into our rapidly expanding
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


Instruction
products provide standards–based, state-specific supplemental instruction in
particular subject areas such as reading comprehension, mathematics problem
solving, and vocabulary development. Essential to this strategy is the market
alignment of the Instruction with the 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 and
multicultural texts and related materials, but we are not investing in new
development for these products.





Our Test
Preparation, Assessment, and Instruction products are primarily proprietary, and
management believes this niche will continue to be our fastest growth area in
the future. The Test Preparation, Assessment, and Instruction market is highly
competitive, and we expect our competitors to pursue similar development and
expansion efforts.





Revenue
from the Test Preparation, Assessment, and Instruction product group, as a
percentage of total revenue, was as follows:





Year
      Ended May 31, 2009
                  
                  
                  62
                  %Year
      Ended May 31, 2008
                  
                  
                  64
                  %





College
Preparation





We have
exclusive sales and marketing agreements with two major college publishers who
do not have school divisions, to sell their books into the high school market.
The distribution agreements cover all sales made to the K–12 market, including
each publisher's college products and certain trade and professional products.
We also develop our own proprietary college preparation supplements and
ancillary materials. The first of these products was published in 2004. These
products do not compete with products we distribute under our existing publisher
agreements and are crafted as supplements to help students with their college
preparation studies.





The loss
of either major college publisher distribution agreement would have a material
adverse effect on our revenue and operations. One of the agreements has been in
place for 19 years and expires in December 2012. The other agreement has been in
place for 13 years and expires in September 2011.





Revenue
from the College Preparation product group, as a percentage of total revenue,
was as follows:





Year
      Ended May 31, 2009
                  
                  
                  38
                  %Year
      Ended May 31, 2008
                  
                  
                  36
                  %





Literacy





In March
2009 we entered into exclusive sales and distribution agreements within the
United States for specific products from three publishers. These material
include an extensive selection of leveled reading materials; high interest
engaging resources for striving readers; series that integrate reading, science
and social studies; and selections and strategies for students who are in the
process of learning English. Literacy revenue was approximately 1% of total
revenue for fiscal 2009.


5


PRODUCT
DEVELOPMENT





We
combine our internal product development resources with outside freelance talent
to develop and design our proprietary products in a cost-effective manner. We
utilize a variety of authors, writers, editors, and development houses to
develop products.





Our
editorial department has the responsibility for maintaining editorial quality,
schedules, and budgets.


Product
development is carried out by a combination of in-house staff and contracted
personnel with tight in-house control. We maintain an in-house system of
computer-based technology that makes it possible to complete nearly the entire
production cycle in-house, resulting in digitized material.





Once
conceived, a product proposal is circulated to the management group for input.
Depending on their input and additional market research, the proposal will go
forward or be terminated. A pro forma financial statement is prepared to aid in
determining if the new title is desirable for publication. We believe we have
excellent relationships with our authors, including many well-known names in the
education field.





All
printing is contracted to outside vendors by competitive bidding. All printers
utilized by us are located in the United States. We do not rely on the services
of any one printer.





Our
products require varying periods of development time, depending on the
complexity of the graphics and design, and the writing and editing process. Most
of our multi-book programs can be developed in a period that ranges from six to
twelve months. We believe that our use of outside authors, illustrators, and
freelancers for writing, editing, creating art, designing, and copy editing
allows us to produce the budgeted number of books per year with a relatively
small staff, and allows the flexibility we need to continue to produce and
expand our product lines and to quickly enter market niches with new product
lines.





See also
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Product Development.”





CUSTOMER
BASE





No
customer during the past five years has represented more than 10% of our total
revenue in any one year.





SALES,
MARKETING, AND DISTRIBUTION





Overview


We
conduct our sales activities through inside and outside sales groups (both
salaried and independent), direct mail, conventions, and workshops. We believe
this system is well suited to the supplementary educational materials market. As
we continue to grow, our sales and marketing infrastructure will expand along
with increases in the numbers of inside and outside sales representatives and
managers. We have also increased marketing spending for teacher workshops and
staff development, sample books, exhibits, direct mail, and Web
initiatives.





Integrated Catalog/Inside
and Outside Sales Model


In the
2008-2009 school year, approximately 200,000 copies of thirty-five catalogs and
over thirty various print promotional and direct mail pieces reached our various
market niches. Catalogs and other direct mail pieces are mailed to internally
maintained house lists and other appropriate contact individuals at K-12 school
and district sites throughout the United States. In the same school year,
approximately 174 electronic mailings, sent via e-mail (e-Blasts), were deployed
that targeted about 1.1 million K-12 educators.





Website


Our Web
site (located at www.peopleseducation.com) is primarily used as a sales and
marketing tool that offers product information. The site also includes
additional resources for teachers, including state-specific links, sample
lessons and research information.


6


Sales
Representatives


We
utilize the services of outside independent sales representatives, outside
salaried field representatives, and inside sales representatives to sell our
products. We plan to continue using this sales organization structure in the
future.





Warehouse and
Distribution


During
fiscal years 2009 and 2008, we outsourced warehousing and distribution/shipping
services to two separate third party warehouse and distribution companies - one
located in Brooklyn, NY and the other in Wayne, NJ. These companies warehouse
and ship all products within the Test Preparation, Assessment, and Instruction
product group and the proprietary products from the College Preparation product
group. At the end of fiscal 2009 we consolidated the warehousing and
distribution/shipping services into the Wayne, NJ location. Warehousing and
distribution services for our Literacy product group, which was launched in
March 2009 is outsourced to a third party warehouse in Lexington KY. Orders for
nonproprietary College Preparation materials are billed by us and drop shipped
by the college publishers to our customers. We operate and maintain our own
internal data processing system; however, the services that the warehouse and
distribution companies provide are significant to our operations.





COMPETITION





According
to the 2008 Education Market Research (EMR) report, the educational publishing
assessment market size is over $2 billion for K-12 assessment products and
services, with nearly half of that being spent on classroom testing, a great
deal of which is drawn from locally adopted textbooks. Of that total, 12.1% is
spent on test preparation, 22% on formative assessment and 17.1% on summative
assessment, for a total of about $1.3 billion. EMR also states that the top
ranking publishers for test preparation are Harcourt/Steck-Vaugh, BuckleDown
Publishing, Curriculum Associates, Triumph Learning, ECS Learning Systems,
Options Publishing, Spectrum, American Book Company, and Peoples
Education.





According
to the reports of 130 supplemental companies participating in the EMR survey,
overall sales of supplemental educational products in 2007 totaled $2.5 billion.
Out of the 24 different types of supplemental materials, the following ranks
were assigned based on the total sales in 2007:  assessment (formative
and summative) ranked first, intervention ranked third, supplementary textbooks
ranked fourth, consumable workbooks ranked tenth, and test prep materials ranked
eleventh.





PROTECTION
OF PROPRIETARY RIGHTS





All of
our books have been copyrighted in the United States with United States rights,
most in the name of The Peoples Publishing Group or Peoples Education. A few
titles are copyrighted by the author, and we have secured unlimited exclusive
rights to sell and update these titles. Therefore, we own the exclusive rights
to exploit the copyright in the marketplace. For books created in-house, we have
registered United States rights for all markets, including first and second
serialization, commercial rights, electronic rights, foreign and translation
rights, reprint rights, and rights to any means yet to be developed for
transmitting information in any form. We believe we have adequately protected
our copyrights, but the loss of copyrights or failure of copyright protection
could have a material adverse effect on the Company.





EMPLOYEES





As of May
31, 2009, we had approximately 82 employees. We have never experienced a work
stoppage and our employees are not covered by a collective bargaining agreement.
We believe our relations with our employees are good.





ITEM
      2.
            PROPERTIES





We do not
own any real property. We primarily conduct our operations out of our Saddle
Brook, NJ facility. We lease approximately 23,000 square feet of office space at
this location at an average rental of approximately $445,000 per year through
October 2014.


7


We lease
approximately 4,300 square feet of office space in Austin, TX at a current
rental of $80,000 per year through February 2010.





We lease
1,008 square feet of office space in Columbus, OH at an average rental of
approximately $13,500 per year through November 2011.





Based on
present plans, we believe that our current facilities will be adequate to meet
our anticipated needs for at least the next year.





ITEM
      3.
            LEGAL
      PROCEEDINGS





We are
not currently a party to any material legal proceedings.





ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





NONE


PART
II





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





Market
for Common Stock





Our
common stock has been quoted for trading on the NASDAQ Capital Market under the
symbol “PEDH” since June 1, 2005, and was quoted for trading on the OTC Bulletin
Board from September 10, 2004 through May 31, 2005. Prior to September 10, 2004,
there was no established public trading market for our common stock. The
following table sets forth, the high and low closing sale prices of our common
stock as reported by NASDAQ for the periods indicated.





Year
      Ended
                  
                  
                  Year
      EndedMay
      31, 2009
                  
                  
                  May
      31, 2008Quarter
                  
                  High
                  
                  
                  Low
                  
                  
                  High
                  
                  
                  Low1st
                  
                  $
                  2.40
                  
                  
                  $
                  1.90
                  
                  
                  $
                  4.00
                  
                  
                  $
                  3.102nd
                  
                  $
                  3.30
                  
                  
                  $
                  1.22
                  
                  
                  $
                  4.05
                  
                  
                  $
                  2.783rd
                  
                  $
                  1.72
                  
                  
                  $
                  0.86
                  
                  
                  $
                  3.20
                  
                  
                  $
                  2.354th
                  
                  $
                  2.40
                  
                  
                  $
                  0.53
                  
                  
                  $
                  3.57
                  
                  
                  $
                  1.88





On August
10, 2009, the last reported bid price of our common stock on NASDAQ Capital
Market was $2.00 per share.





Holders





There
were approximately 462 beneficial holders of our common stock as of July 16,
2009.





Dividends





We have
not paid dividends on our common stock and do not presently plan to pay
dividends on our common stock for the foreseeable future. We plan to retain all
net earnings, if any, to fund the development of our business. Our Board of
Directors has sole discretion over the declaration and payment of future
dividends, subject to the availability of sufficient funds to pay dividends. Any
future dividends will depend upon our profitability, financial condition, cash
requirements, future prospects, general business condition, the terms of our
debt agreements which currently restrict the payment of dividends and other
factors our Board of Directors believes are relevant.


8


Issuer
Purchases of Equity Securities





The
Company did not repurchase any of its common stock during the twelve months
ended May 31, 2009.





In 2005,
our Board of Directors approved a share repurchase program, permitting us to
repurchase up to 100,000 shares of our common stock. As of May 31, 2009, 83,768
shares remained available for purchase under the program. No share repurchase
plan or program expired, or was terminated, during the period covered by this
report.





ITEM
      7.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





Forward–Looking
Statements





This
Report contains statements that constitute “forward-looking statements” within
the meaning of Section 21E of the Securities Exchange Act of 1934. The words
“expect,” “estimate,” “anticipate,” “predict,” “believe” and similar expressions
and variations thereof are intended to identify forward-looking statements. Such
statements appear in a number of places in this filing and include statements
regarding the intent, belief or current expectations of Peoples Educational
Holdings, Inc. (the “Company”), its directors or officers with respect to, among
other things, (a) trends affecting the financial condition or results of
operations of the Company and (b) the business and growth strategies of the
Company. These forward-looking statements involve a number of risks and
uncertainties, including (1) demand from major customers, (2) effects of
competition, (3) changes in product or customer mix or revenues and in the level
of operating expenses, (4) rapidly changing technologies and our ability to
respond thereto, (5) the impact of competitive products and pricing, (6) local
and state levels of educational spending, (7) ability to retain qualified
personnel, (8) ability to retain our distribution agreements with our major
college publishers in the College Preparation market, (9) the sufficiency of our
copyright protection, and (10) ability to continue to rely on the services of
third party warehouses, and other factors as discussed elsewhere in this report
or in our other filings with the SEC. The potential investors and shareholders
of the Company are cautioned not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ
materially from those projected in this Annual Report, for the reasons, among
others, discussed in the Section “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof.





Critical
Accounting Policies and Significant Estimates





Our
critical accounting policies and significant estimates are summarized in the
footnotes to our consolidated financial statements. 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 policies that require significant judgment are as
follows:





Revenue Recognition and
Allowance for Returns


Revenue
is recognized when products are shipped, the customer takes title and assumes
risk of loss, and collection of the related receivable is probable. The
allowances for returns as of May 31, 2009 and 2008 were approximately $520,000,
and, $528,000, respectively. These allowances are recorded at the time of
revenue recognition, if the right of return exists, and are recorded as a
reduction of accounts receivable. This allowance is estimated by management
based on our historical rate of returns.  We recognize shipping and
handling revenues as part of revenue, and shipping and handling expenses as part
of cost of revenue on the statements of operations. Subscription based revenue
on our Measuring Up e-Path® products is recognized prorata over the life of the
agreement.


9


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. As of May 31, 2009, the valuation allowance as compared to last year
remained unchanged at $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 Doubtful
Accounts


Credit to
our customers is determined on a customer-by-customer basis. Trade receivables
are carried at original invoice amount less an estimate made for the doubtful
receivables based on a review of all outstanding amounts on a monthly basis. We
determine 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 both May 31, 2009
and 2008 and is believed to be adequate for any exposure to loss.





Allowance for Excess and
Slow-Moving Inventory


We
continuously monitor our 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 us. Any slow-moving
or non-salable inventory identified is reserved or written down at that time.
The reserves of approximately $660,000 and $465,000 at May 31, 2009 and 2008 are
believed to be adequate to cover inventory loss exposure.





Income
Taxes


We
recognize deferred tax assets and liabilities based on the differences between
the financial statements carrying amounts and the tax basis of assets and
liabilities. We provide a valuation allowance for deferred tax assets if we
determine, based on the weight of available evidence, that it is more likely
than not that some or all of the deferred tax assets will not be realized. As of
May 31, 2009, a valuation allowances has been provided in the amount of $700,000
related to the tax benefit of our available federal and state Net
Operating Losses ( NOLs).
The carrying value of the net deferred tax asset assumes that we will be able to
generate sufficient taxable income in the future. We perform a comprehensive tax
review quarterly and if future levels of taxable income are not sufficient or
fail to materialize in the near term, management will adjust the valuation
allowance accordingly.





Year Ended May 31, 2009 vs.
Year Ended May 31, 2008





OVERVIEW





In fiscal
2009, we had a net loss of $1.1 million ($0.25 per share) compared to a net loss
of $0.8 million ($0.17 per share) in the prior year. Net revenue declined by
approximately 8% on a year-over-year basis due principally to an overall decline
in educational spending. Income from operations increased slightly, due to our
efforts to monitor and control costs offset by the lower revenue. Interest
expense declined by $0.6 million primarily as a result of lower average
outstanding debt and a decline in interest rates. We had a net loss before
income taxes of $0.7 million compared to loss of $1.3 million in the prior year.
We had an income tax expense of $0.4 million, which includes a $0.7 million
deferred tax valuation allowance, compared to an income tax benefit of $0.5
million in the prior year. These items are discussed in more detail
below.





NET
REVENUE





(In
      Thousands)
                    
                    Year Ended5/31/2009
                    
                    
                    5/31/2008
                    
                    
                    Variance
                    
                    
                    Variance %Test
      Preparation, Assessment and Instruction
                    
                    $
                    22,368
                    
                    
                    $
                    25,680
                    
                    
                    $
                    (3,312
                    )
                    
                    
                    -12.9
                    %College
      Preparation
                    
                    
                    14,056
                    
                    
                    
                    14,309
                    
                    
                    
                    (253
                    )
                    
                    
                    -1.8
                    %Literacy
                    
                    
                    443
                    
                    
                    
                    -
                    
                    
                    
                    443
                    
                    
                    Not ApplicableTotal
      Net Revenue
                    
                    $
                    36,867
                    
                    
                    $
                    39,989
                    
                    
                    $
                    (3,122
                    )
                    
                    
                    -7.8
                    %


10




Test Preparation,
Assessment, and Instruction


Revenue
for this product group was $22.4 million for fiscal year 2009 compared to $25.7
million in fiscal year 2008, representing a decrease of 12.9%. Testing and
Assessment revenue was $19.1 million, a decrease of 13.9% compared to the prior
year, while Instruction revenue was $3.3 million, down 6.4% from the prior
year.





The
product group’s overall decrease was due in part to an overall decline in
supplemental education spending for the past year. According to Association of
American Publishers, the supplemental education market for the twelve months
ended May 31, 2009 was down approximately 15% from the prior year. In spite
of current economic challenges, we are optimistic about the opportunities for
growth in this market niche and we will continue to invest in new proprietary
product development for this product group .





College
Preparation


Revenue
for this product group was $14.1 million, a decrease of 1.8% from the prior
year. Distribution revenue, which accounts for approximately 95% of the total
revenue within this group, was down 2.6% primarily due to the effects of
decreased spending due to school budget cuts. Revenue from our proprietary
products increased 15.7%, compared to the prior year due to an aggressive sales
and marketing plan in which we distinguished ourselves in the market with unique
skills-based supplements. We will continue to invest in new proprietary product
development as we are optimistic about the opportunities for growth in this
market niche.





Literacy


Revenue
for this product group, which was started in March 2009, was $443,000 for the
year. We feel that these new products allow us to enter a market niche for which
previously we did not have a product offering. We anticipate growing the number
of products within this group through additional distribution agreements and
in-house development.





COST OF
REVENUE





Cost of
Revenue for fiscal 2009 was s $22.9 million (62.2% of revenue) compared to $24.0
million (59.9% of revenue) in the prior year.





Cost of
Revenue consists of two components: direct costs and prepublication cost
amortization. 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, and (3) warehousing and
shipping costs for all products.





·
            Direct
      costs as a percentage of revenue for fiscal 2009 were 44.4%, an increase
      from 43.2% in the prior year. The percentage increase is primarily due to
      revenue mix, as College Preparation revenue increased from 35.8% of total
      revenue in fiscal 2008 to 38.1% in fiscal 2009. 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 nonproprietary 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 fiscal 2009, amortization expense was  $6.6
      million, compared to $6.7 million in the prior year. We expect the fiscal
      2010 amortization expense to be lower than fiscal 2009, as a result of
      reduced prepublication expenditures over the last several
      years.


11


SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES





(In
      Thousands)
                  
                  Year
      EndedMay
      31,2009
                  
                  
                  2008
                  
                  
                  Variance
                  
                  
                  Variance %Selling
      and Marketing Expense
                  
                  $
                  9,275
                  
                  
                  $
                  11,217
                  
                  
                  $
                  (1,942
                  )
                  
                  
                  -17.3
                  %General
      and Administrative Expenses
                  
                  
                  4,543
                  
                  
                  
                  4,741
                  
                  
                  
                  (198
                  )
                  
                  
                  -4.2
                  %Total
      Selling, General and Administrative Expenses
                  
                  $
                  13,818
                  
                  
                  $
                  15,958
                  
                  
                  $
                  (2,140
                  )
                  
                  
                  -13.4
                  %





Selling,
general and administrative (SG&A) expenses for fiscal 2009 were $13.8
million, a decrease of 13.4% from the prior year. As a percentage of revenue,
SG&A expenses for fiscal 2009 were 37.5%, a decrease of 2.4 percentage
points from the prior year.





Selling
and Marketing expenses for fiscal 2009 were $9.3 million, a decrease of $1.9
million from the prior year. The decrease is primarily a result of a reduction
in commission expense due to the decline in revenue, in addition to overall
general cost containment. As a percentage of revenue, the expense decreased from
28.1% in the prior year to 25.2% for fiscal 2009.





General
and Administrative expenses for the year were $4.5 million, a decrease of 4.2%,
as we continue to consistently monitor and control expenses.





INTEREST
EXPENSE





Interest
expense for the year was $677,000, a decrease of $610,000 from the prior year.
The change is primarily related to lower average outstanding debt and a decline
in interest rates. Included in interest expense are non-cash expenses of $5,000
and $148,000 as of May 31, 2009 and 2008 respectively related to the change in
the market value of the term loan interest swap agreement.





INCOME TAX
EXPENSE





For the
year ended May 31, 2009, the effective tax rate was 39.3%; however, this was
adjusted for a $0.7 million deferred tax valuation allowance, compared to 41.0%
in the prior year. The effective tax rate fluctuation of 1.7% is due to an
increase in the state tax rate apportionment as well as a change in the
temporary and permanent tax differences in book versus taxable
loss.





LIQUIDITY AND CAPITAL
RESOURCES





Net cash
provided by operating activities for fiscal 2009 was $7.1 million, compared to
$6.0 million in the prior year. Net cash provided by operating activities in
2009 was primarily provided by our profitability before depreciation and
amortization as well as decreases in accounts receivable, inventory, prepaid
expenses, offset by a net decrease in accounts payable and accrued expenses and
by a decrease in deferred revenue. Accounts receivable decreased as a result of
the decrease in overall revenues on a year-over-year basis. Inventory decreased
due to our continuing efforts to maintain lower inventory levels, offset by the
$0.8 million of Literacy product inventory. Prepaid expenses decreased due to an
increase in product sampling. Accounts payable decreased primarily due to the
timing of payment to vendors, and lower spending levels, and deferred revenue
decreased due to prorata revenue recognition of previously billed subscription
based electronic revenue.





Net cash
used in investing activities was $4.9 million for fiscal 2009, compared to $5.0
million in the prior year. Net cash used in investing activities for 2009
consisted primarily of expenditures for prepublication costs of $4.8
million.





Net cash
used in financing activities was $2.2 million for fiscal 2009, compared to $1.0
million in the prior year. Net cash used in financing activities for 2009,
consisted primarily of net repayments under our bank agreement for both the line
of credit and term loan.





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.


12


The
revolving line of credit provides for advances up to $10.0 million and expires
in March 2012. The interest rate on the revolving line of credit ranges 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 May 31, 2009, $6.2 million was outstanding under this facility, and $3.8
million was available for borrowing.





The term
loan was originally for $10 million and matures in December 2012. The term loan
provides for 20 equal quarterly payments of principal and interest, which began
on March 31, 2008. The term loan bears interest at the same rate as the
revolving line of credit for $3.75 million of the $7.5 million outstanding. In
May 2007, 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 to a variable rate. At May 31,
2009, $7.5 million was outstanding under this agreement.





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
believe that our cash and borrowing availability under our lines of credit,
together with cash generated from operations, will be sufficient to meet our
normal cash needs in 2010. We intend to continue investing in prepublication
costs for our proprietary products at our current spend level.





PRODUCT
DEVELOPMENT





P roduct
development expenditures in fiscal 2009 and 2008 were $4.8 million and $4.7
million, respectively. We continue to actively develop new and revised products.
We expect the current level of spending to continue in the future. Product
development expenditures in 2009 were primarily in the Testing, Assessment, and
Instruction product group as we continued to introduce new and revised products
within our existing states. The state test preparation market continues to grow,
as the states demand higher academic performance from students. Most states have
high-stakes testing requirements, which mean that students, teachers, and
administrators are rewarded for positive test performance or penalized for poor
performance. The support for state standards and testing has been enhanced
considerably by the mandates of the No Child Left Behind federal legislation.
Presently, we publish Test Preparation and Assessment products for various
grades in twelve states .





We intend
to focus our product development in the upcoming year on our core,
state-specific products. We intend to enter additional states and continue to
supplement existing states with additional products. We also plan to expand our
offering of web-based electronic products.





We will
continue to produce proprietary college preparation supplements and ancillary
materials. These products will not compete with products we distribute under our
existing publisher agreements and will be crafted as supplements to help
teachers and students with their college preparation studies.





We do not
have plans in the upcoming year to develop new products for our Literacy product
line, as we intend to grow this product group by offering additional products
from the existing publishers with whom we currently have distribution
agreements.





Our
strategic growth plan calls for an emphasis on the internal development of
products within the test preparation, assessment and Instruction product lines.
Under favorable circumstances, we would consider an acquisition to supplement
our growth plan.





OFF-BALANCE
SHEET ARRANGEMENTS





NONE


13


SEASONALITY





The
supplementary school publishing business is seasonal, cycling around the school
year that runs from September through May. Typically, the major marketing
campaigns, including mailings of new catalogs and focused sales efforts, begin
in September when schools reopen. This is the period when sample books are
provided free-of-charge for review to teachers for their purchase consideration.
General marketing efforts, including additional sales and marketing campaigns,
catalog mailings, and complimentary copies, continue throughout the school year.
Teachers and districts generally review and consider books throughout the school
year, make their decisions in the winter and spring, and place their purchase
requests with the district office or other administrative units at that time.
During spring and summer, these requests are processed and purchase orders are
send to publishers.





Each of
our product lines has its own seasonality. Excluding the Literacy product line
which was launched in March 2009, the average revenue percentage over the past
two full fiscal years by quarter is summarized in the table below.


1st
                
                
                2nd
                
                
                3rd
                
                
                4thQuarter
                
                
                Quarter
                
                
                Quarter
                
                
                QuarterEnded
                
                
                Ended
                
                
                Ended
                
                
                EndedAugust 31
                
                
                November 30
                
                
                February 28
                
                
                May 31Test
      Preparation, Assessment and Instruction
                
                
                29
                %
                
                
                26
                %
                
                
                21
                %
                
                
                24
                %College
      Preparation
                
                
                66
                %
                
                
                15
                %
                
                
                6
                %
                
                
                13
                %Total
      Revenue (Excluding Literacy Product Revenue)
                
                
                43
                %
                
                
                22
                %
                
                
                15
                %
                
                
                20
                %


14


ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




Table of
Contents


May 31,
2009 and 2008








Report
      of Independent Registered Public Accounting Firm
                    16Consolidated
      Financial Statements:Consolidated
      Balance Sheets as of May 31, 2009 and 2008
                    17Consolidated
      Statements of Operations for the years ended May 31, 2009 and
      2008
                    18Consolidated
      Statements of Changes in Stockholders’ Equity for the years ended May 31,
      2009 and 2008
                    19Consolidated
      Statements of Cash Flows for the years ended May 31, 2009 and
      2008
                    20Notes
      to Consolidated Financial Statements
                    21-30


15


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the
Board of Directors and Stockholders


Peoples
Educational Holdings, Inc.





We have
audited the accompanying consolidated balance sheets of Peoples Educational
Holdings, Inc. and Subsidiary as of May 31, 2009 and 2008, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for the years ended May 31, 2009 and 2008. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Peoples Educational
Holdings, Inc. and Subsidiary as of May 31, 2009 and 2008, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.





We were
not engaged to examine management’s assertion about the effectiveness of Peoples
Educational Holdings, Inc and Subsidiary’s internal control over financial
reporting as of May 31, 2009 included in this accompanying Annual Report under
the caption “Management’s Report on Internal Controls over Financial Reporting”
and, accordingly, we do not express an opinion thereon.





/s/ McGLADREY & PULLEN,
    LLP




Minneapolis,
Minnesota


August
18, 2009


16





CONSOLIDATED
BALANCE SHEETS
 (In
Thousands-Except Share Data)
 May 31,2009
                                        
                                        
                                        2008ASSETSCurrent AssetsCash
      and Cash Equivalents
                                        
                                        $
                                        42
                                        
                                        
                                        $
                                        53Accounts
      Receivable Net of Allowances for Doubtful Accounts and
    Returns
                                        
                                        
                                        2,842
                                        
                                        
                                        
                                        3,664Inventory
                                        
                                        
                                        4,219
                                        
                                        
                                        
                                        4,394Prepaid
      Expenses and Other
                                        
                                        
                                        323
                                        
                                        
                                        
                                        404Prepaid
      Marketing Expenses
                                        
                                        
                                        862
                                        
                                        
                                        
                                        829Deferred
      Income Taxes
                                        
                                        
                                        1,092
                                        
                                        
                                        
                                        1,024Total
      Current Assets
                                        
                                        
                                        9,380
                                        
                                        
                                        
                                        10,368Equipment
      - At Cost, Less Accumulated Depreciation of $2,241 and $1,994,
      respectively
                                        
                                        
                                        387
                                        
                                        
                                        
                                        566Other AssetsDeferred
      Prepublication Costs, Net
                                        
                                        
                                        13,466
                                        
                                        
                                        
                                        15,200Deferred
      Income Taxes
                                        
                                        
                                        1,006
                                        
                                        
                                        
                                        1,536Trademarks,
      Net
                                        
                                        
                                        170
                                        
                                        
                                        
                                        191Prepaid
      Expenses and Other
                                        
                                        
                                        273
                                        
                                        
                                        
                                        263Prepaid
      Marketing Expenses
                                        
                                        
                                        -
                                        
                                        
                                        
                                        495Total
      Other Assets
                                        
                                        
                                        14,915
                                        
                                        
                                        
                                        17,685Total Assets
                                        
                                        $
                                        24,682
                                        
                                        
                                        $
                                        28,619LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent LiabilitiesCurrent
      Maturities of Long Term Obligations
                                        
                                        $
                                        2,034
                                        
                                        
                                        $
                                        2,042Accounts
      Payable
                                        
                                        
                                        3,998
                                        
                                        
                                        
                                        4,906Accrued
      Compensation
                                        
                                        
                                        170
                                        
                                        
                                        
                                        247Other
      Accrued Expenses
                                        
                                        
                                        855
                                        
                                        
                                        
                                        347Deferred
      Revenue
                                        
                                        
                                        278
                                        
                                        
                                        
                                        475Total
      Current Liabilities
                                        
                                        
                                        7,335
                                        
                                        
                                        
                                        8,017Long
      Term Obligations, Less Current Maturities
                                        
                                        
                                        11,854
                                        
                                        
                                        
                                        14,046Total Liabilities
                                        
                                        
                                        19,189
                                        
                                        
                                        
                                        22,063Commitments and
    ContingenciesStockholders' EquityPreferred
      Stock, authorized 1,500,000 shares; none issued
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Common
      Stock, $0.02 par value; authorized 8,500,000 shares;
                                          issued:
      4,478,434 as of May 31, 2009 and 4,470,734 as of May 31,
    2008
                                        
                                        
                                        90
                                        
                                        
                                        
                                        89Additional
      Paid In Capital
                                        
                                        
                                        8,060
                                        
                                        
                                        
                                        8,013Accumulated
      Deficit
                                        
                                        
                                        (2,593
                                        )
                                        
                                        
                                        (1,482
                                        )Treasury
      Stock, 16,232 shares for both periods, at cost
                                        
                                        
                                        (64
                                        )
                                        
                                        
                                        (64
                                        )Total Stockholders' Equity
                                        
                                        
                                        5,493
                                        
                                        
                                        
                                        6,556Total Liabilities and Stockholders'
      Equity
                                        
                                        $
                                        24,682
                                        
                                        
                                        $
                                        28,619
  See Notes
to Consolidated Financial Statements


17


CONSOLIDATED
STATEMENTS OF OPERATIONS
 (In
Thousands, Except Per Share Data)
 Years EndedMay 31,2009
                                    
                                    
                                    2008Revenue,
      Net
                                    
                                    $
                                    36,867
                                    
                                    
                                    $
                                    39,989Cost
      of RevenueDirect
      Costs
                                    
                                    
                                    16,378
                                    
                                    
                                    
                                    17,256Prepublication
      Cost Amortization
                                    
                                    
                                    6,556
                                    
                                    
                                    
                                    6,704Total
                                    
                                    
                                    22,934
                                    
                                    
                                    
                                    23,960Gross
      Profit
                                    
                                    
                                    13,933
                                    
                                    
                                    
                                    16,029Selling,
      General and Administrative Expenses
                                    
                                    
                                    13,818
                                    
                                    
                                    
                                    15,958Income
      from Operations
                                    
                                    
                                    115
                                    
                                    
                                    
                                    71Nonoperating
      ExpensesOther
      Expenses, Net
                                    
                                    
                                    115
                                    
                                    
                                    
                                    95Interest
      Expense
                                    
                                    
                                    677
                                    
                                    
                                    
                                    1,287Total
                                    
                                    
                                    792
                                    
                                    
                                    
                                    1,382Loss
      Before Income Taxes
                                    
                                    
                                    (677
                                    )
                                    
                                    
                                    (1,311
                                    )Income
      Tax Expense (Benefit)
                                    
                                    
                                    434
                                    
                                    
                                    
                                    (537
                                    )Net
      Loss
                                    
                                    $
                                    (1,111
                                    )
                                    
                                    $
                                    (774
                                    )Net
      Loss per Common ShareBasic
      and Diluted
                                    
                                    $
                                    (0.25
                                    )
                                    
                                    $
                                    (0.17
                                    )Weighted-average
      Number of Common Shares OutstandingBasic
      and Diluted
                                    
                                    
                                    4,457
                                    
                                    
                                    
                                    4,445
 
 See Notes
to Consolidated Financial Statements


18





CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 (In
Thousands)
 
 AdditionalCommon
                    
                    
                    Paid-In
                    
                    
                    Accumulated
                    
                    
                    TreasuryStock
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    Stock
                    
                    
                    TotalBalance,
      May 31, 2007
                    
                    $
                    89
                    
                    
                    $
                    7,875
                    
                    
                    $
                    (708
                    )
                    
                    $
                    (64
                    )
                    
                    $
                    7,192Stock
      Options Exercised
                    
                    
                    -
                    
                    
                    
                    88
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    88Stock-Based
      Compensation
                    
                    
                    -
                    
                    
                    
                    50
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50Net
      Loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (774
                    )
                    
                    
                    -
                    
                    
                    
                    (774
                    )Balance,
      May 31, 2008
                    
                    
                    89
                    
                    
                    
                    8,013
                    
                    
                    
                    (1,482
                    )
                    
                    
                    (64
                    )
                    
                    
                    6,556Stock-Based
      Compensation
                    
                    
                    -
                    
                    
                    
                    39
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    39Issuance
      of Common Stock to Employees
                    
                    
                    1
                    
                    
                    
                    8
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9Net
      Loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,111
                    )
                    
                    
                    -
                    
                    
                    
                    (1,111
                    )Balance,
      May 31, 2009
                    
                    $
                    90
                    
                    
                    $
                    8,060
                    
                    
                    $
                    (2,593
                    )
                    
                    $
                    (64
                    )
                    
                    $
                    5,493
 
 See Notes
to Consolidated Financial Statements


19


CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (In
Thousands)
  Years
      EndedMay
      31,2009
                        
                        
                        2008Cash
      Flows From Operating ActivitiesNet
      Loss
                        
                        $
                        (1,111
                        )
                        
                        $
                        (774
                        )Adjustments
      to Reconcile Net Loss to Net Cash Provided by Operating
      ActivitiesDepreciation
                        
                        
                        284
                        
                        
                        
                        308Amortization
      of Prepublication Costs and Trademarks
                        
                        
                        6,591
                        
                        
                        
                        6,732Stock-Based
      Compensation
                        
                        
                        48
                        
                        
                        
                        50Market
      Value Adjustment of Interest Rate Swap
                        
                        
                        5
                        
                        
                        
                        148Deferred
      Income Taxes
                        
                        
                        462
                        
                        
                        
                        (534
                        )Changes
      in Assets and LiabilitiesAccounts
      Receivable
                        
                        
                        822
                        
                        
                        
                        297Inventory
                        
                        
                        175
                        
                        
                        
                        789Prepaid
      Expenses and Other
                        
                        
                        72
                        
                        
                        
                        37Prepaid
      Marketing Expenses
                        
                        
                        462
                        
                        
                        
                        437Accounts
      Payable and Accrued Expenses
                        
                        
                        (477
                        )
                        
                        
                        (1,678
                        )Deferred
      Revenue
                        
                        
                        (197
                        )
                        
                        
                        148Net
      Cash Provided By Operating Activities
                        
                        
                        7,136
                        
                        
                        
                        5,960Cash
      Flows From Investing ActivitiesPurchases
      of Equipment
                        
                        
                        (106
                        )
                        
                        
                        (177
                        )Expenditures
      for Intangibles
                        
                        
                        (15
                        )
                        
                        
                        (78
                        )Expenditures
      for Prepublication Costs
                        
                        
                        (4,821
                        )
                        
                        
                        (4,724
                        )Net
      Cash Used In Investing Activities
                        
                        
                        (4,942
                        )
                        
                        
                        (4,979
                        )Cash
      Flows From Financing ActivitiesNet
      Payments Under Line of Credit
                        
                        
                        (163
                        )
                        
                        
                        (465
                        )Proceeds
      From the Exercise of Stock Options
                        
                        
                        -
                        
                        
                        
                        88Principal
      Payments On Long Term Debt
                        
                        
                        (2,042
                        )
                        
                        
                        (649
                        )Net
      Cash Used In Financing Activities
                        
                        
                        (2,205
                        )
                        
                        
                        (1,026
                        )Net
      Decrease in Cash and Cash Equivalents
                        
                        
                        (11
                        )
                        
                        
                        (45
                        )Cash
      and Cash EquivalentsBeginning
      of Year
                        
                        
                        53
                        
                        
                        
                        98End
      of Year
                        
                        $
                        42
                        
                        
                        $
                        53Supplemental
      Cash Flow InformationCash
      Payments for:Interest
                        
                        $
                        692
                        
                        
                        $
                        1,180
 
 See Notes
to Consolidated Financial Statements


20


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Note
1. Nature of Business and Significant Accounting Policies




Nature of business: Peoples
Educational Holdings, Inc. (PEH), through its wholly owned subsidiary, Peoples
Education, Inc. (PE), publishes and markets its own supplementary educational
textbooks and materials for K –12 school market. The materials are predominantly
state-specific and standards-based, focused on state-required tests. PE
publishes its own proprietary, and distributes for other publishers, college
textbooks and supplements to the high school 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.





Principles of consolidation:
The consolidated financial statements include the accounts of PEH and its wholly
owned subsidiary, PE. All significant intercompany accounts and transactions
have been eliminated in consolidation.





Use of estimates: In preparing
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Significant items subject to estimate and assumptions include the
estimated lives of deferred prepublication costs, realization of net deferred
income tax assets, allowances for product returns and valuation allowances for
inventory, deferred prepublication costs and stock option accounting. Actual
results could differ from those estimates.




Cash and cash
equivalents:Cash and cash equivalents include money market
funds and other highly liquid investments.





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
May 31, 2009 and 2008 were approximately $520,000, and, $528,000, respectively.
These allowances are recorded at the time of revenue recognition, if the right
of return exists, and are recorded as a reduction of accounts receivable. The
Company recognizes shipping and handling revenues as part of revenue, and
shipping and handling expenses as part of cost of revenue on the statements of
operations. The Company recognizes its subscription based revenue on Measuring
Up e-Path® 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 the doubtful receivables 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 May 31, 2009 and 2008.




Major suppliers: The Company
has exclusive distribution agreements with two major college book publishers.
The loss of either of these distribution agreements would have a material
adverse effect on the Company’s revenue and operations. Revenue generated from
these distribution agreements accounted for the following percentage of total
revenue by year:





Year
      Ended May 31, 2009
                  
                  
                  36
                  %Year
      Ended May 31, 2008
                  
                  
                  33
                  %





Inventory: Inventory is stated
at the lower of cost or market, which is determined using the first-in,
first-out method. Inventory consists entirely of finished goods. Inventory on
the consolidated balance sheet is reflected net of reserves for write-downs or
non-salability of approximately $660,000 and $465,000 at May 31, 2009 and 2008,
respectively.





Deferred prepublication costs:
Prepublication costs include one-time expenses associated with developing and
producing new or revised proprietary products, which include all editorial
expenses, writing, page design and makeup, art and other permissions, prepress,
and any other costs incurred up to completion of the product. These
prepublication costs also include expenses incurred for other forms of product
development. Prepublication costs are capitalized and are amortized over either
a three or five year period (the estimated minimum lives of the related
publication) using the straight-line method beginning on the in-stock date of
the publication. At both May 31, 2009 and 2008, the Company had an allowance
against these assets of $159,000. If future net undiscounted cash flows are not
sufficient to realize the net carrying value of a specific publication, an
impairment charge is recognized.


21


Prepaid marketing expense: The
costs of catalogs and promotional materials, which 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 workbooks that will be
distributed to educators over the next three years. Sample workbooks are
expensed as they are distributed. Marketing expense, including samples, catalogs
and promotional materials was approximately the following:





(In
      Thousands)Year
      Ended May 31, 2009
                    
                    $
                    1,692Year
      Ended May 31, 2008
                    
                    $
                    2,157





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





(In
      Thousands)May
      31, 2009
                    
                    
                    May
      31, 2008Total
      Prepaid Balance
                    
                    $
                    862
                    
                    
                    $
                    1,324Less
      current portion
                    
                    
                    862
                    
                    
                    
                    829Non
      current balance
                    
                    $
                    -
                    
                    
                    $
                    495





Depreciation: Equipment is
recorded at cost. Depreciation is provided over the equipment’s estimated useful
lives of five to seven years using the straight-line method. Leasehold
improvements are depreciated over the lesser of the useful life of the asset or
the remaining life of the lease. Maintenance and repairs are charged to expense
as incurred, and major renewals or improvements are capitalized. On sale or
retirement of property and equipment, the related costs and accumulated
depreciation are removed from the accounts, and any gain or loss is included in
the results of current operations.





Accounting for long-lived assets:Long-lived assets, such as equipment, deferred prepublication costs, and
other assets with finite lives, are evaluated for impairment whenever events or
changes in circumstances indicate the carrying value of an asset may not be
recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”. This is accomplished by comparing their carrying value with the
estimated future undiscounted net cash flows expected to result from the use of
the assets, including cash flows from disposition. Should the sum of the
expected future undiscounted net cash flows be less than the carrying value, the
Company would recognize an impairment loss at that date. An impairment loss
would be measured by comparing the amount by which the carrying value exceeds
fair value (estimated discounted future cash flows or appraisal of assets) of
the long-lived assets. The Company has not experienced any such losses in the
years presented.





Income taxes: The Company
accounts for deferred taxes on an asset and liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss or tax credit carryforwards, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
basis.





Deferred
taxes are based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts more
likely than not to be realized. Income tax expense is the tax payable or
refundable for the year plus or minus the change during the year in deferred tax
assets and liabilities.





The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement 109” (“FIN 48”), on June 1, 2007 with no
material impact on the consolidated financial statements. The
Company  reviewed all income tax positions taken or that they expect
to take for all open tax years and determined that their income tax positions
are appropriately stated and supported for all open years.  Under the
Company’s  accounting policies they would recognize interest and
penalties accrued on unrecognized tax benefits as well as interest received from
favorable tax settlements within income tax expense. As of May 31, 2009, the
Company recorded no accrued interest or penalties related to uncertain tax
positions.


22


T he fiscal
tax years 2005 through 2008 remain open to examination by the Internal Revenue
Service and various state taxing jurisdictions to which the Company is subject.
The Company expects no significant change in the amount of unrecognized tax
benefit, accrued interest or penalties within the next
12 months .





Basic and diluted net loss per
share: Basic per share amounts are computed, generally, by dividing net
income (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 (see Note 8 for information on stock
options) unless their effect is anti-dilutive, thereby reducing the loss per
share or increasing the income per share. Due to the net losses in 2009, and
2008, diluted shares were the same as basic shares since the effect of options
and warrants would have been anti-dilutive. Options and warrants that were
excluded from the calculation of diluted shares, as their effect would have been
anti-dilutive were -0- as of May 31, 2009 and 3,179 as of May 31,
2008





Stock-based
compensation:The Company accounts for share based payments in
accordance with SFAS No. 123R “Share-Based Payment”, which requires
compensation cost relating to share-based payment transactions be recognized in
the financial statements based on the estimated fair value of the equity or
liability instrument issued. Share-based expense recognized includes:
(a) share-based expense for all awards granted prior to, but not yet vested
as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, and
(b) share-based expense for all awards granted subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123R.





The
Company uses the Black-Scholes option pricing model to estimate the fair value
of such awards. SFAS No. 123R requires forfeitures of share-based awards to
be estimated at the time of the grant and revised in subsequent periods, if
actual forfeitures differ from initial estimates. Therefore, expenses related to
share-based payments and recognized in the years ended May 31, 2009 and 2008
have been reduced for estimated forfeitures. Forfeitures were estimated based on
historical experience. See Note 8 to Consolidated Financial Statements for more
information regarding the assumptions used in estimating the fair value of stock
options.





Fair value of financial
instruments: The financial statements include the following financial
instruments and methods and assumptions used in estimating their fair values:
for cash and cash equivalents, the carrying amount is fair value, and for
accounts receivable, accounts payable, and line-of-credit and long-term debt,
the carrying amounts approximate their fair values due to either the short-term
nature of these instruments or the variable nature of the interest rate. A
portion of the term loan has been effectively converted to a fixed rate of
interest, see “Derivative financial instruments” below for further information
regarding the fair value of the related interest rate swap agreement.No separate comparison of
fair values versus carrying values is presented for the aforementioned financial
instruments, since their fair values are not significantly different than their
balance sheet carrying amounts. In addition, the aggregate fair values of all
financial instruments would not represent the underlying value of the
Company.




Derivative financial
instruments: SFAS No.133, “Accounting for Derivative Instruments and
Hedging Activities”, as amended, defines derivatives and requires that they be
carried at fair value on the balance sheet. On May 23, 2007 the Company entered
into an interest rate swap agreement to effectively convert $5.0 million of
their term loan from a variable rate to a fixed rate for a term of three years.
The change in market value of the interest rate swap is recognized on the
balance sheet within long term obligations and by a charge or credit to interest
expense. The change in the market value for the years ended May 31, 2009 and
2008 was an expense of approximately $5,000 and $148,000 respectively. The fair
value of the swap was $153,000 at May 31, 2009.




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




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


23




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




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




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




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




The
Company endeavors to use the best available information in measuring fair value.
Financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement. As of
May 31, 2009, the only financial liability accounted for at fair value on a
recurring basis is the interest rate swap included in other long-term
liabilities. The Company has determined that the fair value of the swap, based
on LIBOR and swap rates, falls within Level 2 in the fair value hierarchy.
The application of SFAS 157 did not change the Company’s valuation
techniques from prior periods.





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





In
December 2007, the FASB issued SFAS No. 141R, Business Combinations,
which changes how the Company would account for business acquisitions.
SFAS No. 141R requires the acquiring entity in a business combination
to recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of this standard will, among other things,
impact the determination of acquisition-date fair value of consideration paid in
a business combination (including contingent consideration); exclude transaction
costs from acquisition accounting; and change accounting practices
for  acquisition-related restructuring costs, in-process research and
development, indemnification assets, and tax benefits. For the Company,
SFAS No. 141R is effective for business combinations and adjustments
to an acquired entity’s deferred tax asset and liability balances occurring
after December 31, 2008. The Company will apply the provisions of this
standard to business combinations on a prospective basis.





I n
May 2009, the FASB issued SFAS No. 165,  “Subsequent Events”. The
provisions of SFAS No. 165 set forth the period after the balance sheet date
during which management should evaluate events or transactions that may have
occurred for potential recognition or disclosure in the financial statements,
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS No. 165 is effective for the
Company’s quarter ended August 31, 2009, although early adoption is
permitted .





Note
2. 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 undiscounted cash
flows. If future undiscounted cash flows are not sufficient to support the net
carrying value of the asset, an impairment charge will be recognized. At both
May 31, 2009 and 2008 the Company had an allowance of $159,000, reducing
prepublication costs to their estimated net realizable value.


24


The
activities in deferred prepublication costs were as follows:


(In
      Thousands)Year
      EndedMay
      31,2009
                    
                    
                    2008Balance,
      Beginning
                    
                    $
                    15,200
                    
                    
                    $
                    17,180Prepublication
      Cost Additions
                    
                    
                    4,821
                    
                    
                    
                    4,724Amortization
      Expense
                    
                    
                    (6,555
                    )
                    
                    
                    (6,704
                    )Balance,
      Ending
                    
                    $
                    13,466
                    
                    
                    $
                    15,200





The
future amortization expense of deferred prepublication costs is estimated to be
as follows:





(In Thousands)For
      the year ending May 31,2010
                        
                        $
                        5,3772011
                        
                        
                        4,0212012
                        
                        
                        2,4892013
                        
                        
                        1,0832014
      and thereafter
                        
                        
                        496





Future
estimated amortization expense may increase as the Company continues its
investments in additional deferred prepublication costs.





Note 3. Trademarks





Costs are
capitalized and amortized over their estimated lives, generally 15 years, using
the straight-line method. The activity and balances were as
follows:





(In
      Thousands)Year
      EndedMay
      31,2009
                        
                        
                        2008Balance,
      Beginning
                        
                        $
                        191
                        
                        
                        $
                        141Additions
                        
                        
                        15
                        
                        
                        
                        78Amortization
      Expense
                        
                        
                        (36
                        )
                        
                        
                        (28
                        )Balance,
      Ending
                        
                        $
                        170
                        
                        
                        $
                        191





Note
4. 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.





T he
revolving line of credit provides for advances up to $10.0 million and expires
in March 2012. The interest rate on the revolving line of credit ranges 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 May 31, 2009, $6.2 million was outstanding under this facility at an interest
rate of 2.5%, and $3.8 million was available for borrowing .





T he term
loan was originally for $10 million and matures in December 2012. The term loan
provides for 20 equal quarterly payments of principal and interest which began
on March 31, 2008. The term loan bears interest at the same rate as the
revolving line of credit for $3.75 million of the $7.5 million outstanding. In
May 2007, 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 the Company’s funded debt to EBITDA ratio.
After the three-year period, the interest rate reverts back to a variable rate.
At May 31, 2009 the interest rate on the fixed portion of the term loan was 7.6%
and 2.5% on the variable portion. At May 31, 2009, $7.5 million was outstanding
under this agreement .


25


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.





Long-term
debt at May 31, 2009 and 2008 consisted of the following:





(In
      Thousands)2009
                    
                    
                    2008Obligations
      under capital leases (Note 7)
                    
                    $
                    34
                    
                    
                    $
                    76Market
      value of interest rate swap
                    
                    
                    153
                    
                    
                    
                    148Notes
      payable under line of credit (see above)
                    
                    
                    6,201
                    
                    
                    
                    6,364Term
      Loan (see above)
                    
                    
                    7,500
                    
                    
                    
                    9,50013,888
                    
                    
                    
                    16,088Less
      current maturities
                    
                    
                    (2,034
                    )
                    
                    
                    (2,042
                    )$
                    11,854
                    
                    
                    $
                    14,046





Approximate
maturities of long-term debt at May 31, 2009, are as follows:





(In
      Thousands)Years
      ending May 31:2010
                    
                    $
                    2,0342011
                    
                    
                    2,1522012
                    
                    
                    8,2022013
                    
                    
                    1,500$
                    13,888





Note
5. Net Revenue by Product Group





The
Company operates as one business segment, which historically had two product
groups. In March 2009, the Company added a third product group, Literacy. The
Company’s revenues, net of returns, by product group are as
follows:


(In Thousands)Year EndedMay 31,2009
                                      
                                      
                                      2008Test Preparation, Assessment and
      Instruction
                                      
                                      $
                                      22,368
                                      
                                      
                                      $
                                      25,680College Preparation
                                      
                                      
                                      14,056
                                      
                                      
                                      
                                      14,309Literacy
                                      
                                      
                                      443
                                      
                                      
                                      
                                      -Total Net Revenue
                                      
                                      $
                                      36,867
                                      
                                      
                                      $
                                      39,989





Note
6. Income Taxes





Federal
and state income tax expense (benefit) consists of the
following:




(In
      Thousands)Year
      EndedMay
      31,2009
                      
                      
                      2008Current
                      
                      $
                      (28
                      )
                      
                      $
                      (3
                      )Deferred
                      
                      
                      462
                      
                      
                      
                      (534
                      )Total
                      
                      $
                      434
                      
                      
                      $
                      (537
                      )




26


For the
years ended May 31, 2009, and 2008, the income tax provision (benefit) differs
from the amount of income tax expense (benefit) determined by applying the U.S.
federal income tax rate to pretax loss, due to the following:




(In
      Thousands)Year
      EndedMay
      31,2009
                        
                        
                        2008Computed
      federal income tax benefit at statutory rate
                        
                        $
                        (237
                        )
                        
                        $
                        (460
                        )State
      income tax benefit, net of federal effect
                        
                        
                        (23
                        )
                        
                        
                        (60
                        )Effect
      of lower rates
                        
                        
                        6
                        
                        
                        
                        13Deferred
      tax valuation allowance
                        
                        
                        700
                        
                        
                        
                        -Other,
      including nondeductible expenses, net
                        
                        
                        (12
                        )
                        
                        
                        (30
                        )$
                        434
                        
                        
                        $
                        (537
                        )




The
Company established a  valuation allowance in accordance with the
provisions of FAS No. 109, “Accounting for
Income Taxes”. In evaluating
its ability to realize the net deferred tax assets, the Company considers all
available evidence, both positive and negative, including their past operating
results, tax planning strategies and forecasts of future taxable income. In
considering these sources of taxable income the Company made certain assumptions
and judgments that are based on the plans and estimates used to manage their
underlying businesses. A valuation allowance has been provided for deferred tax
assets based on past operating results, expected timing of the reversals of
existing temporary book/tax basis differences, alternative tax strategies and
projected future taxable income. Although realization is not assured for the
remaining deferred tax assets, the Company believes it is more likely than not
that they will be realized in the future. During the year ended May 31, 2009,
the Company recorded a valuation allowance of $0.7 million. The valuation
allowance relates to uncertainty in the realizability of certain federal and
state deferred tax assets.


27





Net
deferred tax assets and liabilities are comprised of the following:




(In
      Thousands)May
      31,2009
                        
                        
                        2008Deferred
      tax assets:Allowance
      for doubtful accounts
                        
                        $
                        15
                        
                        
                        $
                        15Allowance
      for sales returns
                        
                        
                        201
                        
                        
                        
                        203Allowance
      for prepublication costs
                        
                        
                        61
                        
                        
                        
                        61Inventory
                        
                        
                        308
                        
                        
                        
                        244Federal
      and state net operating loss carryforward
                        
                        
                        2,459
                        
                        
                        
                        2,078Other
                        
                        
                        37
                        
                        
                        
                        38Deferred
      prepublication costs
                        
                        
                        -
                        
                        
                        
                        254Deferred
      tax valuation allowance
                        
                        
                        (700
                        )
                        
                        
                        -2,381
                        
                        
                        
                        2,893Deferred
      tax liabilities:Equipment
                        
                        
                        (25
                        )
                        
                        
                        (49
                        )Allowance
      for purchase returns
                        
                        
                        (154
                        )
                        
                        
                        (157
                        )Prepaid
      expenses
                        
                        
                        (104
                        )
                        
                        
                        (127
                        )(283
                        )
                        
                        
                        (333
                        )Net
      deferred tax assets
                        
                        $
                        2,098
                        
                        
                        $
                        2,560




The
aforementioned net deferred tax assets are reflected on the consolidated balance
sheets as follows:




(In
      Thousands)May,
      312009
                      
                      
                      2008Current
      assets
                      
                      $
                      1,092
                      
                      
                      $
                      1,024Noncurrent
      assets
                      
                      
                      1,006
                      
                      
                      
                      1,536Net
      deferred tax assets
                      
                      $
                      2,098
                      
                      
                      $
                      2,560




As of May
31, 2009, the Company had approximately $6.0 million of federal net operating
loss (NOL) carryforwards available to reduce federal taxable income which begin
to expire May 31, 2010 through May 31, 2029.





As of May
31, 2009, the Company had approximately $7.4 million of state net operating loss
(NOL) carryforwards available to reduce state taxable income which begin to
expire May 31, 2012 through May 31, 2016.





In
addition, future utilization of NOL carryforwards are subject to certain
limitations under Section 382 of the Internal Revenue Code. This section
generally relates to a 50 percent change in ownership of a company over a
three-year period.  As the Company has not performed an analysis of their
NOL’s under Section 382, it is unknown whether the future utilization of the NOL
will be limited. Accordingly, the Company’s ability to use NOL tax attributes
may be limited.





Note
7. Commitments


Operating leases: The Company
leases its various facilities and certain office equipment under non-cancelable
operating lease arrangements.


28


As of May
31, 2009, future minimum rental obligations under operating leases are as
follows:





(In
      Thousands)Years
      ending May 31:2010
                      
                      
                      5182011
                      
                      
                      4562012
                      
                      
                      4572013
                      
                      
                      4562014
                      
                      
                      465Thereafter
                      
                      
                      196$
                      2,548





Rent
expense under operating leases was $616,000 and $666,000 for the years ended May
31, 2009 and 2008 respectively.





Capital leases:The Company
has a capital lease for the use of certain office equipment. The lease term is
four years. The effective interest rate on the obligation is 8.4%. Lease
payments of $34,000, including $1,000 of interest, will be paid during fiscal
year ended May 31, 2010.





A summary
of equipment under capital leases is as follows:





(In
      Thousands)
                      
                      May
      31,2009
                      
                      
                      2008Office
      Equipment
                      
                      $
                      160
                      
                      
                      $
                      160Less
      accumulated depreciation
                      
                      
                      123
                      
                      
                      
                      90$
                      37
                      
                      
                      $
                      70





Employment
agreements:  The Company has employment agreements with certain
executive officers, which provide severance benefits in the event the Company,
without cause, terminates such officers.





Note
8. Stock Options and Warrants





In
connection with a stock offering in 2005, the underwriter was granted warrants
to purchase 50,000 shares of Company common stock at an exercise price of $7.56
per share. Such warrants became exercisable in June 2006, and expire in June
2010.





The 1998
Stock Option Plan (1998 Plan) permitted the granting of incentive stock options
and nonqualified options. A total of 1,000,000 shares of the Company common
stock were reserved for issuance pursuant to the options granted under the 1988
Plan. Options issued under the 1988 Plan were generally granted with an exercise
price equal to the fair market value of the Company’s stock on the date of grant
and expired up to 10 years from the date of grant. These options generally
vested and became exercisable over a three-year period. The 1998 Plan has
expired and no additional options may be granted under the 1998 Plan. Options
outstanding under the 1998 Plan continue to be exercisable in accordance with
their terms. At May 31, 2009, options to purchase 770,636 shares were
outstanding under the 1998 Plan.





On
January 8, 2009, the shareholders approved the adoption of the 2009 Stock Option
Plan (2009 Plan). The 2009 Plan permits the granting of incentive stock options
meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended and nonqualified options that do not meet the requirements of Section
422. A total of 250,000 shares of the Company common stock have been reserved
for issuance pursuant to options granted under the 2009 Plan. Options issued
under the 2009 Plan are generally granted with an exercise price equal to the
fair market value of the Company’s stock on the date of grant and expire up to
10 years from the date of grant. These options generally vest and become
exercisable over a three-year period. At May 31, 2009, options to purchase
12,000 shares were outstanding and 238,000 shares were available for grant under
the 2009 Plan.





Stock-based
compensation expense of $39,000 and $50,000 was recognized for the years ended
May 31, 2009 and 2008 respectively.


29


The
following weighted average assumptions were used in the Black-Scholes
option-pricing model for the indicated years:





2009
                                
                                2008Dividend
      Yield
                                
                                
                                0.0%
                                
                                
                                0.0%Risk
      Free Interest Rate
                                
                                
                                1.60%
                                
                                2.7%
      to 6.3%Expected
      Life of Options
                                
                                5
      Years
                                
                                5
      to 10 YearsExpected
      Volatility Factor
                                
                                
                                36%
                                
                                32%
      to 55%





E xpected
volatility is based on the historical volatility of the Company’s share price
for the period prior to option grant equivalent to the expected life of the
options. The expected term is based upon management’s estimate of when the
option will be exercised which is generally consistent with the term of the
option. The risk-free interest rate for periods within the contractual life of
the option is based upon the U.S. Treasury yield curve in effect at the time of
grant .





A summary
of stock option activity is as follows:





Weighted-
                      
                      
                      
                      
                      
                      Weighted-Average
                      
                      
                      
                      
                      
                      AverageGrant
                      
                      
                      
                      
                      
                      ExerciseFair Value
                      
                      
                      Shares
                      
                      
                      PriceOutstanding
      at May 31, 2008
                      
                      $
                      1.69
                      
                      
                      
                      830,136
                      
                      
                      $
                      3.41Granted
                      
                      
                      0.61
                      
                      
                      
                      22,000
                      
                      
                      
                      1.80Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      2.37
                      
                      
                      
                      (64,500
                      )
                      
                      
                      4.27Outstanding
      at May 31, 2009
                      
                      
                      1.97
                      
                      
                      
                      787,636
                      
                      
                      
                      3.29Exercisable
      at May 31, 2009
                      
                      $
                      2.07
                      
                      
                      
                      691,217
                      
                      
                      $
                      3.31




At May
31, 2009, there was approximately $53,000 of unrecognized compensation cost
related to share-based payments, which is expected to be recognized over a
weighted-average period of three years.





Note
9. Retirement Plan





The
Company maintains a defined contribution plan subject to the provisions of the
Employee Retirement Income Security Act (ERISA). All employees are eligible to
participate following the completion of six months of service. Eligible
participants may elect to contribute a portion of their compensation to the
plan, subject to the Internal Revenue Code limitations for 401(k) plans.
Participants direct the investment of their contributions into various
investment options offered by the plan. The Company may make discretionary
contributions to the plan in which all eligible employees will receive a portion
of the Company’s contribution. There were no discretionary contributions made by
the Company to the plan during the years ended May 31, 2009 and
2008.


30





ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





NONE





ITEM
      9A(T).
            CONTROLS
      AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We have
established disclosure controls and procedures to ensure that material
information relating to the Company is made known to the officers who certify
the financial statements and to other members of senior management and the Audit
Committee of the Board.





We
conducted an evaluation, under the supervision and with the participation of our
chief executive officer and chief financial officer, of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934). Based on this evaluation, our chief
executive officer and chief financial officer have concluded that, as of
May 31, 2009, our disclosure controls and procedures are
effective.





Changes
in Internal Control Over Financial Reporting





There
have been no changes in our internal controls over financial reporting during
the fourth quarter of  the fiscal year ended May 31, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





Management’s
Report on Internal Controls over Financial Reporting


The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal control system
was designed to provide reasonable assurance to our management and Board of
Directors regarding the preparation and fair presentation of published financial
statements.





All
internal controls over financial reporting, no matter how well designed, have
inherent limitations, including the possibility of human error and the
circumvention or overriding of controls. Therefore, even effective internal
control over financial reporting can provide only reasonable assurance with
respect to financial statement preparation and presentation. Further, because of
changes in conditions, the effectiveness of internal controls over financial
reporting may vary over time.





Our
management, including our chief executive officer and chief financial officer,
assessed the effectiveness of our internal control over financial reporting as
of May 31, 2009. In making its assessment of internal control over
financial reporting, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control—Integrated
Framework.





Under SEC
rules, management may assess its internal control over financial reporting as
effective if there are no identified material weaknesses at the reporting date.
A material weakness is “a deficiency, or a combination of deficiencies (within
the meaning of PCAOB Auditing Standard No. 5), in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.”  Controls for financial close and
reporting were in place as of year-end and were found to be operating
effectively, based on management testing of key controls.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.


31


ITEM
      9B.
            OTHER
      INFORMATION





NONE


PART
III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The
following individuals constitute the current directors and executive officers of
the Company:





Name
              
              Age
              
              Position with the
CompanyG.
      Thomas Ahern
              
              51
              
              Director
      (1)Brian
      T. Beckwith
              
              53
              
              Director,
      President and Chief Executive OfficerJohn
      C. Bergstrom
              
              49
              
              Director
      (1)(2)(3)Richard
      J. Casabonne
              
              64
              
              Director
      (3)Anton
      J. Christianson
              
              57
              
              Director
      (2)(3)Michael
      L. DeMarco
              
              45
              
              Executive
      Vice President and Chief Financial OfficerJames
      P. Dolan
              
              60
              
              Director
      (1)(2)Diane
      M. Miller
              
              57
              
              Director,
      Co-founder, Executive Vice President and Chief Creative
      OfficerJames
      J. Peoples
              
              72
              
              Director,
      Co-founder, Chairman, and Senior
Advisor





(1)  Member
of Audit Committee


(2)  Member
of Compensation Committee


(3)  Member
of Governance Committee





G. Thomas Ahern has been a
Director of the Company since 2006. He has been CEO of Coughlan Companies and
Capstone Publishers, a major publisher of children’s books through their
imprints; Capstone Press, Compass Point Books, Picture Window and Stone Arch
Books, since 2007. Mr. Ahern has more than 20 years of executive management,
technology and sales experience. Prior to joining Coughlan Companies, he served
as CEO of SwiftKnowledge, a web-based business intelligence software company
from 2001 to 2007. He also was Executive Vice President, Sales and Marketing for
PLATO Learning (NASDAQ: TUTR), a highly successful educational software company
based in Bloomington, MN, from 1990 to 2001. Mr. Ahern is a Communications
graduate of Northwestern University (BA 1980).





Brian T. Beckwith has been a
Director of the Company since 2001, and has served as President and Chief
Executive Officer of the Company since December 2001. Mr. Beckwith has over 25
years of publishing industry experience, including positions in market research,
consumer marketing, operations, business development, and general management.
Prior to joining the Company, he was a principal in Beckwith & Associates, a
publishing advisory firm specializing in start-ups, acquisitions, and Internet
business development. From 1998 to 2000, he was President and Chief Operating
Officer of Grolier, Inc., a $450 million publisher and direct marketer of
children’s books and other educational products. From 1991 to 1997, Mr. Beckwith
served in various senior management positions with K-III (Primedia) including
President and Chief Executive Officer of the Special Interest Magazine Group.
Mr. Beckwith has also held management positions with News Corporation, CBS
Magazines, and Ziff-Davis Publishing. He holds a B.A. summa cum laude from New
England College and an M.B.A. from Fordham University’s Graduate School of
Business.





John C. Bergstromhas been
aDirector of the
Company since 1998. He has been a partner in RiverPoint Investments, Inc., a St.
Paul, MN-based business and financial advisory firm since 1995. Mr. Bergstrom is
also a director of Dolan Media Co. (NYSE:DM), Tecmark, Inc., Instrumental, Inc.,
JobDig, Inc., Great River Communications Corp., Creative Publishing Solutions,
Inc., and IDLoyalty, LLC. Mr. Bergstrom is a graduate of Gustavus Adolphus
College, B.A., and the University of Minnesota, M.B.A.





Richard J. Casabonnehas been
aDirector of the
Company since 2002. He is the founder and President of Casabonne Associates,
Inc., an educational research, strategy and development firm, since 1972. From
October 2003 to May 2004, he served as Chief Executive Officer of TestU, an
instructional assessment company based in New York City. From July 2001 to April
2002, Mr. Casabonne also served as the President of the Education and Training
Group of Leapfrog Enterprises, Inc. where he also served as a director. He is a
past President of AEP (The Association of Educational
Publishers).


32


Anton J. Christiansonhas been
aDirector of the
Company since 1998. He is the Chairman of Cherry Tree Companies, a firm involved
in investment management, investment banking, and wealth management, since Mr.
Christianson is a General Partner of School Power LP, an investor in Peoples
Educational Holdings and a Cherry Tree affiliate. He serves as a director of
AmeriPride Services, Inc., Dolan Media Co. (NYSE:DM), Titan Machinery, Inc.
(NASDAQ: TITN) and Arctic Cat, Inc. (NASDAQ:ACAT). Mr. Christianson is a
graduate of St. John’s University, Collegeville, Minnesota, and earned an M.B.A.
from Harvard Business School.





Michael L. DeMarcohas served
as, Chief Financial Officer of the Company since May 2002 and Executive Vice
President since June 2007, and previously served as Vice President of Finance
and Operations of the Company from May 1999 to April 2002. Mr. DeMarco has over
20 years of experience in finance and accounting. Prior to joining the Company,
Mr. DeMarco was Controller for Health Tech, a health care products company. He
was also a Controller for Omnitech Corporate Solutions, a computer integration
and software development company. Mr. DeMarco also spent four years as an
auditor with the public accounting firm of Ernst and Young. Mr. DeMarco is a
graduate of Pace University in New York and is a Certified Public
Accountant.





James P. Dolanhas been a
Director of the Company since 1999. Since 1992, he has been Chairman, President
and Chief Executive Officer and founder of Dolan Media Company, (NYSE:DM)
Minneapolis, a specialized business information company that publishes daily and
weekly business newspapers in 21 U.S. markets; operates a number of legal
services businesses including Counsel Press, the nation’s largest appellate
legal services provider, and National Default Exchange, a leading provider of
mortgage default processing services to the foreclosure bar. From 1989 to 1993,
he was Executive Vice President of the Jordan Group, New York City, an
investment bank specializing in media. He previously held executive positions
with News Corporation Ltd. in New York, Sun-Times Company of Chicago, and Centel
Corp., Chicago, and was an award-winning reporter and editor at newspapers in
San Antonio, New York, Chicago, Sydney, and London. He serves as a director of
several private companies and is a journalism graduate of the University of
Oklahoma.





Diane M. Millerhas been a
Director of the Company since 1998. She is co-founder and has served as
Executive Vice President of the Company since 1989, and Chief Creative Officer
since 2005. Her educational publishing experience encompasses general
management, product development, strategic planning, market research, writing,
curriculum development, editorial, marketing, production, and professional
development. Prior to forming the Company, Ms. Miller was publisher of Globe
Books, a remedial, supplementary education publisher owned by Simon and
Schuster. Prior to joining Globe Books, she was Senior Editor of Reading for
Harcourt Brace Jovanovich. Ms. Miller has classroom and research experience, as
well, and is a graduate with honors of Centre College of Kentucky.





James J. Peopleshas been
aDirector of the
Company since 1998. He is a co-founder and serves as Chairman. Effective
December 2001, Mr. Peoples resigned as CEO and President of the Company and
remains Chairman of the Board. He has over 40 years of experience in schoolbook
publishing, including positions in sales, sales management, corporate staff
assignments, and general management. Prior to forming PE, Mr. Peoples was
President of the Prentice Hall School Group for seven years and served three
years as Group President of the $350 million Simon and Schuster Educational
Group. Mr. Peoples is a graduate of Oregon State University.





Board
Committees.





The Board
of Directors has established an Audit Committee, a Governance Committee and a
Compensation Committee.





The Audit
Committee is currently composed of Messrs. Bergstrom (Chair), Ahern, and Dolan.
The committee meets with our independent registered public accounting firm and
representatives of management to review the internal and external financial
reporting of the Company, considers comments by the auditors regarding internal
controls and accounting procedures and management's response to these comments,
and approves any material non-audit services to be provided by our independent
registered public accounting firm. Our Board of Directors has determined that
Mr. Bergstrom is an audit committee financial expert as defined in Item
407(d)(5) of Regulation S-K. He is independent pursuant to the independence
standards promulgated by the NASDAQ Stock Market.


33


The
Compensation Committee is currently composed of Messrs. Bergstrom (Chair),
Christianson, and Dolan. The Compensation Committee reviews and makes
recommendations to the Board of Directors regarding salaries, compensation,
stock options, and benefits of officers and employees.





The
Governance Committee is currently composed of Messrs. Christianson (Chair),
Bergstrom, and Casabonne. The Governance Committee reviews and makes
recommendations to the Board regarding corporate governance policies and
procedures, reviews our Code of Conduct and compliance thereof, identifies and
makes recommendations to the Board regarding candidates for election as
directors, and evaluates the Board of Directors.





Section
16(a) Beneficial Ownership Reporting Compliance





Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires the Company’s
officers and directors, and persons who own more than 10% of a registered class
of the Company’s equity securities, to file reports of ownership on Form 3
and changes in ownership on Form 4 or Form 5 with the SEC. Such
officers, directors and 10% stockholders are also required by SEC rules to
furnish the Company with copies of all Section 16(a) forms they
file.





B ased
solely on its review of the copies of such forms received by it, or written
representations from certain reporting persons, the Company believes that,
during the fiscal year ended May 31, 2009, all required Section 16(a)
filings applicable to its officers, directors and 10% stockholders were timely
made, with the exception of the following reports that were filed
late:  a Form 4 by each of G. Thomas Ahern, John C. Bergstrom,
Richard J. Casabonne, Anton J. Christianson, James P.Dolan and James J. Peoples
reporting the grant of a stock option, and a Form 5 by Brian T. Beckwith
reporting stock purchases made during the prior fiscal year that were
exempt from Form 4 reporting requirements .




Code of Ethics





We have
adopted a Code of Business Conduct and Ethics that applies to all of our
directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer. The Code of
Business Conduct and Ethics is posted on our website at www.peopleseducation.com
under the caption Investor Relations.





We intend
to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of the Code of Business
Conduct and Ethics by posting such information on our website, at the address
and location specified above and, to the extent required by the listing
standards of the NASDAQ Capital Market, by filing a Current Report on
Form 8-K with the SEC, disclosing such information.


34





ITEM
      11.
            EXECUTIVE
      COMPENSATION





Summary
of Cash and Certain Other Compensation





The
following table shows, for fiscal 2009 and 2008, the compensation earned by or
awarded to Brian T. Beckwith, the Company’s Chief Executive Officer and
President; Michael L. DeMarco, the Company’s Executive Vice President and Chief
Financial Officer; and Diane M. Miller, Executive Vice President and Chief
Creative Officer, the only other executive officer of the Company (collectively
with Mr. Beckwith and Mr. DeMarco, the “Named Executives”).





Summary
Compensation Table for Fiscal Year Ended May 31, 2009 and 2008





Non-EquityIncentitive
                                                                                  
                                                                                  
                                                                                  (a)
                                                                                  
                                                                                  
                                                                                  (b)Plan
                                                                                  
                                                                                  
                                                                                  Option
                                                                                  
                                                                                  
                                                                                  All
      OtherName
      and Principal Position
                                                                                  
                                                                                  Year
                                                                                  
                                                                                  Salary
                                                                                  
                                                                                  
                                                                                  Compensation
                                                                                  
                                                                                  
                                                                                  Awards
                                                                                  
                                                                                  
                                                                                  Compensation
                                                                                  
                                                                                  
                                                                                  TotalBrian
      T. Beckwith
                                                                                  
                                                                                  2009
                                                                                  
                                                                                  $
                                                                                  310,800
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  6,086
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,160
                                                                                  
                                                                                  
                                                                                  $
                                                                                  319,046President
      and Chief Executive Officer
                                                                                  
                                                                                  2008
                                                                                  
                                                                                  $
                                                                                  300,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  12,131
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,160
                                                                                  
                                                                                  
                                                                                  $
                                                                                  314,291Michael
      L. DeMarco
                                                                                  
                                                                                  2009
                                                                                  
                                                                                  $
                                                                                  207,200
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3,043
                                                                                  
                                                                                  
                                                                                  $
                                                                                  831
                                                                                  
                                                                                  
                                                                                  $
                                                                                  211,074Executive
      Vice President and Chief Financial
      Officer
                                                                                  
                                                                                  2008
                                                                                  
                                                                                  $
                                                                                  200,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,825
                                                                                  
                                                                                  
                                                                                  $
                                                                                  850
                                                                                  
                                                                                  
                                                                                  $
                                                                                  203,675Diane
      M. Miller
                                                                                  
                                                                                  2009
                                                                                  
                                                                                  $
                                                                                  172,774
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3,043
                                                                                  
                                                                                  
                                                                                  $
                                                                                  9,195
                                                                                  
                                                                                  
                                                                                  $
                                                                                  185,012Executive
      Vice President and Chief Creative
      Officer
                                                                                  
                                                                                  2008
                                                                                  
                                                                                  $
                                                                                  162,098
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,825
                                                                                  
                                                                                  
                                                                                  $
                                                                                  9,195
                                                                                  
                                                                                  
                                                                                  $
                                                                                  174,118





(a)
            These
      amounts reflect the expense recognized for financial statement reporting
      purposes for fiscal 2009 and 2008 in accordance with SFAS No. 123R,
      unreduced by the estimated service-based forfeitures. The other
      assumptions used in calculating these amounts are set forth in Note 8 to
      the Consolidated Financial Statements for the fiscal year ended May 31,
      2009.


(b)
            The
      named executives receive a car allowance and the non-business portion of
      this allowance is included as taxable income to the named executive. In
      addition, the Company provided supplemental life insurance to Ms. Miller.
      The policy premium of $1,995 for both 2009 and 2008 was taxable income to
      Ms. Miller.




35


Outstanding
Equity Awards at May 31, 2009





The
following table provides a summary of equity awards outstanding for each of the
Named Executives as of the end of fiscal 2009:





Option AwardsNumber of SecuritiesUnderlyingUnexercised Options
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    OptionExercise
                                                                                                                                    
                                                                                                                                    Option(#)
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (#)
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    Price
                                                                                                                                    
                                                                                                                                    ExpirationNamed Executive
                                                                                                                                    
                                                                                                                                    Exercisable
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    Unexercisable
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    ($)
                                                                                                                                    
                                                                                                                                    DateBrian T. Beckwith
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    10,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    10,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (1
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3.05
                                                                                                                                    
                                                                                                                                    4/10/2013President
    and
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    125,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3.00
                                                                                                                                    
                                                                                                                                    1/1/2012Chief Executive
      Officer
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    33,331
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    14,669
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (2
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    4.50
                                                                                                                                    
                                                                                                                                    7/30/201210,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    5.20
                                                                                                                                    
                                                                                                                                    10/3/2010125,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3.00
                                                                                                                                    
                                                                                                                                    12/18/2011Michael L. DeMarco
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    5,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    5,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (3
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3.05
                                                                                                                                    
                                                                                                                                    4/10/2013Executive Vice President
      and
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    15,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3.60
                                                                                                                                    
                                                                                                                                    6/23/2013Chief Financial
      Officer
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    30,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3.00
                                                                                                                                    
                                                                                                                                    5/17/201210,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3.50
                                                                                                                                    
                                                                                                                                    12/29/20105,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    5.20
                                                                                                                                    
                                                                                                                                    10/3/20102,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3.00
                                                                                                                                    
                                                                                                                                    12/21/2009Diane M. Miller
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    5,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    5,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (3
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3.05
                                                                                                                                    
                                                                                                                                    4/10/2013Executive Vice President
      and
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    75,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3.00
                                                                                                                                    
                                                                                                                                    10/26/2011Chief Creative
      Officer
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    5,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    5.20
                                                                                                                                    
                                                                                                                                    10/3/2010





(1)
            Becomes
      exercisable with respect to 5,000 shares on each April 10, 2010 and
      2011.


(2)
            Becomes
      exercisable with respect to 14,669 shares on January 1,
    2010.


(3)
            Becomes
      exercisable with respect to 2,500 shares on each of April 10, 2010 and
      2011.





Potential
Payments Upon Termination





Brian T.
Beckwith, our President and Chief Executive Officer, entered into an employment
agreement in 2001, which was amended in July 2004. The agreement, as amended,
provides for a term ending in December 2008 with automatic renewals thereafter
from year to year unless terminated by either party by 180 days’ prior notice
before the end of each contract year. Pursuant to these arrangements, the term
of the agreement has been extended to December 2010. The agreement contains
non-competition and non-solicitation covenants which at the Company’s option
continue in effect for a period ending one year after Mr. Beckwith ceases to be
employed. In consideration for these covenants, Mr. Beckwith will receive on a
monthly basis, 60% of his monthly salary in effect at the time his employment
ceased. If Mr. Beckwith is terminated by the Company without cause, or if Mr.
Beckwith resigns for good reason, Mr. Beckwith is entitled to 18 months of
severance at his then-current annual salary. If we provide Mr. Beckwith notice
of non-renewal, Mr. Beckwith is entitled to 12 months of severance at his
then-current annual salary. The agreement also provides for, under certain
circumstances, our repurchase right and Mr. Beckwith’s put right to the Company
with respect to Company stock owned by Mr. Beckwith following termination of his
employment which he has acquired upon exercise of stock options and held for at
least one year.





Michael
L. DeMarco, our Executive Vice President and Chief Financial Officer, entered
into an employment agreement in May 2002, which was most recently amended in
June 2007. The agreement, as amended, provides for a term ending in May 2008,
with automatic renewals thereafter from year to year unless terminated by either
party by 180 days’ prior notice before the end of each contract year. Pursuant
to these arrangements, the term of the agreement has been extended to May 2010.
The agreement contains non-competition and non-solicitation covenants which at
the Company’s option continue in effect for a period ending one year after Mr.
DeMarco ceases to be employed by the Company. In consideration for these
covenants, Mr. DeMarco will receive on a monthly basis, 60% of his monthly
salary in effect at the time his employment ceased. If Mr. DeMarco is terminated
without cause or resigns for good reason, Mr. DeMarco is entitled to 12 months
salary as severance at his then-current annual salary.


36





Diane M.
Miller, our Executive Vice President and Chief Creative Officer, entered into an
employment agreement in 1990, which was amended and restated in November 2004.
The agreement provides for a term ending in November 2007, with automatic
renewals thereafter for successive one-year periods unless terminated by either
party at least 180 days prior to the end of the contract year. Pursuant to these
arrangements, the term of the agreement has been extended to November 2010. The
agreement contains non-competition and non-solicitation covenants which at the
Company’s option continue in effect for a period ending one year after Ms.
Miller ceases to be employed. In consideration for these covenants, Ms. Miller
will receive on a monthly basis, 60% of her monthly salary in effect at the time
her employment ceased. If Ms. Miller is terminated without cause or if Ms.
Miller resigns for good reason, Ms. Miller is entitled to 12 months of severance
at the rate in effect at the time her employment ceased. We have a right of
first refusal with respect to any share transfers of Company stock by Ms. Miller
to a competitor.





Compensation
of Non-Management Directors





We use a
combination of cash and stock-based incentive compensation to attract and retain
qualified candidates to serve on the Board of Directors. For 2009, each
non-management member of the Board of Directors received on a quarterly basis
$3,000 for services as a director, plus $500 for each committee on which they
served, plus an additional $500 for each committee of which they were the chair.
Mr. Bergstrom received an additional $3,500 per quarter for his services on the
audit and compensation committee. Non-employee directors were also reimbursed
for certain expenses in connection with attendance at Board and committee
meetings. In addition, each non-employee director receives nonqualified options
to purchase our common stock at an option price equal to the fair market value
of our common stock on the date that the option is granted. The options are
exercisable in annual increments of 25% each over a four-year period during the
term of the options, which range from five years to eight years. During fiscal
year 2009, non-management directors were granted stock options under the terms
described above. On January 9, 2009, they received options to purchase 2,000
shares each at $1.05 per share.





Non-Management
Director Compensation for the Fiscal Year Ended May 31, 2009





Fees Earnedor
                  
                  
                  Option
                  
                  
                  All OtherPaidinCash
                  
                  
                  Awards
                  
                  
                  Compensation
                  
                  
                  TotalG.
      Thomas Ahern
                  
                  $
                  14,000
                  
                  
                  $
                  2,394
                  (a)
                  
                  $
                  -
                  
                  
                  $
                  16,394John
      C. Bergstrom
                  
                  $
                  36,000
                  
                  
                  $
                  2,394
                  (a)
                  
                  $
                  -
                  
                  
                  $
                  38,394Richard
      J. Casabonne
                  
                  $
                  14,000
                  
                  
                  $
                  2,394
                  (a)
                  
                  $
                  38,400
                  (b)
                  
                  $
                  54,794Anton
      J. Christianson
                  
                  $
                  18,000
                  
                  
                  $
                  2,394
                  (a)
                  
                  $
                  -
                  
                  
                  $
                  20,394James
      P. Dolan
                  
                  $
                  16,000
                  
                  
                  $
                  2,394
                  (a)
                  
                  $
                  -
                  
                  
                  $
                  18,394James
      J. Peoples
                  
                  $
                  13,333
                  
                  
                  $
                  -
                  
                  
                  $
                  32,000
                  (c
      )
                  
                  $
                  45,333





(a)
            These
      amounts reflect the expense recognized for financial statement reporting
      purposes for fiscal 2009 in accordance with SFAS No. 123R, unreduced by
      the estimated service-based forfeitures. The other assumptions used in
      calculating these amounts are set forth in Note 8 to the Consolidated
      Financial Statements for the fiscal year ended May 31,
    2009.





(b)
            Mr.
      Casabonne received an additional $9,600 per quarter for his services
      related to marketing and product
development.





(c)
            Mr. Peoples received an
      additional $9,600 per quarter for his services related to business
      development. Since Mr. Peoples became a non-management director effective
      August 1, 2008, compensation was prorated for the partial
      year.


37





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS




The
following table sets forth information provided to the Company as to the
beneficial ownership of our Common Stock as of July 15, 2009 by (i) the only
stockholders known to the Company to hold 5% or more of such stock, and (ii)
each of the directors, the Named Executives set forth in the Summary
Compensation Table in Item 11, and directors and officers as a
group.





Common StockBeneficiallyBeneficialOwner
                    
                    Owned
                    
                    
                    Total (%)Anton
      J. Christianson (1) (2)
                    
                    
                    1,801,075
                    
                    
                    
                    40.2
                    %NAP
      & CO - c/o Delaware State Pension Fund (3)
                    
                    
                    603,151
                    
                    
                    
                    13.5
                    %James
      J. Peoples (1) (4)
                    
                    
                    573,581
                    
                    
                    
                    12.8
                    %Dolphin
      Offshore Partners, Inc. (5)
                    
                    
                    361,887
                    
                    
                    
                    8.1
                    %Diane
      M. Miller (1) (4)
                    
                    
                    336,016
                    
                    
                    
                    7.4
                    %Brian
      T. Beckwith (1) (4)
                    
                    
                    338,385
                    
                    
                    
                    7.1
                    %Michael
      L. DeMarco (1)
                    
                    
                    67,000
                    
                    
                    
                    1.5
                    %John
      C. Bergstrom (1)
                    
                    
                    60,150
                    
                    
                    
                    1.3
                    %James
      P. Dolan (1)
                    
                    
                    57,334
                    
                    
                    
                    1.3
                    %Richard
      J. Casabonne (1)
                    
                    
                    35,834
                    
                    
                    
                    *G.
      Thomas Ahern (1)
                    
                    
                    19,000
                    
                    
                    
                    *Directors
      and Officers as a group (9 persons) (1) (2)
                    
                    
                    3,288,375
                    
                    
                    
                    64.9
                    %




* Less
than 1%





(1)
            Includes
      shares of Common Stock subject to outstanding stock options exercisable
      within 60 days as follows: Mr. Christianson, 19,834shares; Mr.
      Peoples, 2,000 shares; Ms. Miller, 85,000shares; Mr.
      Beckwith, 303,331 shares; Mr. DeMarco, 67,000 shares; Mr. Bergstrom,
      19,834shares; Mr. Dolan,
      57,334 shares; Mr. Casabonne, 35,834 shares; Mr. Ahern, 15,000 and
      directors and officers as a group, 605,167
  shares.





(2)
            Mr.
      Christianson’s ownership includes ownership of 1,610,986 shares owned by
      School Power Limited Partnership, 109,007 shares owned by Adam Smith
      Growth Partners, and 61,248 shares owned by Adam Smith Fund, LLC. The
      general partners of School Power Limited Partnership are Gordon Stofer and
      Adam Smith Companies, LLC. Mr. Christianson is the manager of and controls
      Adam Smith Companies, LLC. Mr. Christianson and Mr. Stofer share voting
      and investment powers with respect to the securities owned by School Power
      Limited Partnership. The managing member of Adam Smith Growth Partners is
      Adam Smith Companies, LLC. Mr. Christianson, as manager of Adam Smith
      Companies, LLC has voting and investment powers with respect to the
      securities owned by Adam Smith Growth Partners. The managing member of
      Adam Smith Fund, LLC is Adam Smith Management, LLC, whose managing
      member is Adam Smith Companies, LLC. Mr. Christianson, as manager of
      Adam Smith Companies, LLC, has investment and voting powers with
      respect to the securities owned by Adam Smith Fund, LLC. Mr. Christianson,
      Mr. Stofer, Adam Smith Companies, LLC, and Adam Smith Management, LLC
      disclaim beneficial ownership of the securities owned by School Power
      Limited Partnership, Adam Smith Growth Partners and Adam Smith Fund,
      LLC except to the extent of their pecuniary interest in such
      securities. The address of Mr. Christianson, Mr. Stofer, School Power
      Limited Partnership and each of the Adam Smith entities is 301
      Carlson Parkway, Suite #103, Minnetonka, MN
  55305





(3)
            The
      address of the Delaware State Pension Fund is 860 Silver Lake Boulevard,
      McArdle Building, Suite #1, Dover, DE
19904.





(4)
            The
      address of Mr. Peoples, Ms. Miller and Mr. Beckwith is 299 Market Street,
      Saddle Brook, NJ 07663-5316.


38





(5)
            The
      general partner of Dolphin Direct Equity Partners, L.P. is Dolphin
      Advisors, LLC, and the managing member of Dolphin Advisors, LLC is Dolphin
      Management, Inc. Peter E. Salas is the President and sole owner of Dolphin
      Management, Inc. and exercises voting and investment powers with respect
      to the securities owned by Dolphin Direct Equity Partners, L.P. 
      Dolphin Advisors, LLC, Dolphin Management, Inc. and Mr. Salas disclaim
      beneficial ownership of the securities owned by Dolphin Direct Equity
      Partners, L.P. except to the extent of their pecuniary interest in such
      securities. The address of Dolphin Direct Equity Partners, L.P. is c/o
      Dolphin Asset Management Corp., 129 East 17th Street, New York, NY
      10003.





Equity
Compensation Plan Table





The
following table sets forth aggregate information regarding the Company’s equity
compensation plans as of May 31, 2009.





Number of securities to
                    be issued upon
                    exerciseof outstanding
                    options,warrants and
                    rights
                  
                  
                  Weighted-average
                    exercise price of
                    outstanding options,
                    warrants and rights
                  
                  
                  Number of securities
                    remaining available for
                    future issuance under
                    equity compensation
                    plans(excluding
                    securitiesreflected in
                    column (a))Plan Category
                  
                  (a)
                  
                  
                  (b)
                  
                  
                  (c)Equity
      compensation plans approved by security holders
                  
                  
                  787,636
                  
                  
                  $
                  3.29
                  
                  
                  
                  238,000





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Certain
Relationships and Related Transactions





None





Director
Independence





The Board
of Directors of the Company has determined that Messrs. Ahern, Bergstrom,
Casabonne, Christianson and Dolan are “independent” directors, as that term is
defined under the rules of The NASDAQ Stock Market for companies included in The
NASDAQ Capital Market.





ITEM
      14.
              PRINCIPAL
      ACCOUNTING FEES AND SERVICES.





In
connection with the fiscal years ended May 31, 2009 and May 31, 2008, McGladrey
& Pullen, LLP and its related entity RSM McGladrey, Inc., provided various
audit and non-audit services to the Company and billed the Company for these
services as follows:





(a)
              Audit
      Fees. Fees for audit services totaled $131,880 and $142,791 in fiscal 2009
      and fiscal 2008, respectively, including fees for the annual audits and
      the reviews of the Company’s quarterly reports on Form
    10-Q.





(b)
            Audit-Related
      Fees. Fees for audit-related services totaled $-0- and $2,600 in fiscal
      2009 and fiscal 2008, respectively. These services related to responding
      to technical and accounting questions and the related research, and
      meetings with management.





(c)
            Tax
      Fees. Fees for tax services, including certain tax compliance assistance,
      totaled $-0- for both fiscal 2009 and fiscal
  2008.





(d)
            All
      Other Fees. There were no other services provided by McGladrey &
      Pullen, LLP or RSM McGladrey, Inc., not included above, in either fiscal
      2009 or fiscal 2008.


39





The Audit
Committee preapproves all audit and permissible non-audit services provided by
the independent registered public accounting firm on a case-by-case basis. All
of the services provided by the independent registered public accounting firm
during fiscal 2009 and fiscal 2008, including services related to Audit-Related
Fees and Tax Fees, have been approved by the Audit Committee under its
pre-approval process. The Audit Committee has considered whether the provision
of services related to the Audit-Related Fees, Tax Fees and All Other Fees was
compatible with maintaining the independence of McGladrey & Pullen, LLP and
determined that such services did not adversely affect the independence of
McGladrey & Pullen, LLP.


40





PART
IV





ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES





(a)
            The
      following documents are filed as a part of this
  report:





(1)
            Financial
      Statements.  See Item 8
above.





(2)
            Exhibits.  The
      following exhibits are included with this Annual Report on Form 10-K (or
      incorporated by reference) as required by Item 601 of Regulation
      S-K:





EXHIBIT
                NO.
              
              DESCRIPTION3.1
              
              Certificate
      of Incorporation of the Registrant (incorporated by reference to Exhibit
      3.1 to the Registrant’s Form 10-KSB for the year ended December 31,
      2001).3.2
              
              Bylaws
      of the Registrant (incorporated by reference to Exhibit 3.2 to the
      Registrant’s Form 8-K dated May 23, 2007).10.1‡
              
              Registrant's
      1998 Stock Plan (incorporated by reference to Exhibit 10.1 to the
      Registrant’s Form 10-KSB for the year ending December 31,
      1998).10.2‡
              
              Registrant’s
      2009 Stock Plan.10.3‡
              
              Amended
      and Restated Employment Agreement between Peoples Education, Inc. and
      Diane M. Miller dated July 1, 2001 (incorporated by reference to Exhibit
      10.8 to the Registrant’s Form 10-KSB for the year ended December 31,
      2001), as amended by Amendment to Employment Agreement dated November 19,
      2004 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form
      8-K dated November 22, 2004).10.4‡
              
              Amended
      and Restated Employment Agreement between the Company and Michael L.
      DeMarco dated May 17, 2002 (incorporated by reference to Exhibit 10 to the
      Registrant’s Form 10-QSB for the quarter ended June 30, 2002) as amended
      by Amendment to Employment Agreement dated October 4, 2005 (incorporated
      by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated October 4,
      2005) and by Second Amendment to Employment agreement dated June 1, 2007
      (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K
      dated June 1, 2007).10.5‡
              
              Employment
      Agreement between the Company and Brian T. Beckwith dated December 18,
      2001 (incorporated by reference to Exhibit 10.7 to the Registrant’s Form
      10-KSB for the year ended December 31, 2001), as amended by Amendment to
      Employment Agreement dated July 30, 2004 (incorporated by reference to
      Exhibit 10.1 to the Registrant’s Form 10-QSB for the quarter ended June
      30, 2004).10.6
              
              Loan
      Agreement dated February 15, 2007, by and between Peoples Educational
      Holdings, Inc. and Sovereign Bank (incorporated by reference to Exhibit
      10.1 to the Registrant’s Form 8-K dated February 15,
  2007).10.7
              
              $10
      million Revolving Credit Promissory Note dated February 15, 2007 payable
      by Peoples Educational Holdings, Inc. to Sovereign Bank (incorporated by
      reference to Exhibit 10.2 to the Registrant’s Form 8-K dated February 15,
      2007).10.8
              
              $10
      million Term Promissory Note dated February 15, 2007 payable by Peoples
      Educational Holdings, Inc. to Sovereign Bank (incorporated by reference to
      Exhibit 10.3 to the Registrant’s Form 8-K dated February 15,
      2007).


41





10.9
              
              Security
      Agreement dated February 15, 2007, by and between Peoples Educational
      Holdings, Inc., Peoples Education, Inc. and Sovereign Bank (incorporated
      by reference to Exhibit 10.4 to the Registrant’s Form 8-K dated February
      15, 2007).10.10
              
              Guaranty
      and Suretyship Agreement dated February 15, 2007, by Peoples Educational
      Holdings, Inc. and Peoples Education, Inc. in favor of Sovereign Bank
      (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K
      dated February 15, 2007).10.11
              
              Pledge
      of Stock Agreement dated February 15, 2007, by Peoples Educational
      Holdings, Inc. in favor of Sovereign Bank (incorporated by reference to
      Exhibit 10.6 to the Registrant’s Form 8-K dated February 15,
      2007).14
              
              Code
      of Ethics (incorporated by reference to Exhibit 14 to the Registrant’s
      Form 10-KSB for the year ended December 31, 2003).21
              
              Subsidiaries
      of the Registrant:  Peoples Education, Inc., a Delaware
      corporation.23.1*
              
              Consent
      of McGladrey & Pullen, LLP.31.1*
              
              Certification
      of the Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2*
              
              Certification
      of the Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32*
              
              Certification
      of the Chief Executive Officer and the Chief Financial Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002.





‡
Management contract or compensatory plan.


* Filed
herewith.


42





SIGNATURES





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





PEOPLES
      EDUCATIONAL HOLDINGS, INC.Date:  August
      18, 2009/s/
      Brian T. BeckwithBrian
      T. Beckwith, Chief Executive Officerand
      President (principal executive
officer)





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on August 18, 2009





/s/
      Brian T. BeckwithBrian
      T. Beckwith, Chief Executive Officer,President
      and Director/s/
      Michael L. DeMarcoMichael
      L. DeMarco, Executive Vice President and ChiefFinancial
      Officer/s/
      James J. PeoplesJames
      J. Peoples, Chairman and Director/s/
      Diane M. MillerDiane
      M. Miller, Executive Vice President, Chief CreativeOfficer
      and Director/s/
      John C. BergstromJohn
      C. Bergstrom, Director/s/
      Richard J. CasabonneRichard
      J. Casabonne, Director/s/
      Anton J. ChristiansonAnton
      J. Christianson, Director/s/
      James P. DolanJames
      P. Dolan, Director/s/
      G.Thomas AhernG.
      Thomas Ahern,
Director


43