**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**




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


**For
      the fiscal year ended May 31, 2008**





**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**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **41-1368898**
              (I.R.S.
                Employer
              Identification
                No.)**299
                Market Street, Saddle Brook, NJ**
              (Address
                of principal executive offices)
            **07663**
              (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**
              **Common
                Stock, $0.02 par value**
            **Name
                of each exchange on which registered**
              **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. o




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 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
      definition of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
                accelerated filero
            Accelerated
                fileroNon-accelerated
                filer o(Do
                not check if a smaller reporting company)
            Smaller
                reporting companyx





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, 2007 (the last business day of the registrant’s most recently
      completed second fiscal quarter) was $7,638,331.





The
      number of shares outstanding of the issuer's common stock on July 25, 2008
      was
      4,454,502.





Documents
      incorporated by reference:  None.







**TABLE
        OF CONTENTS**




**Page No.**PART
                  I
              1ITEM
                  1. BUSINESS
              1ITEM
                  2. PROPERTIES
              7ITEM
                  3. LEGAL PROCEEDINGS
              7ITEM
                  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
              7PART
                  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
              32ITEM
                  9A(T). CONTROLS AND PROCEDURES
              32ITEM
                  9B. OTHER INFORMATION
              33PART
                  III
              34ITEM
                  10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
              34ITEM
                  11. EXECUTIVE COMPENSATION
              36ITEM
                  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND
                  RELATED STOCKHOLDER MATTERS
              40ITEM
                  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE
              41ITEM
                  14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
              41PART
                  IV
              43ITEM
                  15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
              43SIGNATURES
              45









**PART
      I**





**ITEM
      1.**  **BUSINESS** ****




**OVERVIEW
      AND COMPANY HISTORY**




Peoples
      Educational Holdings, Inc. (PEH), through its wholly owned subsidiary, Peoples
      Education, Inc. (PE), formerly known as The Peoples Publishing Group, Inc.,
      develops and sells its own proprietary products which are predominantly
      state-specific and standards-based, focused on state-required tests. We also
      distribute other publishers’ products. Our products are organized into two
      product groups, one designated as Test Preparation, Assessment, and Instruction,
      and the other as College Preparation. The Test Preparation, Assessment, and
      Instruction materials are almost exclusively proprietary products, while the
      College Preparation materials are mainly distributed products accompanied by
      a
      growing number of proprietary titles. 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. As a result of the merger, PE became a wholly owned
      subsidiary of PEH. All of the 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 2-8. 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.





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.




**INDUSTRY
      BACKGROUND**





School
      Enrollment


The
      National Center for Education Statistics (“NCES”) forecasts record public school
      enrollment through 2017. The fall 2008 public school enrollment is estimated
      at
      49.8 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 2000-2009 the
      South and the West enrollments increased 1.8 million and 1.0 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 6.4 million students growing to 6.7 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.




1




Educational
      Funding


The
      relationship between state and local school funding has been shifting over
      the
      last 30 years, with local funding decreasing to 37.2% and state funding rising
      to 45.5%. Federal funds for schools have grown to 8.2% and “other” funding
      accounts for the balance. *(National
      Center for Education Statistics, 2006)*





Most
      states reported healthy fiscal conditions in 2007. In 2008 a large number of
      states are experiencing fiscal problems. States with less severe housing issues,
      high energy production and strong commodity pricing have escaped the fiscal
      downturn. However, the influence of the fiscal 2009 economic environment will
      be
      significantly more state inclusive.





The
      estimated increase in the states’ general fund expenditure in fiscal 2008 was
      5.1% which turned out to be in the low range of a 31 year average of 6.1%.
      The
      June 2008 Fiscal Survey of the States found, on average, that the governors
      fiscal 2009 proposed budgets targeted a 1.0% increase in general fund spending
      which is the lowest amount proposed in the last 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.





Although
      the state picture isn’t encouraging, one needs to recall that historically
      states have managed to support and grow K-12 funding during difficult financial
      times. To date we have been encouraged by states like New Jersey and New York
      which completed budgets with increased K-12 funding of $600 million and $1.75
      billion respectively. Also encouraging is California’s  revised
      2009 state budget with flat K-12 funding which is a significant change from
      the
      Governor’s earlier proposal for a 10% across the board education
      cut.





The
      local
      school budget supported by healthy real estate assets has traditionally been
      viewed as a reliable source of K-12 educational funding. However, in the current
      housing crisis local revenue may not be as secure as once believed. Local school
      boards are struggling to support community schools in the context of increased
      heating costs, cooling costs and transportation expenses. The local funding
      concerns will not be universal but it will be challenging for many local school
      districts to absorb additional costs.





The
      federal 2008 budget which began October 1, 2007 included discretionary spending
      of $57.2 billion which is 0.5% less than the $57.5 billion in fiscal 2007.
      Spending under Title I, a funding program under the Elementary and Secondary
      Education Act, increased 8.6% to $13.9 billion from the 2007 level of $12.8
      billion. Reading First, a United States Department of Education funding program
      was reduced to $393 million while educational technology was down slightly
      to
      $367.5 million.





Title
      I
      funds will increase in 41 states. The 10 states scheduled to receive the largest
      Title I allocations will receive 56.7% of total Title I funds in 2008. We
      produce test preparation, focused instruction and assessment products in 9
      of
      these 10 states. Targeting the school districts in the states with the largest
      Title I allocations is an opportunity for the company.





No
      Child Left Behind


Although
      No Child Left Behind (”NCLB”) has not been a major issue to date in the current
      presidential race, the reauthorization has been widely debated in congress
      and
      is expected to be a priority after the fall election. The bill likely will
      undergo important changes but the accountability, assessment and standards
      based
      instruction will continue to be at the center of NCLB. High on the legislative
      agenda will be the debate over the adequacy of NCLB funding, formative
      assessment, more local control, and a growth model assessment that uses
      individual student achievement to measure proficiency, rather than the current
      model that looks at proficiency by comparing student groups against test scores
      from the prior year.





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 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




Supplementary
      Materials Market


We
      do
      business in the $4.3 billion pre K-12 supplementary materials market which
      is a
      subset of the larger instructional materials market. For 2007, the Association
      of American Publishers (AAP) member companies reported a 7.8% decline in
      supplemental revenue. In his June 2008 Educational Industry Outlook Report,
      industry expert Peter Alpert, Goldman Sachs and Co., confirmed the 2007 AAP
      supplemental revenue decline. In addition, the Peter Alpert report, as well
      as
      Simba Information, “Publishing for the Pre-12 Market 2008-2009” estimate a 3.0%
      to 3.5% supplemental market revenue growth in 2008. In this uncertain
      environment, many school budgets have been reduced and school administrators
      have pulled back on spending or postponed purchasing instructional
      materials.





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


As
      required by law, all states have developed state content standards and high
      stakes state tests. State standards are not static and the states frequently
      adjust and up-grade their standards. None of the 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
      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.





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 (2007) reported that 90% of the respondents use test preparation
      materials, and that virtually all respondents (96.7%) maintain that these
      products improve student test scores. We believe that state-specific test
      preparation, assessment, and instruction materials are among the fastest growing
      niches in the supplementary market. As such, schools and school districts are
      expected to aggressively purchase these materials.





College
      PreparationMarket


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 AP  examinations.
      According to the College Board, the total number of AP test takers increased
      at
      an annual compound growth rate of over 11% from 1997 to 2007, rising from
      921,600 test takers in 1997 to 2,533,610 in 2007. In 2007, students from 16,464
      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 AP  examination
      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.




3




**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 two 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.
      Measuring  Up ® is
      positioned as standards-based, state-customized instruction and classroom
      assessment, designed to be an integral part of a school’s instructional program
      throughout the school year.





Measuring
      Up e-Path ® (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 and Test Preparation and Assessment products,
      so
      that both product lines are suitable for sale to an identical customer base
      with
      an identical sales force. We continue to sell our backlist remedial 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:


12
                    Months Ended May 31, 2008
                
                
                64
                %12
                    Months Ended May 31, 2007
                
                
                67
                %




4




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 have entered into additional exclusive and semi-exclusive distribution
      agreements with other publishers. 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 18 years and expires in December 2012. The other agreement has been
      in
      place for 12 years and expires in September 2011.





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


12
                    Months Ended May 31, 2008
                
                
                36
                %12
                    Months Ended May 31, 2007
                
                
                33
                %





**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 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.




5




Integrated
      Catalog/Inside and Outside Sales Model


In
      the
      2007-2008 school year, approximately 425,000 copies of thirty-three catalogs
      and
      over thirty various print promotional and direct mail pieces reached our various
      market niches that included both proprietary and distributed products. 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 sixty
      electronic mailings, sent via e-mail (e-Blasts), were deployed that targeted
      about 410,000 K-12 educators.





Website


Our
      website (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.





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


We
      outsource warehousing and distribution/shipping services to two separate third
      party warehouse and distribution companies. One is located in Brooklyn, NY
      and
      the other is 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. 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**





Eight
      supplementary publishers accounted for approximately 60% of reported 2007
      supplemental sales in the United States. These publishers produce a wide variety
      of print and electronic products, workbooks, magazines, and library/trade books
      (non-textbooks) used in schools. In 2007, the leading supplemental publishers
      were: School Specialty, Houghton Mifflin Harcourt, Scholastic Education,
      McGraw-Hill Learning Group, Pearson, RD School & Ed Services, Renaissance
      Learning, and Voyager Learning (Simba Information, Electronic Education Report,
      May 5, 2008). There are also numerous other companies and divisions of the
      large
      companies not noted above that are competitors of ours. These publishers include
      Triumph Learning, Buckledown, and Options Publishing. In addition, we compete
      with major college publishers who sell their textbooks and other products in
      the
      high school Advanced Placement market. Many of our competitors are well
      established, significantly larger, and have substantially greater financial
      and
      marketing resources than the Company.





**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. On 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.




6




**EMPLOYEES**





As
      of May
      31, 2008, we had approximately 110 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, New Jersey facility. We lease approximately 25,000 square feet of office
      space at this location at a current rental of approximately $452,000 per year
      through October 2014.





We
      lease
      approximately 4,300 square feet of office space in Austin Texas at a current
      rental of $78,000 per year, escalating to $80,000 per year through February
      2010.





We
      lease
      1,008 square feet of office space in Columbus, Ohio at a current rental of
      $13,000 per year through November 2009.





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




7




**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, for the periods indicated, the available high and low closing bid
      quotations for the common stock by quarter for the years ended May 31, 2008
      and
      2007. Quotations reflect inter-dealer prices, without retail mark-up, mark-down
      or commissions and may not represent actual transactions.




Year
                  Ended
              
              Year
                  EndedMay
                  31, 2008
              
              May
                  31, 2007Quarter
              
              High
              
              Low
              
              High
              
              Low1st
              
              
              $4.00
              
              
              $3.10
              
              
              $4.25
              
              
              $3.652nd
              
              
              $4.05
              
              
              $2.78
              
              
              $5.00
              
              
              $3.373rd
              
              
              $3.20
              
              
              $2.35
              
              
              $4.90
              
              
              $3.354th
              
              
              $3.57
              
              
              $1.88
              
              
              $3.69
              
              
              $2.20




On
      August
      7, 2008, the last reported bid price of our common stock on NASDAQ Capital
      Market was $1.90 per share.





**Holders**





There
      were approximately 392 beneficial holders of our common stock as of August
      7,
      2008.





**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.





**Issuer
      Purchases of Equity Securities**





The
      Company did not purchase any of its common stock during the twelve months ended
      May 31, 2008.





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, 2008, 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.




8




**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
      significant 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


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, 2008 and 2007 were approximately $528,000, and,
      $478,000, 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 its Measuring Up e-Path® prorata over the life of the agreement.





Deferred
      Prepublication Costs


Deferred
      prepublication costs are recorded at their original cost and amortized over
      a
      three or five-year period, based on the estimated lives of the related
      publications. The net carrying value of the deferred prepublication costs is
      periodically reviewed and compared to an estimate of future net undiscounted
      cash flows. On May 31, 2008 and 2007, we had a valuation allowance against
      these
      assets of $159,000 and $106,000 respectively. 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 May 31, 2008 and
      2007 and is believed to be adequate for any exposure to loss.




9




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 $465,000 and $269,000 at May 31, 2008 and 2007
      are
      believed to be adequate to cover inventory loss exposure.





Stock-Based
      Compensation


We
      adopted the provisions of Statement of Financial Accounting Standards
      (SFAS) 123R, *Share-Based
      Payment* on
      January 1, 2006. SFAS 123R requires us to measure and recognize in our
      consolidated statements of operations the expense associated with all
      share-based payment awards made to employees and directors based on estimated
      fair values. We utilize the Black-Scholes option valuation model to measure
      the
      amount of compensation expense to be recognized for each option award. There
      are
      several assumptions that must be made when using the Black-Scholes model such
      as
      the expected term of each option, the expected volatility of the stock price
      during the expected term of the option, the expected dividends to be paid and
      the risk free interest rate expected during the option term. Of these
      assumptions, the expected term of the option and expected volatility of our
      common stock are the most difficult to estimate since they are based on the
      exercise behavior of employees and the expected future performance of our stock.
      An increase in the volatility of our stock price or an increase in the average
      period before exercise will increase the amount of compensation expense on
      new
      awards. Dividend yields and risk-free interest rates are less difficult to
      estimate, but an increase in the dividend yield will cause a decrease in
      compensation expense and an increase in the risk-free interest rate will
      increase compensation expense. We believe the assumptions used in computing
      our
      compensation expense for the periods ended May 31, 2008 and 2007, respectively,
      are appropriate.





Income
      Taxes


The
      carrying value of the Company’s net deferred tax assets assumes that the Company
      will be able to generate sufficient taxable income. No valuation allowance
      has
      been established as of May 31, 2008 or 2007 as management is projecting
      sufficient taxable income to fully realize the net deferred income tax assets
      over the near term. If such future levels of taxable income are not sufficient
      or fail to materialize in the near term, management will establish a valuation
      allowance to reduce the net deferred income tax assets to an amount that they
      believe is more likely than not to be realized and would also record
      corresponding income tax expense. On a quarterly basis, the Company evaluates
      the realizability of its deferred tax assets and assesses the requirements
      for a
      valuation allowance.





**Twelve
      Months Ended May 31, 2008 vs. Twelve Months Ended May 31, 2007**





**NET
      REVENUE**




(In
      Thousands)


12
                  Months Ended5/31/2008
              
              5/31/2007
              
              Variance
              
              Variance
                  %Test
                  Preparation, Assessment and Instruction
              
              $
              25,680
              
              $
              25,980
              
              $
              (300
              )
              
              -1.2
              %College
                  Preparation
              
              
              14,309
              
              
              12,722
              
              
              1,587
              
              
              12.5
              %Total
                  Net Revenue
              
              $
              39,989
              
              $
              38,702
              
              $
              1,287
              
              
              3.3
              %





Test
      Preparation, Assessment, and Instruction





Revenue
      for this product group was $25.7 million for the 12 months ended May 31, 2008,
      a
      decrease of 1.2% compared to the prior year. Testing and Assessment revenue
      was
      $22.2 million, flat with the prior year, while Instruction revenue was $3.5
      million, down 7.8% from the prior year.





The
      product group 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, 2008 was down approximately 9% from the prior year. We continue
      to
      invest in new product development for this product group.





College
      Preparation





Revenue
      for this product group was $14.3 million, an increase of 12.5% from the prior
      year.  Distribution revenue, which accounts for approximately 95% of the
      total revenue within this group, was up 11.6% primarily due to increased market
      penetration, especially in the private and parochial school markets. 
Revenue from our proprietary products increased 33.7% 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 continue
      to invest in new proprietary product development while actively growing
      distribution products in FY09. In spite of current economic challenges, we
      are
      optimistic about the opportunities for growth in this market niche.




10




**COST
      OF REVENUE**





Cost
      of
      Revenue for the 12 months ended May 31, 2008 was $24.0 million (59.9% of
      revenue) compared to $21.9 million (56.5% 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 on proprietary products,
      and (3) warehousing and shipping costs for all products.





·
            Direct
                costs as a percentage of revenue for fiscal 2008 was 43.2%, an increase
                from 41.1% in the prior year. The percentage increase is primarily
                due to
                revenue mix, as College Preparation revenue increased from 32.9%
                of the
                total revenue in fiscal 2007 to 35.8% in fiscal 2008. College Preparation
                direct costs are substantially higher than the direct cost of Testing,
                Assessment and Instruction, as the majority of College Preparation
                revenue
                consists of non-proprietary
                products.





·
            Prepublication
                costs include one-time expenses associated with developing and producing
                new or revised proprietary products. It includes all editorial expenses,
                writing, page design and makeup, art and other permissions, prepress,
                and
                any other costs incurred up to the print/bind stage of the books.
                These
                prepublication costs also include expenses incurred for other forms
                of
                product development. Prepublication costs are capitalized and expensed
                on
                a straight-line basis over a three or five-year period, based upon
                the
                product. We believe our amortization policy is in line with industry
                practice. For fiscal 2008, we amortized $6.7 million of prepublication
                costs, compared to $6.0 million in the prior year. We expect fiscal
                2009
                amortization expense to be similar to fiscal 2008, then decreasing
                in the
                following years as a result of lower prepublication
                expenditures.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**




(In
        Thousands)
 
 12
                  Months EndedMay
                  31,2008
              
              2007
              
              Variance
              
              Variance
                  %Selling
                  and Marketing Expense
              
              $
              11,217
              
              $
              11,403
              
              $
              (186
              )
              
              -1.6
              %General
                  and Administrative Expenses
              
              
              4,741
              
              
              4,758
              
              $
              (17
              )
              
              -0.4
              %Total
                  Selling, General and Administrative Expenses
              
              $
              15,958
              
              $
              16,161
              
              $
              (203
              )
              
              -1.3
              %




Selling,
      general and administrative (SG&A) expenses for fiscal 2008 were $16.0
      million, a decrease of 1.3% from the prior year. As a percentage of revenue,
      SG&A expenses for fiscal 2008 were 39.9%, a decrease of 1.9 percentage
      points from the prior year.





Selling
      and Marketing expenses for fiscal 2008 were $11.2 million, a decrease of
      $186,000 from the prior year. As a percentage of revenue the expense decreased
      from 29.5% of revenue in the prior year to 28.1% for fiscal 2008 as we continue
      to closely control costs.





General
      and Administrative expenses for the year were $4.7 million, flat from the prior
      year, as we continue to consistently monitor and control these
      expenses.





**INTEREST
      EXPENSE**





Interest
      expense for the year was $1.3 million, an increase of $158,000 from the prior
      year. The change is primarily related to $148,000 of non-cash interest expense
      recorded during the year as a result of the mark to market interest rate
      adjustment related to our swap agreement on our term loan.




11




**INCOME
      TAX BENEFIT**





For
      the
      twelve months ended May 31, 2008, the effective tax rate was 41.0% compared
      to
      43.8% in the prior year. The effective tax rate fluctuation is due to a 2.8%
      decrease in the state tax rate apportionment as well as an increase in the
      temporary and permanent tax differences in book versus taxable
      loss.





**RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS**





In
      September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      157 (SFAS 157), *“Fair
      Value Measurements”* . 
      SFAS 157 establishes a common definition for fair value to be applied to U.S.
      GAAP guidance requiring use of fair value, establishes a framework for measuring
      fair value, and expands disclosure about such fair value measurements. SFAS
      157
      is effective for fiscal years beginning after November 15, 2007. We are
      currently assessing the impact SFAS 157 may have if any on our consolidated
      financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      No. 159 gives companies an irrevocable option to carry many financial
      assets and liabilities at fair values, with changes in fair value recognized
      in
      earnings. SFAS No. 159 is effective for us beginning June 1, 2008, although
      early adoption is permitted. We are currently assessing the potential impact
      that adoption of SFAS No. 159 may have, if any, on our consolidated
      financial statements.





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 acquired
      contingencies, 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 is currently evaluating the future
      impacts and disclosures of this standard.




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
      in Consolidated Financial Statements, an amendment of ARB No. 51,” which
      establishes new standards governing the accounting for and reporting of
      noncontrolling interests (NCIs) in partially owned consolidated subsidiaries
      and
      the loss of control of subsidiaries. Certain provisions of this standard
      indicate, among other things, that NCIs (previously referred to as minority
      interests) be treated as a separate component of equity, not as a liability;
      that increases and decrease in the parent’s ownership interest that leave
      control intact be treated as equity transactions, rather than as step
      acquisitions or dilution gains or losses; and that losses of a partially owned
      consolidated subsidiary be allocated to the NCI even when such allocation might
      result in a deficit balance. This standard also requires changes to certain
      presentation and disclosure requirements. For the Company,
      SFAS No. 160 is effective beginning January 1, 2009. The
      provisions of the standard are to be applied to all NCIs prospectively, except
      for the presentation and disclosure requirements, which are to be applied
      retrospectively to all periods presented. The Company is currently evaluating
      the future impacts and disclosures of this standard.





In
      March
      2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
      Hedging Activities” (SFAS 161). The new standard is intended to improve
      financial reporting about derivative instruments and hedging activities by
      requiring enhanced disclosures to enable investors to better understand their
      effects on an entity’s financial position, results of operations and cash flows.
      SFAS 161 is effective for financial statements issued for fiscal years and
      interim periods beginning after November 15, 2008, with earlier application
      encouraged. We are currently investigating the impact, if any, of adopting
      SFAS
      161 on our financial statements.





In
      May
      2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
      Principles” (SFAS 162). The new standard identifies the sources of accounting
      principles and the framework for selecting the principles to be used in the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States (the GAAP hierarchy). This Statement is effective 60 days
      following the SEC’s approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
      Generally Accepted Accounting Principles. We do not anticipate any significant
      changes as a result of adopting SFAS 162.




12




**LIQUIDITY
      AND CAPITAL RESOURCES**





Net
      cash
      provided by operating activities for 2008 was $6.0 million, compared to $2.4
      million in 2007. Net cash provided by operating activities for 2008 was
      primarily provided by our profitability before depreciation and amortization
      as
      well as decreases in accounts receivable, inventory, prepaid expenses, and
      accounts payable. This was offset by increases in deferred income taxes and
      deferred revenue. Accounts receivable decreased as a result of a decrease in
      fourth quarter revenues on a year-over-year basis. Inventory decreased due
      to
      the timing of ordering and receiving products into inventory. Prepaid expenses
      decreased due to our increase in product sampling. Accounts payable and accrued
      expenses decreased primarily due to the timing of payment to
      vendors.





Net
      cash
      used in investing activities was $5.0 million in 2008 compared to $6.7 million
      in 2007. Net cash used in investing activities for 2008 consisted primarily
      of
      expenditures for prepublication costs of $4.7 million in 2008, which represents
      a decrease of $1.8 million from 2007. The decrease is primarily due to
      efficiencies realized within our product development process, which allowed
      us
      to reduce the development costs on new and revised titles.





Net
      cash
      used in financing activities was
      $1.0
      million in 2008 compared to $3.7 million of cash provided by in 2007. Net cash
      used in financing activities for 2008, consisted primarily of net repayments
      under our new bank agreement for both the line of credit and term loan. Net
      cash
      provided by financing activities for 2007, consisted primarily of net borrowings
      under our new bank agreement for both the line of credit and term
      loan.





On
      February 15, 2007, we entered into a $20 million credit agreement with Sovereign
      Bank to refinance our previous bank credit agreement. 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.





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 is in a range
      from LIBOR plus 2.0% to LIBOR plus 2.25%, or prime to prime plus 0.5%, with
      the
      exact interest rate based on the ratio of the Company’s total funded debt to
      EBITDA. At
      May
      31, 2008, $6.4 million was outstanding under this facility, and $3.6 million
      was
      available for borrowing.





The
      term
      loan is for $10.0 million and matures in December 2012. The term loan provides
      for payments of interest only for the first twelve months and for 20 equal
      quarterly payments of principal and interest thereafter until maturity. The
      term
      loan bears interest at the same rate as the revolving line of credit for $5
      million of the $9.5 million outstanding. We entered into a swap agreement to
      fix
      the interest rate on the balance of the term loan for three years at a rate
      of
      5.3% plus an interest spread of 2.00% to 2.25% based upon our total funded
      debt
      to EBITDA ratio. After the three-year period, the interest rate reverts back
      to
      a variable rate. At May 31, 2008, $9.5 million was outstanding under this
      agreement.





In
      May
      2008, the Company entered into a $1.5 million letter of credit agreement with
      Sovereign Bank. The interest rate on the letter of credit is LIBOR plus 2.5%,
      or
      prime plus 0.5%. The agreement expires May 31, 2009. Amounts borrowed under
      the
      agreement are secured by substantially all of the assets of the Company. At
      May
      31, 2008, no amounts were 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 2009. We intend to continue investing in prepublication
      costs for our proprietary products to the extent cash flow allows. As we develop
      these products for more states, additional working capital investments may
      be
      required.




13




**PRODUCT
      DEVELOPMENT**





Product
      development expenditures for the twelve months ended May 31, 2008 were $4.7
      million, compared to $6.5 million for the twelve months ended May 31, 2007.
      We
      continue to actively develop new and revised products, but as a result of
      operational efficiencies we have been able to significantly reduce our
      development expenditures. We expect the current level of spending to continue
      in
      the future. Product development expenditures in 2008 were primarily in the
      Testing, Assessment, and Instruction product group as we continued to roll
      out
      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 Measuring Up e-Path®, our electronic, web-based assessment and
      scoring product.





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.





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





**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
      orders with the district office or other administrative units at that time.
      During spring and summer, the district offices process purchase orders and
      send
      them to publishers.





Each
      of
      our product lines has its own seasonality. The average revenue percentage over
      the past two full fiscal years by quarter is summarized in the table
      below.




**1st**
              
              **2nd**
              
              **3rd**
              
              **4th****Quarter**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter****Ended**
              
              **Ended**
              
              **Ended**
              
              **Ended****August
                  31**
              
              **November
                  30**
              
              **February
                  28**
              
              **May
                  31**Test
                  Preparation, Assessment and Instruction
              
              
              28%
              
              
              25%
              
              
              21%
              
              
              26%College
                  Preparation
              
              
              65%
              
              
              14%
              
              
              6%
              
              
              15%Total
                  Revenue
              
              
              41%
              
              
              21%
              
              
              16%
              
              
              22%





14




**ITEM
      8.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





Table
      of
      Contents


May
      31,
      2008 and 2007


Report
                  of Independent Registered Public Accounting Firm
              16Consolidated
                  Financial Statements:Consolidated
                  Balance Sheets as of May 31, 2008 and 2007
              17Consolidated
                  Statements of Operations for the years ended May 31, 2008 and
                  2007
              18Consolidated
                  Statements of Shareholders’ Equity for the years ended May 31, 2008 and
                  2007
              19Consolidated
                  Statements of Cash Flows for the years ended May 31, 2008 and
                  2007
              20Notes
                  to Consolidated Financial Statements
              21-31
  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, 2008 and 2007, and the related
      consolidated statements of operations, changes in stockholders’ equity, and cash
      flows for the years ended May 31, 2008 and 2007. 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, 2008 and 2007, 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, 2008 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, LLPMcGLADREY
                    & PULLEN, LLP




Minneapolis,
      Minnesota


August
      22, 2008




16


**CONSOLIDATED
        BALANCE SHEETS**
 (In
        Thousands-Except Share Data)
 
 May
                  31,2008
              
              
              2007ASSETSCurrent
                  AssetsCash
                  and Cash Equivalents
              
              $
              53
              
              $
              98Accounts
                  Receivable Net of Allowances for Doubtful Accounts and Returns
              
              
              3,664
              
              
              3,961Inventory
              
              
              4,394
              
              
              5,183Prepaid
                  Expenses and Other
              
              
              404
              
              
              334Prepaid
                  Marketing Expenses
              
              
              829
              
              
              725Deferred
                  Income Taxes
              
              
              1,024
              
              
              871Total
                  Current Assets
              
              
              10,368
              
              
              11,172Equipment
                  - At Cost, Less Accumulated Depreciation of $1,994 and $1,692,
                  respectively
              
              
              566
              
              
              697Other
                  AssetsDeferred
                  Prepublication Costs, Net
              
              
              15,200
              
              
              17,180Deferred
                  Income Taxes
              
              
              1,536
              
              
              1,155Trademarks,
                  Net
              
              
              191
              
              
              141Prepaid
                  Expenses and Other
              
              
              263
              
              
              370Prepaid
                  Marketing Expenses
              
              
              495
              
              
              1,036Total
                  Other Assets
              
              
              17,685
              
              
              19,882Total
                  Assets
              
              $
              28,619
              
              $
              31,751LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  LiabilitiesCurrent
                  Maturities of Long Term Obligations
              
              $
              2,042
              
              $
              649Accounts
                  Payable
              
              
              4,906
              
              
              6,304Accrued
                  Compensation
              
              
              247
              
              
              547Other
                  Accrued Expenses
              
              
              347
              
              
              327Deferred
                  Revenue
              
              
              475
              
              
              327Total
                  Current Liabilities
              
              
              8,017
              
              
              8,154Long
                  Term Obligations, Less Current Maturities
              
              
              14,046
              
              
              16,405Total
                  Liabilities
              
              
              22,063
              
              
              24,559Commitments
                  and ContingenciesStockholders'
                  EquityPreferred
                  Stock, authorized 1,500,000 shares; none issued
              
              
              -
              
              
              -Common
                  Stock, $0.02 par value; authorized 8,500,000 shares; issued: 4,470,734
                  as
                  of May 31, 2008 and 4,441,173 as of May 31, 2007
              
              
              89
              
              
              89Additional
                  Paid In Capital
              
              
              8,013
              
              
              7,875Accumulated
                  Deficit
              
              
              (1,482
              )
              
              (708
              )Treasury
                  Stock, 16,232 shares for both periods, at cost
              
              
              (64
              )
              
              (64
              )Total
                  Stockholders' Equity
              
              
              6,556
              
              
              7,192Total
                  Liabilities and Stockholders' Equity
              
              $
              28,619
              
              $
              31,751
 
 See
        Notes
        to Consolidated Financial Statements
  17
  **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 (In
        Thousands, Except Share Data)
  Fiscal
                  Year EndedMay
                  31,2008
              
              2007Revenue,
                  Net
              
              
              39,989
              
              
              38,702Cost
                  of RevenueDirect
                  Costs
              
              
              17,256
              
              
              15,905Prepublication
                  Cost Amortization
              
              
              6,704
              
              
              5,955Total
              
              
              23,960
              
              
              21,860Gross
                  Profit
              
              
              16,029
              
              
              16,842Selling,
                  General and Administrative Expenses
              
              
              15,958
              
              
              16,161Income
                  from Operations
              
              
              71
              
              
              681Other
                  Expenses, Net
              
              
              95
              
              
              43Interest
                  Expense
              
              
              1,287
              
              
              1,129Net
                  Loss Before Income Taxes
              
              
              (1,311
              )
              
              (491
              )Income
                  Tax Benefit
              
              
              (537
              )
              
              (215
              )Net
                  Loss
              
              
              (774
              )
              
              (276
              )Net
                  Loss per Common Share
                Basic
                  and Diluted
              
              $
              (0.17
              )
              $
              (0.06
              )Weighted-average
                  Number of Common Shares Outstanding
                Basic
                  and Diluted
              
              
              4,445
              
              
              4,429
  See
        Notes
        to Consolidated Financial Statements
  18
  **CONSOLIDATED
        STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY**
 (In
        Thousands - Except Share Data)
 
 Common
                Stock
              
              Additional
                Paid-In
                Capital
              
              Accumulated
                Deficit
              
              Treasury
                Stock
              
              TotalBalance,
                  May 31, 2006
              
              $
              89
              
              $
              7,787
              
              $
              (432
              )
              $
              (8
              )
              $
              7,436Stock-Based
                  Compensation
              
              
              -
              
              
              88
              
              
              -
              
              
              -
              
              
              88Purchase
                  of Treasury Stock (14,582 shares)
              
              
              -
              
              
              -
              
              
              -
              
              
              (56
              )
              
              (56
              )Net
                  Loss
              
              
              -
              
              
              -
              
              
              (276
              )
              
              -
              
              
              (276
              )Balance,
                  May 31, 2007
              
              
              89
              
              
              7,875
              
              
              (708
              )
              
              (64
              )
              
              7,192Stock
                  Options Exercised
              
              
              -
              
              
              88
              
              
              -
              
              
              -
              
              
              88Stock-Based
                  Compensation
              
              
              -
              
              
              50
              
              
              -
              
              
              -
              
              
              50Net
                  Loss
              
              
              -
              
              
              -
              
              
              (774
              )
              
              -
              
              
              (774
              )Balance,
                  at May 31, 2008
              
              $
              89
              
              $
              8,013
              
              $
              (1,482
              )
              $
              (64
              )
              $
              (6,556
              )
 
 19
  **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(In
        Thousands)**
 
 Fiscal
                  Year Ended
                May
                  31,2008
              
              2007Cash
                  Flows From Operating ActivitiesNet
                  Loss
              
              $
              (774
              )
              $
              (276
              )Adjustments
                  to Reconcile Net Loss to Net Cash Provided by Operating
                  ActivitiesDepreciation
              
              
              308
              
              
              317Amortization
                  of Prepublication Costs and Trademarks
              
              
              6,732
              
              
              5,973Stock-Based
                  Compensation
              
              
              50
              
              
              88Market
                  Value Adjustment of Interest Rate Swap
              
              
              148
              
              
              -Deferred
                  Income Taxes
              
              
              (534
              )
              
              (224
              )Changes
                  in Assets and LiabilitiesAccounts
                  Receivable
              
              
              297
              
              
              (611
              )Inventory
              
              
              789
              
              
              (1,289
              )Prepaid
                  Expenses and Other
              
              
              37
              
              
              (323
              )Prepaid
                  Marketing Expenses
              
              
              437
              
              
              (412
              )Accounts
                  Payable and Accrued Expenses
              
              
              (1,678
              )
              
              (1,571
              )Deferred
                  Revenue
              
              
              148
              
              
              69Income
                  Taxes Payable or Refundable
              
              
              -
              
              
              668Net
                  Cash Provided By Operating Activities
              
              
              5,960
              
              
              2,409Cash
                  Flows From Investing ActivitiesPurchases
                  of Equipment
              
              
              (177
              )
              
              (185
              )Expenditures
                  for Intangibles
              
              
              (78
              )
              
              (33
              )Expenditures
                  for Prepublication Costs
              
              
              (4,724
              )
              
              (6,529
              )Net
                  Cash Used In Investing Activities
              
              
              (4,979
              )
              
              (6,747
              )Cash
                  Flows From Financing ActivitiesNet
                  (Payments) Borrowings Under Line of Credit
              
              
              (465
              )
              
              401Purchases
                  of Treasury Stock
              
              
              -
              
              
              (56
              )Proceeds
                  From the Exercise of Stock Options
              
              
              88
              
              
              -Payments
                  Of Debt Issue Costs
              
              
              -
              
              
              (405
              )Principal
                  Payments On Short Term Loan
              
              
              -
              
              
              (1,000
              )Proceeds
                  From Long Term Debt
              
              
              -
              
              
              10,000Principal
                  Payments On Long Term Debt
              
              
              (649
              )
              
              (5,254
              )Net
                  Cash Provided By (Used In) Financing Activities
              
              
              (1,026
              )
              
              3,686Net
                  Decrease in Cash and Cash Equivalents
              
              
              (45
              )
              
              (652
              )Cash
                  and Cash EquivalentsBeginning
                  of Year
              
              
              98
              
              
              750End
                  of Year
              
              $
              53
              
              $
              98Supplemental
                  Cash Flow InformationCash
                  Payments for:Interest
              
              $
              1,180
              
              $
              1,008
 
 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 asset, 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. The
      Company maintains its cash in bank accounts, which, at times, may exceed
      federally insured limits. The Company has not experienced any losses in such
      accounts.





**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, 2008 and 2007 were approximately $528,000, and,
      $478,000, 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 its Measuring Up e-Path® prorata over the life of the
      agreement.




The
      Company provides credit to its customers determined on a customer-by-customer
      basis. Trade receivables are carried at original invoice amount less an estimate
      made for 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, 2008 and 2007.




**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 period:





12
                Months Ended May 31, 2008
            
            
            33
            %12
                Months Ended May 31, 2007
            
            
            30
            %





**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 $465,000 and $269,000 at May
      31,
      2008 and 2007, respectively.


21


**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, such as expert reviews. Prepublication costs are capitalized and
      are amortized over 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. On May 31, 2008 and 2007, The Company has
      a
      valuation allowance against these assets of $159,000 and $106,000 respectively.
      If future net undiscounted cash flows are not sufficient to realize the net
      carrying value of the asset, an impairment charge will be recognized.





**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)12
                Months Ended May 31, 2008
            
            $
            2,15712
                Months Ended May 31, 2007
            
            $
            1,795








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





(In
                Thousands)May 31, 2008
            
            May 31, 2007Total
                Prepaid Balance
            
            $
            1,324
            
            $
            1,761Less
                current portion
            
            
            829
            
            
            725Long-term
                balance
            
            $
            495
            
            $
            1,036





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





(In
                thousands)For
                the years ended May 31:2009
            
            $
            8292010
            
            $
            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 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 net undiscounted cash flows expected to result from the
      use
      of the assets, including cash flows from disposition. Should the sum of the
      expected future 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.


22





We
      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 Company’s consolidated
      financial statements.





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




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.





**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 9 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 loss in 2008, and 2007, 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 are as
      follows:





Total SharesYear
                Ended May 31, 2008
            
            
            3,179Year
                Ended May 31, 2007
            
            
            146,111





**Stock-based
      compensation:** On
      January 1, 2006, the Company adopted 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. The Company has adopted
      SFAS No. 123R using the modified prospective method and has applied it to
      the accounting for the Company’s stock options. Under the modified prospective
      method, share-based expense recognized after adoption 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, Accounting for
      Stock-Based Compensation, 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.





Our
      May
      31, 2008 and 2007 consolidated financial statements reflect the impact of SFAS
      No. 123R. Stock-based compensation expense recognized under SFAS 123R was
      $50,000 ($0.01 per diluted common share) for May 31, 2008 and $88,000 ($0.01
      per
      diluted common share) for May 31, 2007.





The
      Company uses the Black-Scholes model in deriving the fair value estimates of
      such awards. SFAS No. 123R requires forfeitures of share-based awards to be
      estimated at time of grant and revised in subsequent periods if actual
      forfeitures differ from initial estimates. Therefore, expense related to
      share-based payments and recognized in the periods ended May 31, 2008 and 2007
      have been reduced for estimated forfeitures. Forfeitures were estimated based
      on
      historical experience. See Note 9 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 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. ****


23


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





**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 we entered into an interest swap agreement
      to
      effectively convert $5.0 million of our term loan from a variable rate to a
      fixed rate for a term of three years. The change in market value of the interest
      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
      year ended May 31, 2008 was an expense of approximately $148,000, there was
      no
      adjustment at May 31, 2007.




**Recently
      Issued Accounting Pronouncements**





In
      September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      157 (SFAS 157), *“Fair
      Value Measurements”* . 
      SFAS 157 establishes a common definition for fair value to be applied to U.S.
      GAAP guidance requiring use of fair value, establishes a framework for measuring
      fair value, and expands disclosure about such fair value measurements. SFAS
      157
      is effective for fiscal years beginning after November 15, 2007. We are
      currently assessing the impact SFAS 157 may have, if any, on our consolidated
      financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      No. 159 gives companies an irrevocable option to carry many financial
      assets and liabilities at fair values, with changes in fair value recognized
      in
      earnings. SFAS No. 159 is effective for us beginning June 1, 2008, although
      early adoption is permitted. We are currently assessing the potential impact
      that adoption of SFAS No. 159 may have, if any, on our consolidated
      financial statements.





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 acquired
      contingencies, 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 is currently evaluating the future
      impacts and disclosures of this standard.




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
      in Consolidated Financial Statements, an amendment of ARB No. 51,” which
      establishes new standards governing the accounting for and reporting of
      noncontrolling interests (NCIs) in partially owned consolidated subsidiaries
      and
      the loss of control of subsidiaries. Certain provisions of this standard
      indicate, among other things, that NCIs (previously referred to as minority
      interests) be treated as a separate component of equity, not as a liability;
      that increases and decrease in the parent’s ownership interest that leave
      control intact be treated as equity transactions, rather than as step
      acquisitions or dilution gains or losses; and that losses of a partially owned
      consolidated subsidiary be allocated to the NCI even when such allocation might
      result in a deficit balance. This standard also requires changes to certain
      presentation and disclosure requirements. For the Company,
      SFAS No. 160 is effective beginning January 1, 2009. The
      provisions of the standard are to be applied to all NCIs prospectively, except
      for the presentation and disclosure requirements, which are to be applied
      retrospectively to all periods presented. The Company is currently evaluating
      the future impacts and disclosures of this standard.


24





**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 May
      31,
      2008 and 2007 we had a valuation allowance of $159,000 and $106,000
      respectively.




The
      activities in deferred prepublication costs were as follows:




(In Thousands)Year EndedMay 31,2008
            
            2007Balance,
                Beginning
            
            $
            17,180
            
            $
            16,606Prepublication
                Cost Additions
            
            
            4,724
            
            
            6,529Amortization
                Expense
            
            
            (6,704
            )
            
            (5,955
            )Balance,
                Ending
            
            $
            15,200
            
            $
            17,180





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





(In
                Thousands)For the year ending May 31,2009
            
            $
            6,3502010
            
            
            4,3742011
            
            
            2,8432012
            
            
            1,3392013
                and thereafter
            
            
            294





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 31,2008
            
            2007Balance,
                Beginning
            
            $
            141
            
            $
            126Additions
            
            
            78
            
            
            33Amortization
                Expense
            
            
            (28
            )
            
            (18
            )Balance,
                Ending
            
            $
            191
            
            $
            141




The
      estimated future amortization expense related to these intangibles is expected
      to increase to and range from approximately $4,000 to $8,000 per year over
      the
      next five years.





**Note
      4. Financing Arrangements**


On
      February 15, 2007, the Company entered into a $20 million credit agreement
      with
      Sovereign Bank to refinance its previous bank credit agreement. 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.


25





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 is in a range
      from LIBOR plus 2.0% to LIBOR plus 2.25%, or prime to prime plus 0.5%, with
      the
      exact interest rate based on the ratio of the Company’s Total Funded Debt to
      EBITDA. At May 31, 2008, $6.4 million was outstanding under this facility at
      an
      interest rate of 7.6%, and $3.6 million was available for
      borrowing.





The
      term
      loan is for $10.0 million and matures in December 2012. The term loan provides
      for payments of interest only for the first twelve months and for 20 equal
      quarterly payments of principal and interest thereafter until maturity. The
      term
      loan bears interest at the same rate as the revolving line of credit for $5
      million of the $9.5 million outstanding. The Company entered into a swap
      agreement to fix the interest rate on the balance of the term loan for three
      years at a rate of 5.3% plus an interest spread of 2.00% to 2.25% based upon
      our
      total funded debt to EBITDA ratio. After the three-year period, the interest
      rate reverts back to a variable rate. At May 31, 2008 the interest rate on
      the
      term loan was 7.6%. At May 31, 2008, $9.5 million was outstanding under this
      agreement.





In
      May
      2008, the Company entered into a $1.5 million letter of credit agreement with
      Sovereign Bank. The interest rate on the letter of credit is LIBOR plus 2.50%,
      or prime rate plus 0.5%. The agreement expires May 31, 2009. Amounts borrowed
      under the agreement are secured by substantially all of the assets of the
      Company. At
      May
      31, 2008, no amounts were 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.





In
      May
      2006, the Company entered into a short-term bank loan in the amount of $1.0
      million, which matured on October 31, 2006. The interest rate on this facility
      was prime. Payments were interest only with a balloon payment due at maturity.
      This loan was repaid prior to its maturity date.





Long-term
      debt at May 31, 2008 and 2007 consisted of the following:





(In
                Thousands)2008
            
            2007Obligations
                under capital leases (Note 7)
            
            $
            76
            
            $
            225Market
                value of interest rate swap
            
            
            148
            
            
            -Notes
                payable under line of credit (see above)
            
            
            6,364
            
            
            6,829Term
                Loan (see above)
            
            
            9,500
            
            
            10,00016,088
            
            
            17,054Less
                current maturities
            
            
            (2,042
            )
            
            (649
            )$
            14,046
            
            $
            16,405





Approximate
      maturities of long-term debt at May 31, 2008, are as follows:





(In
                Thousands)Years
                ending May 31:2009
            
            $
            2,0422010
            
            
            2,1822011
            
            
            2,0002012
            
            
            8,3642013
            
            
            1,500$
            16,088


26




**Note
      5.**  **Net Revenue by Product Group**


The
      Company operates as one business segment, with two product groups. The Company’s
      revenues, net of returns, by product group are as follows:




(In
                Thousands)Year EndedMay 31,2008
            
            2007Test
                Preparation, Assessment and Instruction
            
            $
            25,680
            
            $
            25,980College
                Preparation
            
            
            14,309
            
            
            12,722Total
                Net Revenue
            
            $
            39,989
            
            $
            38,702





**Note
      6. Income Taxes**





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


(In
                  Thousands)Year Ended
                May 31,2008
              
              2007Current
              
              $
              (3
              )
              $
              9Deferred
              
              
              (534
              )
              
              (224
              )Total
              
              $
              (537
              )
              $
              (215
              )





For
      the
      years ended May 31, 2008, and 2007, the income tax provision differs from the
      amount of income tax determined by applying the U.S. federal income tax rate
      to
      pretax income (loss), due to the following:


(In
                  Thousands)Year Ended
                May 31,2008
              
              2007Computed
                  federal income tax at statutory rate
              
              $
              (460
              )
              $
              (175
              )State
                  income taxes, net of federal benefit
              
              
              (60
              )
              
              (15
              )Income
                  (loss) taxed at low er rate
              
              
              13
              
              
              5Other,
                  including nondeductible expenses,
                  net
              
              
              (30
              )
              
              (30
              )$
              (537
              )
              $
              (215
              )  27





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


(In
                  Thousands)May 31,2008
              
              2007Deferred
                  tax assets:Allowance
                  for doubtful accounts
              
              $
              15
              
              $
              15Allowance
                  for sales returns
              
              
              203
              
              
              184Allowance
                  for prepublication costs
              
              
              61
              
              
              41Inventory
              
              
              244
              
              
              196Stock
                  options
              
              
              38
              
              
              -Federal
                  and state net operating loss
              
              
              2,078
              
              
              1,282Deferred
                  prepublication costs (see Note 10)
              
              
              254
              
              
              6882,893
              
              
              2,406Deferred
                  tax liabilities:Equipment
              
              
              (49
              )
              
              (125
              )Allowance
                  for purchase returns
              
              
              (157
              )
              
              (142
              )Prepaid
                  expenses
              
              
              (127
              )
              
              (113
              )(333
              )
              
              (380
              )Net
                  deferred tax assets
              
              $
              2,560
              
              $
              2,026




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


(In
                  Thousands)May,
                  312008
              
              2007Current
                  assets
              
              $
              1,024
              
              $
              871Noncurrent
                  assets
              
              
              1,536
              
              
              1,155Net
                  deferred tax assets
              
              $
              2,560
              
              $
              2,026


As
      of May
      31, 2008, the Company had approximately $5.0 million of federal net operating
      loss (NOL) carryforwards available to reduce federal taxable income which begin
      to expire in May 31, 2009 through May 31, 2028.





As
      of May
      31, 2008, the Company had approximately $7.3 million of state net operating
      loss
      (NOL) carryforwards available to reduce state taxable income which begin to
      expire in May 31, 2012 through May 31, 2015.





**Note
      7.**  **Commitments**


**Operating
      leases:** The
      Company leases its various facilities under operating lease arrangements. The
      lease of the corporate office was extended in 2008 and expires in October 2014.
      The Company also leases office space in Austin, Texas and Columbus, Ohio. The
      leases expire in February 2010 and November 2009, respectively. The Company
      also
      leases certain office equipment under operating leases.


28


Future
      minimum rental obligations under operating leases are as follows:




(In
                Thousands)Years ending May 31:2009
            
            $
            5582010
            
            
            5012011
            
            
            4332012
            
            
            4422013
            
            
            453Thereafter
            
            
            660$
            3,047





Rent
      expense under the aforementioned operating leases was as follows:





(In
                Thousands)Year
                ended May 31, 2008
            
            $
            666Year
                ended May 31, 2007
            
            $
            669





**Capital
      leases:** The
      Company has capital leases for the use of certain office equipment. Lease terms
      are generally three to five years. Effective interest rates on these obligations
      ranges from seven to twelve percent.





A
      summary
      of equipment under capital leases is as follows:





(In Thousands)
            
            May 31,2008
            
            2007Office
                equipment
            
            $
            160
            
            $
            1,328Less
                accumulated depreciation
            
            
            90
            
            
            920$
            70
            
            $
            408





Approximate
      minimum annual lease payments under capital leases are as follows:


(In
                  Thousands)Years
                  ending May 31:2009
              
              $
              472010
              
              
              3582Less
                  amount representing interest
              
              
              6Present
                  value of minimum lease payments (included in long-term debt-Note
                  4)
              
              $
              76





**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.**  **Capital Stock**





**Authorized
      capital stock:** The
      Company has authorized 10,000,000 shares of capital stock, of which 8,500,000
      are designated as common shares and 1,500,000 are designated as preferred
      shares.


29





**Warrants:** In
      connection with a stock offering in 2005, the underwriter was granted a warrant
      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.





**Note
      9. Stock Options**





The
      1998
      Stock Option Plan (the Plan) permits the granting of incentive stock options
      and
      nonqualified options. A total of 1,000,000 shares of the Company common stock
      have been reserved for issuance pursuant to the options granted under the Plan.
      Options issued under the 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. Shares available for grant under the
      plan
      were approximately 44,375 at May 31, 2008.





On
      January 1, 2006, the Company adopted SFAS No. 123(R), 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. The fair value of each option was estimated on
      the
      date of grant using the Black-Scholes model. Expected volatility was based
      on
      historical volatility. The risk-free interest rate was based on the U.S.
      Treasury yield for a term equal to the expected life of the options at the
      time
      of grant. The Company used historical exercise behavior data of similar employee
      groups to determine the expected life of options. All inputs into the
      Black-Scholes model are estimates made at the time of grant.


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





**2008**
            
            **2007**Dividend
                Yield
            
            
            0.0%
            
            
            0.0%Risk
                Free Interest Rate
            
            
            2.7%
                to 6.3%
            
            
            3.3%
                to 6.3%Expected
                Life of Options
            
            
            5
                to 10 Years
            
            
            5
                to 10 YearsExpected
                Volatility Factor
            
            
            32%
                to 55%
            
            
            43%
                to 55%





A
      summary
      of stock option activity is as follows:


Weighted-
                Average
                Grant
                FairValue
              
              Shares
              
              Weighted-
                Average
                Exercise
                PriceOutstanding
                  at May 31, 2006
              
              
              $1.87
              
              
              826,036
              
              
              $3.43Granted
              
              
              1.27
              
              
              40,000
              
              
              4.18Forfeited
              
              
              4.03
              
              
              (10,000)
              
              
              6.00Outstanding
                  at May 31, 2007
              
              
              1.82
              
              
              856,036
              
              
              3.44Granted
              
              
              1.01
              
              
              115,000
              
              
              3.14Exercised
              
              
              2.10
              
              
              (29,561)
              
              
              3.00Forfeited
              
              
              2.09
              
              
              (111,339)
              
              
              3.46Outstanding
                  at May 31, 2008
              
              
              1.69
              
              
              830,136
              
              
              3.41Exercisable
                  at May 31, 2008
              
              
              $1.91
              
              
              735,278
              
              
              $3.34





The
      total
      intrinsic value of the cash received from options exercised during the year
      ended May 31, 2008, was $18,000.





At
      May
      31, 2008, there was approximately $105,000 of unrecognized compensation cost
      related to share-based payments, which are expected to be recognized over a
      weighted-average period of three years.


30





**Note
      10. 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, 2008 and
      2007.


31




**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, 2008, 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 for
      the
      fiscal quarter ended May 31, 2008 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, 2008. 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) in *Internal 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.





32




**ITEM
              9B.**
            **OTHER
                INFORMATION******





NONE





33


**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 Company**G.
                Thomas Ahern
            
            50
            
            Director
                (1)Brian
                T. Beckwith
            
            52
            
            President
                and Chief Executive OfficerJohn
                C. Bergstrom
            
            48
            
            Director
                (1)(2)(3)Richard
                J. Casabonne
            
            63
            
            Director
                (3)Anton
                J. Christianson
            
            56
            
            Director
                (2)(3)Michael
                L. DeMarco
            
            44
            
            Executive
                Vice President and Chief Financial OfficerJames
                P. Dolan
            
            59
            
            Director
                (1)(2)Diane
                M. Miller
            
            56
            
            Co-founder,
                Executive Vice President and Chief Creative OfficerJames
                J. Peoples
            
            71
            
            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 July 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. 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 h** as
      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. Bergstrom** has
      been
      a **** Director
      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., Mall
      Marketing Media, LLC, Instrumental, Inc., JobDig, Inc., Credible Information,
      Inc., Great River Communications Corp., Cherry Tree Acquisition Corp. and
      IDLoyalty, LLC.   He is also a director of the non-profit Goodwill
      Easter Seals Minnesota.  Mr. Bergstrom is a graduate of Gustavus Adolphus
      College, B.A., and the University of Minnesota, M.B.A.





**Richard
      J. Casabonne** has
      been
      a **** Director
      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. Currently he is President of AEP (The Association of Educational
      Publishers).




34




**Anton
      J. Christianson** has
      been
      a **** Director
      of the Company since 1998. He is the Chairman of Cherry Tree Companies, a firm
      involved in investment management, investment banking, and wealth management.
      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), Fair Isaac Corporation,
      (NYSE: FIC) and Titan Machinery, Inc. (NASDAQ: TITN). Mr. Christianson is a
      graduate of St. John’s University, Collegeville, Minnesota, and earned an M.B.A.
      from Harvard Business School.





**Michael
      L. DeMarco** has
      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. Dolan** has
      been
      a Director of the Company since 1999.  Since 1993, 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 American Processing Company, 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. Miller** has
      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. Peoples** has
      been
      a **** Director
      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 44 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.




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.




35




The
      Governance Committee is currently composed of Messrs. Christianson (Chair),
      Bergstrom, and Casabonne. Mr. Dolan served on the committee during fiscal 2007.
      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.





Based
      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, 2008, all Section 16(a) filing
      requirements applicable to its officers, directors and 10% stockholders were
      timely complied, With the exception of the following reports that were filed
      late: a Form 4 by Anton J. Christianson, Gordon Stofer and Adam Smith
      Companies reporting stock purchases by Adam Smith Activist Fund in June and
      July
      2007, and a Form 4 by the same persons reporting a stock purchase by Adam Smith
      Activist Fund in January 2008.




**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.





**ITEM
              11.**
            **EXECUTIVE
                COMPENSATION**





**Summary
      of Cash and Certain Other Compensation**





The
      following table shows, for fiscal 2008 and 2007, the compensation earned by
      or
      awarded to Brian T. Beckwith, the Company’s Chief Executive Officer and
      President, Michael DeMarco, the Company’s Executive Vice President and Chief
      Financial Officer, and the two other most highly compensated executives officer
      of the Company whose compensation is at least $100,000 (collectively with Mr.
      Beckwith and Mr. DeMarco, the “Names Executives”).




36




**Summary
        Compensation Table for Fiscal Year Ended May 31, 2008 and
        2007**
  Non-EquityIncentitive
              
              
              
              (b)
              
              (c)Plan
              
              (a)
              
              Option
              
              All OtherName and Principal Position
              
              Year
              
              Salary
              
              Compensation
              
              Bonus
              
              Awards
              
              Compensation
              
              TotalBrian
                  T. Beckwith
              
              
              2008
              
              $
              300,000
              
              $
              -
              
              $
              -
              
              $
              12,131
              
              $
              2,160
              
              $
              314,291President
                  and Chief Executive Officer
              
              
              2007
              
              $
              300,000
              
              $
              -
              
              $
              -
              
              $
              26,821
              
              $
              2,160
              
              $
              328,981Michael
                  DeMarco
              
              
              2008
              
              $
              200,000
              
              $
              -
              
              $
              -
              
              $
              2,825
              
              $
              850
              
              $
              203,675Executive
                  Vice President and
              
              
              2007
              
              $
              181,725
              
              $
              -
              
              $
              10,000
              
              $
              3,483
              
              $
              692
              
              $
              195,900Chief
                  Financial OfficerDiane
                  Miller
              
              
              2008
              
              $
              162,098
              
              $
              -
              
              $
              -
              
              $
              2,825
              
              $
              9,195
              
              $
              174,118Executive
                  Vice President and
              
              
              2007
              
              $
              162,098
              
              $
              -
              
              $
              -
              
              $
              3,483
              
              $
              9,195
              
              $
              174,776Chief
                  Creative OfficerJames
                  P. Peoples
              
              
              2008
              
              $
              100,000
              
              $
              -
              
              $
              -
              
              $
              559
              
              $
              3,600
              
              $
              104,159Chairman,
                  Senior Advisor
              
              
              2007
              
              $
              100,000
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              3,840
              
              $
              103,840




(a)
            The
                Company paid Mr. DeMarco a $10,000 bonus in connection with his promotion
                to Executive Vice President in January
                2007.


(b)
            These
                amounts reflect the expense recognized for financial statement reporting
                purposes for fiscal 2008 and 2007 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
                9 to
                the Consolidated Financial Statements for the fiscal year ended May
                31,
                2008.


(c)
            The
                named executives receive a car allowance and the non-business portion
                of
                this allowance is included as taxable income to the named executive.
                For
                2008, the taxable amounts were as follows: Mr. Beckwith — $2,160; Mr.
                DeMarco — $850; Mr. Peoples — $3,600; and Ms. Miller — $7,200. In
                addition, the Company provided supplemental life insurance to Ms.
                Miller.
                The 2008 policy premium of $1,995 was taxable income to Ms.
                Miller.





37





**Outstanding
      Equity Awards at May 31, 2008**





The
      following table provides a summary of equity awards outstanding for each of
      the
      Named Executives as of the end of fiscal 2008:


Option AwardsNumber of SecuritiesUnderlying
              
              OptionUnexercised Options
              
              Exercise
              
              Option(#)
              
              (#)
              
              Price
              
              ExpirationNamed Executive
              
              
              
              Exercisable
              
              Unexercisable
              
              ($)
              
              DateBrian
                  T. Beckwith
              
              
              (1)
              
              
              5,000
              
              
              15,000
              
              $
              3.05
              
              
              4/10/2013President
                  and
              
              
              
              
              
              125,000
              
              
              -
              
              $
              3.00
              
              
              1/1/2012Chief
                  Executive Officer
              
              
              (2)
              
              
              11,109
              
              
              36,891
              
              $
              4.50
              
              
              7/30/2012(3)
              
              
              7,500
              
              
              2,500
              
              $
              5.20
              
              
              10/3/2010125,000
              
              
              -
              
              $
              3.00
              
              
              12/18/2011Michael
                  DeMarco
              
              
              (4)
              
              
              2,500
              
              
              7,500
              
              $
              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
              
              
              12/29/2010(5)
              
              
              3,750
              
              
              1,250
              
              $
              5.20
              
              
              10/3/20102,000
              
              
              -
              
              $
              3.00
              
              
              12/21/200910,000
              
              
              -
              
              $
              3.00
              
              
              5/31/2009Diane
                  Miller
              
              
              (4)
              
              
              2,500
              
              
              7,500
              
              $
              3.05
              
              
              4/10/2013Executive
                  Vice President and
              
              
              
              
              
              75,000
              
              
              -
              
              $
              3.00
              
              
              10/26/2011Chief
                  Creative Officer
              
              
              (5)
              
              
              3,750
              
              
              1,250
              
              $
              5.20
              
              
              10/3/2010James
                  P. Peoples
              
              
              (6)
              
              
              1,000
              
              
              3,000
              
              $
              3.05
              
              
              4/10/2013Chairman,
                  Senior Advisor





(1)
            Becomes
                exercisable with respect to 5,000 on each April 10, 2009, 2010 and
                2011


(2)
            Becomes
                exercisable with respect to 22,222 shares on January 1, 2009, and
                14,669
                shares on January 1, 2010.


(3)
            Becomes
                exercisable with respect to 2,500 shares on October 3,
                2008


(4)
            Becomes
                exercisable with respect to 2,500 shares on each April 10, 2009,
                2010 and
                2011


(5)
            Becomes
                exercisable with respect to 1,250 shares on October 3,
                2008


(6)
            Becomes
                exercisable with respect to 1,000 shares on each April 10, 2009,
                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 2009. 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.




38




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 2009.
      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.





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 2009.
      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.





Mr.
      Peoples, our Chairman of the Board of Directors and Senior Advisor, entered
      into
      an employment agreement in June 2003. The agreement expired in accordance with
      its terms on July 31, 2008, and Mr. Peoples’ service as an employee of the
      Company was concluded on that date. Mr. Peoples continues to serve as a director
      of the Company. The agreement contains non-competition and non-solicitation
      covenants which will continue in effect for a period ending July 31, 2009.





**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 2008, 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 2008, non-management directors were granted two stock options under the
      terms described above. On October 09, 2007, they received options to purchase
      2,000 shares each at $4.05 per share and on April 10, 2008 they received options
      to purchase 4,000 shares at a price of $3.05.





**Non-Management
      Director Compensation for the Fiscal Year Ended May 31,
      2008**


Fees Earnedor
              
              Option
              
              All OtherPaid in Cash
              
              Awards
              
              Compensation
              
              TotalG.
                  Thomas Ahern
              
              $
              14,000
              
              $
              4,143
              (a)
              $
              -
              
              $
              18,143John
                  C. Bergstrom
              
              $
              36,000
              
              $
              2,332
              (a)
              $
              -
              
              $
              38,332Richard
                  J. Casabonne
              
              $
              14,000
              
              $
              2,332
              (a)
              $
              38,400
              (b)
              $
              54,732Anton
                  J. Christianson
              
              $
              18,000
              
              $
              2,332
              (a)
              $
              -
              
              $
              20,332James
                  P. Dolan
              
              $
              16,000
              
              $
              2,332
              (a)
              $
              -
              
              $
              18,332




39




(a)
            These
                amounts reflect the expense recognized for financial statement reporting
                purposes for fiscal 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 9 to the Consolidated
                Financial Statements for the fiscal year ended May 31, 2008.





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





**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 25, 2008 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 Stock****Beneficially****Beneficial
                Owner**
            
            **Owned**
            
            **Total
                (%)**Anton
                J. Christianson (1) (2)
            
            
            1,931,903
            
            
            43.2
            %NAP
                & CO - c/o Delaware State Pension Fund (3)
            
            
            603,151
            
            
            13.5
            %James
                J. Peoples (1) (4)
            
            
            572,581
            
            
            12.9
            %Dolphin
                Offshore Partners, Inc. (5)
            
            
            361,887
            
            
            8.1
            %Diane
                M. Miller (1) (4)
            
            
            332,266
            
            
            7.3
            %Brian
                T. Beckwith (1) (4)
            
            
            303,363
            
            
            6.4
            %Michael
                L. DeMarco (1)
            
            
            73,250
            
            
            1.6
            %John
                C. Bergstrom (1)
            
            
            62,650
            
            
            1.4
            %James
                P. Dolan (1)
            
            
            54,834
            
            
            1.2
            %Richard
                Casabonne (1)
            
            
            32,334
            
            
            *G.
                Thomas Ahern (1)
            
            
            14,000
            
            
            *Directors
                and Officers as a group (9 persons) (1) (2)
            
            
            3,377,181
            
            
            67.2
            %





*
      Less
      than 1%





(1)
            Includes
                shares of Common Stock subject to outstanding stock options exercisable
                within 60 days as follows: Mr. Christianson, 22,334****shares;
                Mr. Peoples, 1,000 shares; Ms. Miller, 81,250****shares;
                Mr. Beckwith, 273,609 shares; Mr. DeMarco, 73,250 shares; Mr. Bergstrom,
                22,334****shares;
                Mr. Dolan, 54,834 shares; Mr. Casabonne, 32,334 shares; Mr. Ahern,
                10,000
                and directors and officers as a group, 570,945
                shares.





(2)
            Mr.
                Christianson’s ownership includes ownership of 1,813,363 shares owned by
                School Power Limited Partnership, and 96,206 shares owned by Adam
                Smith
                Activist 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. The
                managing member of Adam Smith Activist Fund is Adam Smith Management,
                LLC.
                 Mr. Christianson is the manager of Adam Smith Management, LLC and
                has investment power with respect to the securities owned by Adam
                Smith
                Activist Fund, LLC.  Mr. Christianson and Mr. Stofer share voting and
                investment powers with respect to the securities owned by School
                Power
                Limited Partnership. Adam Smith Companies, LLC, Adam Smith Management,
                LLC, Mr. Christianson and Mr. Stofer disclaim beneficial ownership
                of the
                securities owned by School Power Limited Partnership and Adam Smith
                Activist Fund, LLC except to the extent of their pecuniary interest
                in
                such securities.  The address of Mr. Christianson, Mr. Stofer, Adam
                Smith Activist Fund, LLC and School Power Limited Partnership is
                301
                Carlson Parkway, Suite #103, Minnetonka, MN
                55305.




40




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





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





(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, 2008.


**Number of securities to**
                **be****issued upon**
                **exercise of** **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**
                **securities****reflected in**
                **column (a))****Plan
                  Category**
              
              **(a)**
              
              **(b)**
              
              **(c)**Equity
                  compensation plans approved by security holders
              
              
              830,136
              
              $
              3.41
              
              
              44,375





**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, 2008 and May 31, 2007, 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 $142,791 and $110,432 in fiscal
                2008
                and fiscal 2007, respectively, including fees for the annual audits
                and
                the reviews of the Company’s quarterly reports on Form 10-Q.




41




(b)
            
            Audit-Related
                Fees. Fees for audit-related services totaled $2,600 and $7,800 in
                fiscal
                2008 and fiscal 2007, 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- and $1,650 in fiscal 2008 and fiscal 2007.(d)
            
            All
                Other Fees. There were no other services provided by McGladrey &
                Pullen, LLP or RSM McGladrey, Inc., not included above, in either
                fiscal
                2008 or fiscal 2007.




The
      Audit
      Committee pre-approves 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 2008 and fiscal 2007, including services related to the
      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.




42




**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.**
            
            **DESCRIPTION**3.1
            
            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
            
            Employment
                Agreement between Peoples Education, Inc. and James J. Peoples, dated
                June
                30, 2003 (incorporated by reference to Exhibit 10 to the Registrant’s Form
                10-QSB for the quarter ended June 30, 2003) as amended by Amendment
                to
                Employment Agreement dated June 17, 2005 (incorporated by reference
                to
                Exhibit 10.1 to the Registrant’s Form 8-K dated June 17, 2005), as amended
                by Second Amendment to Employment Agreement dated July 31, 2006
                (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K
                dated September 11, 2006) and as amended by Third Amendment to Employment
                Agreement dated August 3, 2007 (incorporated by reference to Exhibit
                10.1
                to the Registrant’s Form 8-K dated August 3, 2007).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).




43




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).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.





*
      Filed
      herewith.




44





**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 22, 2008/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 22, 2008/s/
                  Brian T. BeckwithBrian
                  T. Beckwith, Chief Executive Officer,President
                  and Director/s/
                  Michael L. DeMarcoMichael
                  L. DeMarco, Executive Vice President and
                Chief
                  Financial Officer/s/
                  James J. PeoplesJames
                  J. Peoples, Chairman and Director/s/
                  Diane M. MillerDiane
                  M. Miller, Executive Vice President,
                Chief
                  Creative Officer 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





45