SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,
D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter
Ended September 30, 2008

Commission File
No.0-16056

TRUDY CORPORATION353 Main Avenue
Norwalk, CT 06851

Incorporated in
the State of DELAWARE
Federal Identification No. 06-1007765

Telephone: (203)
846-2274

Trudy Corporation
has filed all reports required to be filed by section 13 or 15 (d) of the
Securities Act of 1934 during the preceding twelve months and has been subject
to such filing requirements for the past 90 days.

SHARES OUTSTANDING
AT
November 19, 2008
Common Stock, $.0001 par value: 641,307,356 shares

---



INDEX

|                                                                                                                                               |  |             | 
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | 
|                                                                                                                                               |  | PAGE NUMBER
|                                                                                                                                               |  |            
|                                                                                                                                              
|PART I. FINANCIAL INFORMATION                                                                                                                  |  |             | 
|                                                                                                                                               |  |             | 
|Item
  1. Financial Statements                                                                                                                 |  |             | 
|                                                                                                                                               |  |             | 
|Consolidated
  Balance Sheet  September 30, 2008 (unaudited)                                                                                  |  | 3           | 
|                                                                                                                                               |  |             | 
|Consolidated
  Statements of Operations (unaudited) for the three and six months ended
  September 30, 2008 and September 30, 2007 (unaudited) |  | 4           | 
|                                                                                                                                               |  |             | 
|Consolidated
  Statement of Shareholders Deficit (unaudited) from April 1, 2008 through
  September 30, 2007                                  |  | 5           | 
|                                                                                                                                               |  |             | 
|Consolidated
  Statements of Cash Flows (unaudited) for the six months ended September 30,
  2008 and September 30, 2007 (unaudited)           |  | 6           | 
|                                                                                                                                               |  |             | 
|Notes
  to Financial Statements (unaudited)                                                                                                    |  | 7           | 
|                                                                                                                                               |  |             | 
|Item
  2. Managements Discussion and Analysis                                                                                                 |  | 14          | 
|                                                                                                                                               |  |             | 
|PART II. OTHER
INFORMATION                                                                                                                     |  |             | 
|                                                                                                                                               |  |             | 
|Item
  1. Legal Proceedings                                                                                                                    |  | 24          | 
|                                                                                                                                               |  |             | 
|Item
  2. Changes in Securities                                                                                                                |  | 24          | 
|                                                                                                                                               |  |             | 
|Item
  3. Defaults upon Senior Securities                                                                                                      |  | 24          | 
|                                                                                                                                               |  |             | 
|Item
  4. Submission of Matters to a Vote of Security Holders                                                                                  |  | 25          | 
|                                                                                                                                               |  |             | 
|Item
  5. Other Information                                                                                                                    |  | 25          | 
|                                                                                                                                               |  |             | 
|Item
  6. Exhibits and Reports on Form 8-K                                                                                                     |  | 25          | 

2

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Trudy CorporationBalance Sheet
September 30, 2008

|                                             |  |             |            |  
|-------------------------------------------- |  | ----------- | ---------- | -
|                                             |  | (Unaudited) |           
|Assets                                       |  |             |            |  
|                                             |  |             |            |  
|Current
  assets                             |  |             |            |  
|Cash and
  cash equivalents                  |  | $           | 91,528     |  
|Accounts
  receivable, net                   |  |             | 1,588,449  |  
|Inventory,
  net                             |  |             | 1,667,811  |  
|Prepaid
  expenses and other current assets  |  |             | 72,133     |  
|                                             |  |             |            |  
|                                             |  |             |            |  
|Total current assets                         |  |             | 3,419,921  |  
|                                             |  |             |            |  
|Equipment,
  net                             |  |             | 57,664     |  
|Royalty
  advances, net                      |  |             | 240,002    |  
|Prepublication
  costs and other assets, net |  |             | 463,088    |  
|Intangible Assets, net                       |  |             | 413,495    |  
|                                             |  |             |            |  
|                                             |  |             |            |  
|Total Other assets                           |  |             | 1,174,249  |  
|                                             |  |             |            |  
|                                             |  |             |            |  
|Total assets                                 |  | $           | 4,594,170  |  
|                                             |  |             |            |  
|                                             |  |             |            |  
|Current
  liabilities                        |  |             |            |  
|Notes
  payable - Bank & related parties     |  | $           | 2,861,269  |  
|Accounts
  payable and accrued expenses      |  |             | 1,673,397  |  
|Deferred
  Revenue                           |  |             | 216,019    |  
|Royalties
  and commissions payable          |  |             | 351,330    |  
|                                             |  |             |            |  
|                                             |  |             |            |  
|Total Current liabilities                    |  |             | 5,102,015  |  
|                                             |  |             |            |  
|Total liabilities                            |  |             | 5,102,015  |  
|                                             |  |             |            |  
|Commitments                                  |  |             |            |  
|                                             |  |             |            |  
|Shareholders equity                         |  |             |            |  
|Common stock
  - par value                   |  |             | 64,131     |  
|Paid-in
  capital                            |  |             | 7,035,506  |  
|Accumulated
  deficit                        |  |             | (7,607,482 | )
|                                             |  |             |            |  
|Total shareholders equity                   |  |             | (507,845   | )
|                                             |  |             |            |  
|                                             |  |             |            |  
|Total liabilities and shareholders equity   |  | $           | 4,594,170  |  
|                                             |  |             |            |  

The accompanying
summary of significant accounting policies and notes to financial statements
are an integral part of the consolidated financial statements.

3

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Trudy CorporationStatement of Operations
For the Quarters Ended September 30, 2009 & September 30, 2008

|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|---------------------------------------------------- |  | ------------------------------------------ | ----------- | ---------------------------------------- | - | ----------- | - | ----------- | ----------- | - | - | ----------- | -
|                                                     |  | Three
  Month Period
  Ended September 30, |             | Six
  Month Period
  Ended September 30, |  
|                                                     |  |                                            |             |                                          |  
|                                                     |  | 2008                                       |             | 2007                                     |   | 2008        |   | 2007        |            
|                                                     |  |                                            |             |                                          |   |             |   |             |            
|                                                     |  | (unaudited)                                |             | (unaudited)                              |   | (unaudited) |   | (unaudited) |            
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Net product
  sales                                  |  |                                            | 1,567,363   |                                          |   | 1,855,287   |   |             | 3,099,277   |   |   | 2,826,369   |  
|Royalty
  sales                                      |  |                                            | 9,872       |                                          |   | 22,300      |   |             | 17,242      |   |   | 28,117      |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Net Sales                                            |  |                                            | 1,577,235   |                                          |   | 1,877,587   |   |             | 3,116,519   |   |   | 2,854,486   |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Cost of
  sales                                      |  |                                            | 984,414     |                                          |   | 964,205     |   |             | 1,864,714   |   |   | 1,616,025   |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Gross profit                                         |  |                                            | 592,821     |                                          |   | 913,382     |   |             | 1,251,805   |   |   | 1,238,461   |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Operating
  expenses:                                |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Selling,
  general and administrative                |  |                                            | 708,071     |                                          |   | 757,049     |   |             | 1,553,558   |   |   | 1,489,781   |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Income/(loss)
  from operations                      |  |                                            | (115,249    | )                                        |   | 156,333     |   |             | (301,753    | ) |   | (251,320    | )
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Other
  expense                                      |  |                                            | (21,370     | )                                        |   | (19,453     | ) |             | (53,423     | ) |   | (52,423     | )
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Net
  income/(loss)                                  |  | $                                          | (136,620    | )                                        | $ | 136,880     |   | $           | (355,176    | ) | $ | (303,743    | )
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Basic and
  diluted net income/(loss) loss per share |  | $                                          |            |                                          | $ |            |   | $           |            |   | $ |            |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  
|Weighted
  average number of shares outstanding      |  |                                            | 641,307,356 |                                          |   | 612,566,330 |   |             | 630,605,639 |   |   | 612,566,330 |  
|                                                     |  |                                            |             |                                          |   |             |   |             |             |   |   |             |  

The accompanying
summary of significant accounting policies and notes to financial statements are
an integral part of the consolidated financial statements.

4

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Trudy CorporationStatements of Shareholders Equity
Quarter ended September 30, 2008

|                                       |  |              |             |                    |   |             |  |                       |           |        |   |            |   |   |          |  
|-------------------------------------- |  | ------------ | ----------- | ------------------ | - | ----------- |  | --------------------- | --------- | ------ | - | ---------- | - | - | -------- | -
|                                       |  | Common Stock |             | Additional Paid-in |   | Accumulated |  | Total
  Shareholders |          
|                                       |  |              |             |                    |   |            
|                                       |  | Shares       |             | Amount             |   | Capital     |  | Deficit               |           | Equity |  
|                                       |  |              |             |                    |   |             |  |                       |           |        |  
|                                       |  |              |             |                    |   |             |  |                       |           |        |   |            |   |   |          |  
|Balance at
  March 31, 2008 (audited)  |  |              | 641,307,356 |                    | $ | 64,131      |  | $                     | 7,035,506 |        | $ | (7,252,306 | ) | $ | (152,669 | )
|                                       |  |              |             |                    |   |             |  |                       |           |        |   |            |   |   |          |  
|Net loss
  (unaudited)                 |  |              |            |                    |   |            |  |                       |          |        |   | (218,556   | ) |   | (218,556 | )
|                                       |  |              |             |                    |   |             |  |                       |           |        |   |            |   |   |          |  
|                                       |  |              |             |                    |   |             |  |                       |           |        |   |            |   |   |          |  
|Balance at
  June 30, 2008 (unaudited) |  |              | 641,307,356 |                    | $ | 64,131      |  | $                     | 7,035,506 |        | $ | (7,470,862 | ) | $ | (371,225 | )
|                                       |  |              |             |                    |   |             |  |                       |           |        |   |            |   |   |          |  
|                                       |  |              |             |                    |   |             |  |                       |           |        |   |            |   |   |          |  
|Net loss
  (unaudited)                 |  |              |             |                    |   |             |  |                       |           |        |   | (136,620   | ) |   | (136,620 | )
|                                       |  |              |             |                    |   |             |  |                       |           |        |   |            |   |   |          |  
|                                       |  |              |             |                    |   |             |  |                       |           |        |   |            |   |   |          |  
|Balance at
  September 30, 2008        |  |              | 641,307,356 |                    | $ | 64,131      |  | $                     | 7,035,506 |        | $ | (7,607,482 | ) | $ | (507,845 | )
|                                       |  |              |             |                    |   |             |  |                       |           |        |   |            |   |   |          |  

The accompanying
summary of significant accounting policies and notes to financial statements
are an integral part of the consolidated financial statements.

5

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Trudy CorporationStatements of Cash Flows

|                                                                              |  |                                                |          |             |   |          |  
|----------------------------------------------------------------------------- |  | ---------------------------------------------- | -------- | ----------- | - | -------- | -
|                                                                              |  | For the Six Months Ended 
  September 30, 2008 |         
|                                                                              |  |                                                |         
|                                                                              |  | 2008                                           |          | 2007        |  
|                                                                              |  |                                                |          |             |  
|                                                                              |  | (unaudited)                                    |          | (unaudited) |  
|                                                                              |  |                                                |          |             |  
|Cash Flows From Operating
  Activities                                        |  |                                                |          |             |   |          |  
|Net loss                                                                      |  | $                                              | (355,176 | )           | $ | (303,745 | )
|Adjustments to reconcile net loss to net
  cash used in operating activities: |  |                                                |          |             |   |          |  
|Depreciation                                                                  |  |                                                | 9,177    |             |   | 6,809    |  
|Amortization of pre-publication costs                                         |  |                                                | 123,847  |             |   | 138,662  |  
|Amortization of intangibles                                                   |  |                                                | 37,419   |             |   | 0        |  
|Provision for losses on accounts
receivable                                   |  |                                                | 0        |             |   | 300      |  
|Provision for promotional allowance                                           |  |                                                | (27,000  | )           |   | (6,500   | )
|Provision for slow moving inventory                                           |  |                                                | (65,000  | )           |   | 0        |  
|Provision for sales returns                                                   |  |                                                | (516,687 | )           |   | (133,278 | )
|                                                                              |  |                                                |          |             |   |          |  
|Consulting fee                                                                |  |                                                | 0        |             |   | 54,688   |  
|                                                                             
|Changes in operating assets and
  liabilities:                                |  |                                                |          |             |   |          |  
|Decrease in accounts receivable                                               |  |                                                | 497,513  |             |   | 137,275  |  
|Increase in inventories                                                       |  |                                                | (78,843  | )           |   | (1,691   | )
|Increase in prepaid expenses and other
  current assets                       |  |                                                | 89,788   |             |   | 13,946   |  
|Decrease in accounts payable and accrued
  expenses                           |  |                                                | 193,017  |             |   | (169,613 | )
|Increase (Decrease) in deferred revenue                                       |  |                                                | 182,019  |             |   | 254,103  |  
|Decrease in royalties and commissions
  payable                               |  |                                                | (1,068   | )           |   | 6,321    |  
|                                                                              |  |                                                |          |             |   |          |  
|Net cash (used) / provided by operating
  activities                          |  |                                                | 89,006   |             |   | (2,724   | )
|                                                                              |  |                                                |          |             |   |          |  
|Investing activities:                                                         |  |                                                |          |             |   |          |  
|Purchases of property and equipment                                           |  |                                                | (1,500   | )           |   | (8,528   | )
|Pre-publication and royalty advances                                          |  |                                                | (166,932 | )           |   | (137,855 | )
|                                                                              |  |                                                |          |             |   |          |  
|Net cash (used) / provided by investing
  activities                          |  |                                                | (168,432 | )           |   | (146,383 | )
|                                                                              |  |                                                |          |             |   |          |  
|Financing activities:                                                         |  |                                                |          |             |   |          |  
|Net change in note payable, bank                                              |  |                                                | 66,938   |             |   | 185,864  |  
|Repayments to related parties                                                 |  |                                                | (24,040  | )           |   | (33,515  | )
|Proceeds from related parties                                                 |  |                                                | 106,800  |             |   | 0        |  
|                                                                              |  |                                                |          |             |   |          |  
|Net cash provided/(used) by financing
  activities                            |  |                                                | 149,698  |             |   | 152,350  |  
|                                                                              |  |                                                |          |             |   |          |  
|                                                                              |  |                                                |          |             |   |          |  
|Net increase / (decrease) in cash and cash
  equivalents                      |  |                                                | 70,272   |             |   | 3,244    |  
|Cash and cash equivalents at beginning of
  period                            |  |                                                | 21,256   |             |   | 5,753    |  
|                                                                              |  |                                                |          |             |   |          |  
|Cash and cash equivalents at end of period                                    |  | $                                              | 91,528   |             | $ | 8,997    |  
|                                                                              |  |                                                |          |             |   |          |  
|                                                                              |  |                                                |          |             |   |          |  
|Cash paid for interest                                                        |  | $                                              | 39,337   |             | $ | 69,445   |  
|Cash paid for income taxes                                                    |  | $                                              |         |             | $ |         |  

The accompanying
summary of significant accounting policies and notes to financial statements
are an integral part of the consolidated financial statements.

6

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TRUDY CORPORATIONNOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

1. Description of Business and Basis of Presentation

Trudy Corporation (hereinafter referred to as the
Company), publishes childrens books, eBooks and audiobooks and designs,
manufactures and markets plush stuffed toys, childrens instruments and musical
electronics for sale directly to consumers in the United States and to domestic
and international retail and wholesale customers. The Companys products are
sold under the trade names (i.e. imprints) of Studio Mouse, Soundprints, Little
Soundprints, Fetching Books, Music for Little People and BeBop.

The accompanying unaudited financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (including normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2009. For further information, refer to the financial statements and footnotes
thereto included in the Companys annual report on Form 10-KSB for the year
ended March 31, 2008.

2. Summary of Significant Accounting Policies

Estimates

The preparation of these financial statements in
conformity with accounting principles generally accepted in the United States
of America requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosures. On an ongoing basis, the Company evaluates its estimates and
judgments based on historical experience and various other factors that are believed
to be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.

Cash and Cash Equivalents

The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.

7

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Credit Risk

The Company transacts business on a credit basis with
its customers. The Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its trade accounts receivable
credit risk exposure is limited. The Company does not require collateral or
other security to support credit sales, but provides an allowance for bad debts
based on historical experience and specifically identified risks. The Company
also obtains credit insurance on customers when it is deemed warranted.

Inventories

Inventories, which consist principally of finished
goods, are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method. The Company reviews its inventory for obsolescence
and provides for obsolescence when the inventory is deemed to be unsaleable
over a reasonable time.

Equipment

Equipment is stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
assets which range from three to seven years for machinery and equipment, and
furniture and fixtures, and from one to three years for computer software and
hardware.

Fair Value of Financial Instruments

The Company has the following financial instruments:
cash and cash equivalents, accounts receivable, inventories, prepaid expenses,
accounts payable and accrued expenses, notes payable and long-term debt. The
carrying value of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses, and notes payable approximate their fair value
based on the liquidity of these financial instruments or based on their
short-term nature. The carrying value of long-term debt approximates fair
market value based on the market interest rates available to the Company for
debt of similar risk and maturities.

Pre-Publication Costs

Pre-publication costs are deferred and amortized on an
accelerated method over their expected revenue generating lives.

8

---



Intangible Assets

Intangible
Assets related to Music for Little People are amortized on a straight line
basis over their estimated useful lives.

Long-Lived Assets

In accordance with Financial Accounting Standards
Board Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Management performs ongoing business
reviews and evaluates impairment indicators based on qualitative and
quantitative factors. If it is determined that the carrying amount of an asset
cannot be fully recovered, an impairment loss is recognized.

Revenue

Revenues are recorded in accordance with SEC Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements.

Revenues from product sales are recognized in the
period when persuasive evidence of an arrangement with the customer exists, the
products are shipped and title has transferred to the customer, all significant
obligations have been delivered, and collection is considered probable. Since
many of the product shipments are accompanied with the right of return, a
provision for estimated returns on these sales is made at the time of sale, in
accordance with Statement of Financial Accounting Standards No. 48, Revenue
Recognition When Right of Return Exists, based on historical experience.
Returned product is resold when possible. Historically, a portion of returned
product is deemed unsaleable and is destroyed.

Royalties

The Company records royalty revenue as earned and
provides for its royalty expense at the time the royalty income is recorded.
Royalty advances are recorded as earned when such advances represent a
nonrefundable guarantee and there are no obligations to perform services.
Advance royalty payments are recorded as expense when such advance represents a
nonrefundable guarantee.

Government Taxes

Product sales are presented net of sales tax collected
and remitted to governmental authorities.

9

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Subsidiary Licensing Rights

Depending upon the terms of its various licensing
agreements, the Company can lease its intellectual property rights to another
party. The associated income is recorded as either advances against royalties
or royalties. The associated expenses due to the authors, illustrators or
licensors are a percentage of such income for use of their text, illustrations,
content or imprimaturs.

Income Taxes

Income taxes are accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. The statement employs an asset and liability approach for
financial accounting and reporting of deferred income taxes. Generally, SFAS
109 allows for recognition of deferred tax assets in the current period for the
future benefit of net operating loss carryforwards and items for which expenses
have been recognized for financial statement purposes but will be deductible
for tax purposes in future periods. A valuation allowance is recognized, if on
the weight of the available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.

Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment (SFAS 123R), replacing SFAS 123 and superseding
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). SFAS 123R requires public companies to recognize
compensation expense for the cost of awards of equity compensation effective
for fiscal years beginning after July 1, 2005. This compensation cost will be
measured as the fair value of the award estimated using an option-pricing model
on the grant date. The provisions of SFAS No. 123R were effective for Trudy on
April 1, 2006. The adoption of SFAS No. 123R did not have a material impact on
the financial statements since the Company has no outstanding stock options.

The Company periodically issues shares of its common
stock to employees as grants. Shares issued for services are valued either at
the Companys estimate of the fair value of the common stock at the date of
issuance or based on the market price at the date of issuance.

Income/Loss Per Share Computation

Income/loss per share is computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, (Statement 128). Basic earnings per share is computed by dividing net
income/loss by the weighted average number of outstanding common shares.
Diluted earnings per share is computed using the weighted average number of
outstanding common shares and common share equivalents during the period.
Dilutive common share equivalents consist of employee stock options using the
treasury method and dilutive convertible securities, if any, using the
if-converted method.

10

---



Comprehensive Income (Loss)

The Company has adopted SFAS No. 130, Reporting
Comprehensive Income (Statement 130). Statement 130 establishes rules for the
reporting and display of comprehensive income and its components. Comprehensive
income (loss) for the Company is the same as net income (loss) for all periods
presented.

Segments of an Enterprise and Related Information

The Company has adopted the FASBs SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information
(Statement 131). Statement 131 established standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Statement
131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company has determined it
has no reportable segments under Statement 131.

Advertising

Advertising costs are expensed as incurred, except for
catalogs and brochures which are all amortized over the period benefited not to
exceed the publication date of the new brochure or twelve months, whichever is
less. The Company provides cooperative advertising allowances to certain
customers. These allowances are accounted for in accordance with the
requirements of Emerging Issues Task Force Statement No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer.

Advertising expense related to catalogs and brochures
was $8,628 and $5,136 for the three month periods ended September 30, 2008 and
2007, respectively. Advertising expense related to catalogs and brochures was
$18,584 and $10,511 for the six month periods ended September 30, 2008 and
2007, respectively.

Other advertising expense was $11,428 and $495 for the
three month periods ended September 30, 2008 and 2007, respectively. Other
advertising expense was $26,601 and $495 for the six month periods ended
September 30, 2008 and 2007, respectively.

3.
Acquisition: Music for Little People

On March 7,
2008 the Company purchased certain assets from the childrens audio publisher,
Musical Kidz LLC, pertaining to its mail-order and ecommerce divisions. Musical
Kidz is the publisher of childrens music distributed on the record label,
Music for Little People (MFLP).

The total
purchase price was $550,000. The Company received $100,000 in inventory and
$450,000 in intangible assets such as direct mail catalog files; images;
graphics and text used in direct mail catalogs, flyers, mailing websites;
mailing lists; e-mail lists; all MFLP websites; and licensing agreements for
MFLP and Bebop, Musical Kidz, LLCs branded line of musical instruments.

11

---



4. Inventories

Inventories consist of the following:

|                           |  |   |           |  
|-------------------------- |  | - | --------- | -
|Raw Materials              |  | $ | 38,685    |  
|Finished Goods             |  |   | 1,839,126 |  
|Reserve for
  Obsolescence |  |   | (210,000  | )
|                           |  |   |           |  
|Inventory                  |  | $ | 1,667,811 |  
|                           |  |   |           |  

5. Notes Payable, Bank and Related Parties

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |           | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | --------- | 
|A revolving line
  of credit totaling $850,000 due on demand. Interest is payable monthly equal
  to the Wall Street Journal reported prime rate plus 1.0%. Borrowings are
  subject to a borrowing base equal to 80% of eligible accounts receivable. The
  note is also secured by all of the assets of the Company, a mortgage on the
  Companys premises and a personal guarantee of a principal shareholder
  (William W. Burnham, Chairman of the Board). |  | $ | 789,706   | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |           | 
|Various notes
  payable, to principal shareholder (William W. Burnham, Chairman of the Board)
  due on demand. Interest is payable monthly at LIBOR + 1.25%.                                                                                                                                                                                                                                                                                                     |  |   | 1,832,341 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |           | 
|Note payable,
  bank, payable in monthly installments of $2,713 including interest at 7%.
  Balance due in February 2009. The note is secured by all assets of the
  Company, a mortgage on the Companys premises and a personal guarantee of a
  principal shareholder, William W. Burnham.                                                                                                                                                                    |  |   | 239,222   | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |           | 
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | $ | 2,861,269 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |           | 

12

---



6. Income Taxes

The components of income tax (benefit) are as follows:

|                                                                                  |  |                    |   |                    |   |          |   |          |   |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------ | - | ------------------ | - | -------- | - | -------- | - |  | - | -------- | -
|                                                                                  |  | September 30, 2008 |   | September 30, 2007 |  
|                                                                                  |  |                    |   |                    |  
|                                                                                  |  | Current            |   | Deferred           |   | Current  |   | Deferred |  
|                                                                                  |  |                    |   |                    |   |          |   |          |  
|Income tax
  expense (benefit) before application of operating loss carryforwards |  | $                  | 0 |                    | $ | (142,100 | ) | $        | 0 |  | $ | (121,600 | )
|                                                                                  |  |                    |   |                    |   |          |   |          |   |  |   |          |  
|Income tax
  expense (benefit) of operating loss carryforwards                    |  |                    | 0 |                    |   | 0        |   |          | 0 |  |   | 0        |  
|                                                                                  |  |                    |   |                    |   |          |   |          |   |  |   |          |  
|Change in
  valuation allowance                                                   |  |                    | 0 |                    |   | 142,100  |   |          | 0 |  |   | 121,600  |  
|                                                                                  |  |                    |   |                    |   |          |   |          |   |  |   |          |  
|                                                                                  |  |                    |   |                    |   |          |   |          |   |  |   |          |  
|Income tax
  expense (benefit)                                                    |  | $                  | 0 |                    | $ | 0        |   | $        | 0 |  | $ | 0        |  
|                                                                                  |  |                    |   |                    |   |          |   |          |   |  |   |          |  

The deferred taxes are comprised of the following at
September 30, 2008:

|                                   |  |   |            |  
|---------------------------------- |  | - | ---------- | -
|Net operating
  loss carryforwards |  | $ | 1,408,000  |  
|Reserves and
  allowances          |  |   | 571,000    |  
|                                   |  |   |            |  
|Total deferred
  tax assets        |  |   | 1,979,000  |  
|Less valuation
  allowance         |  |   | (1,979,000 | )
|                                   |  |   |            |  
|                                   |  |   |            |  
|Net deferred tax
  assets          |  | $ | 0          |  
|                                   |  |   |            |  

The deferred tax asset represents expected future tax
savings resulting from the Companys reserves and allowances expensed for
financial reporting purposes but not for tax purposes and net operating loss
carryforwards. As of September 30, 2008, the Company has a net operating loss
carryforward of approximately $4.0 million for federal income tax purposes
which expire at various dates through 2027. Utilization of these benefits is
primarily subject to the extent of future earnings of the Company, and may be
limited by, among other things, shareholder changes, including the possible
issuance by the Company of additional shares in one or more financing
transactions. The Company has established a valuation allowance for the portion
of possible tax savings not likely to be realized by the end of the
carryforward period.

7. Related Party Transactions

The Company is involved in several transactions with
existing officers and shareholders of the Company and entities, which are
controlled by these individuals, collectively related parties. The following
is a summary of this activity:

The Main Avenue property leased by the Company is
owned by a Connecticut limited liability company, Noreast Management LLC, which
is owned jointly by William W. Burnham, the Chairman of the Company and a
principal shareholder, Peter Ogilvie, a former Director and Officer of the
Company, and Fred M. Filoon, a Director of the Company. The Company currently
is on a lease from month to month. Rent expense totaled $29,150 and $23,743 for
the three months ended September 30, 2008 and 2007, respectively. Rent expense
totaled $56,498 and $47,485 for the six months ended September 30, 2008 and
2007, respectively.

13

---



As of September 30, 2008, the Company has borrowings
from related parties of $1,832,341. Interest to related parties totaled $15,387
and $10,221 for the three months ended September 30, 2008 and 2007,
respectively. Interest to related parties totaled $40,732 and $23,354 for the
six months ended September 30, 2008 and 2007, respectively. Repayments to
related parties totaled $14,883 for the three months ended September 30, 2008
and $22,788 for the six months ended September 30, 2008. There were no loan
repayments to related parties for the three or six months periods ended September
30, 2007.

Guarantor fees for Mr. Burnham for the three months
ended September 30, 2008 were $3,795. Guarantor fees for Mr. Burnham for the
three months ended September 30, 2007 were $4,764. Guarantor fees paid to Mr.
Burnham for the six months ended September 30, 2008 were $5,215 versus $9,836
for the prior six months.

The Company has re-engaged Delta Capital Group, Inc.
to assist in identifying and negotiating with possible financing sources. Last
fiscal year Mr. Bradford Mead, the President of Delta Capital Group, was
elected to the Board of Directors.

|                                                                                                    | 
|--------------------------------------------------------------------------------------------------- | 
|Item 2.     MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS

NET SALES.

Overview

Net Sales for the Companys September quarter of
fiscal 2008 decreased 16.0% versus the comparable quarter of fiscal 2007. This
is primarily a result of revenue decreases among drugstore chains and the
Companys exclusive Canadian book distributor and traditional book and gift
retailers and distributors. The Companys profit margin decreased from 48.6% in
the prior year to 37.6% in the current year, primarily as a result of increases
in warehousing and fulfillment costs related to the companys acquisition of a
direct-to-consumer business in March of 2008. The three month period resulted
in a net loss of $136,620 versus net income of $136,880 for the prior year.

Three months ended September 30, 2008

As noted above, net sales for the second quarter of
fiscal 2008 decreased 16.0% versus the prior year. Sales of Disney-licensed
products as a percentage of total Company sales increased from 57.4% to 60.0%
for the quarter versus the comparable quarter a year ago. Sesame Workshop-licensed
sales were immaterial in the current quarter vs. 11.9% of sales in the prior year.  Smithsonian-licensed product sales increased from 12.2% of
Company sales to 25.1%, driven largely by sales to a major home shopping
channel.

14

---



|                |  |                                                                       |       |      |  |       |  
|--------------- |  | --------------------------------------------------------------------- | ----- | ---- |  | ----- | -
|                |  | Percentage of Sales by
  license for the quarters ended September 30, |      
|                |  |                                                                       |      
|License         |  | 2008                                                                  |       | 2007 | 
|                |  |                                                                       |       |      | 
|Disney          |  |                                                                       | 60.0  | %    |  | 57.4  | %
|Proprietary     |  |                                                                       | 6.1   |      |  | 18.2  |  
|Smithsonian     |  |                                                                       | 25.1  |      |  | 12.2  |  
|Sesame Workshop |  |                                                                       | NMF   |      |  | 11.9  |  
|All other       |  |                                                                       | 8.8   |      |  | 0.3   |  
|                |  |                                                                       |       |      |  |       |  
|Total           |  |                                                                       | 100.0 |      |  | 100.0 |  
|                |  |                                                                       |       |      |  |       |  

|                                               |  |                                                                                            |         |      |   |          |  |          |          |   |  |       |   
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------ | ------- | ---- | - | -------- |  | -------- | -------- | - |  | ----- | --
|                                               |  | Sales decreases, net of
  provisions for returns, for the three months ended September 30, |         |      |   |          | 
|                                               |  |                                                                                            |         |      |   |          | 
|Sales channel                                  |  | 2008                                                                                       |         | 2007 |   | Variance |  | % change
|                                               |  |                                                                                            |         |      |   |          |  |         
|Domestic
  Supermarkets & Drugstores           |  | $                                                                                          | 0       |      | $ | 445,354  |  | $        | (445,354 | ) |  | NMF   |   
|                                               |  |                                                                                            |         |      |   |          |  |          |          |   |  |       |   
|Canadian Book
  Distributors                   |  |                                                                                            | 14,239  |      |   | 132,792  |  |          | (118,553 | ) |  | (89.3 | ) 
|                                               |  |                                                                                            |         |      |   |          |  |          |          |   |  |       |   
|Domestic
  Discount Retailers (non-returnable) |  |                                                                                            | 149,936 |      |   | 207,305  |  |          | (57,369  | ) |  | (27.7 | )%
|                                               |  |                                                                                            |         |      |   |          |  |          |          |   |  |       |   
|Direct-to-Consumer
  Book Distributors         |  |                                                                                            | 93,839  |      |   | 150,265  |  |          | (56,426  | ) |  | (37.6 | )%

Sales decreases for the quarter were primarily focused
on a few major retail book and gift channels, principally among major book
chains and book departments of discount department stores, owing to the general
economic malaise.

There were no sales to domestic supermarket &
drugstore chains in the current quarter versus $445,354 in sales in the prior
year. This was a result of a large one-time order to a drug store chain in the
prior year that was not repeated in the current fiscal year.

Sales to the Companys exclusive Canadian book
distributor decreased $118,553 as a result of the exclusion of the Companys
products from the distributors major holiday pallet program.

Sales to domestic non-returnable discount retailers
decreased $57,369 from $207,305 in the prior year to $149,936 for the three
months ended September 30, 2008. This decrease was a result of a vendor change,
delaying the availability of key product for this sales channel.

Sales to direct-to-consumer book distributors also
decreased 37.6% from $150,265 in the prior year to $93,839 in the current 3
month period as a result of delays in product deliveries by the Companys
printer to one major customer and cessation of operations by a major display
marketer.

15

---



Several other channels of trade experienced decreased
sales including international trade book distributors, domestic toy & gift
distributors and domestic book distributors as a result of sluggish retail
markets worldwide.

|                                  |  |                                                                                            |         |      |         |          |  |          |         |  |  |     | 
|--------------------------------- |  | ------------------------------------------------------------------------------------------ | ------- | ---- | ------- | -------- |  | -------- | ------- |  |  | --- | 
|                                  |  | Sales increases, net of
  provisions for returns, for the three months ended September 30, |         |      |         |          | 
|                                  |  |                                                                                            |         |      |         |          | 
|Sales channel                     |  | 2008                                                                                       |         | 2007 |         | Variance |  | % change
|                                  |  |                                                                                            |         |      |         |          |  |         
|Direct-to-Consumer
  (returnable) |  | $                                                                                          | 219,703 |      | 3,188   |          |  | $        | 216,515 |  |  | NMF | 
|                                  |  |                                                                                            |         |      |         |          |  |          |         |  |  |     | 
|Direct Response
  (MFLP)          |  |                                                                                            | 80,754  |      | 0       |          |  |          | 80,754  |  |  | NMF | 
|                                  |  |                                                                                            |         |      |         |          |  |          |         |  |  |     | 
|Internet
  Accounts (MFLP)        |  |                                                                                            | 71,664  |      | 0       |          |  |          | 71,664  |  |  | NMF | 
|                                  |  |                                                                                            |         |      |         |          |  |          |         |  |  |     | 
|Intl Mass
  Market Distributors  |  |                                                                                            | 506,142 |      | 484,724 |          |  |          | 21,418  |  |  | 4.4 | 

Direct-to-consumer (returnable distributor) sales
increased $216,515 from $3,188 to $219,703 in the current quarter as a result
of a roll-out order from a major television home shopping channel resulting
from successful product testing a year ago. International Mass Market
distributor sales also increased. The Company continues its successful
distribution to Spanish language distributors in Spain and Latin America.
Revenue increased 4.4% in the current quarter versus the year ago quarter to
$506,142.

Sales of Music For Little People audio and educational
music products sold directly to consumers yielded revenue of $152,418. The
purchase of Music For Little People was completed in March 2008 and as such
there were no sales in the prior year.

Several other channels of trade including domestic
warehouse club distributors, international trade book retailers and military
bases also experienced increased sales.

Six months ended September 30, 2008

Net sales for the first six months of fiscal 2009
increased 9.2% versus the prior year. Sales of Disney-licensed products as a
percentage of total Company sales, increased from 51.7% to 54.6% for the six
month period versus the comparable period a year ago. Sesame Workshop-licensed
product sales were 2.7% of Company revenue versus 11.1% in the prior 6 month
period. Smithsonian-licensed product sales increased from 18.2% of Company
sales to 21.9%.

16

---



|                |  |                                                                         |       |      |  |       |  
|--------------- |  | ----------------------------------------------------------------------- | ----- | ---- |  | ----- | -
|                |  | Percentage of Sales by
  license for the six months ended September 30, |      
|                |  |                                                                         |      
|License         |  | 2008                                                                    |       | 2007 | 
|                |  |                                                                         |       |      | 
|Disney          |  |                                                                         | 54.6  | %    |  | 51.7  | %
|Smithsonian     |  |                                                                         | 21.9  |      |  | 18.2  |  
|Proprietary     |  |                                                                         | 8.3   |      |  | 16.7  |  
|Sesame Workshop |  |                                                                         | 2.7   |      |  | 11.1  |  
|All other       |  |                                                                         | 12.5  |      |  | 2.3   |  
|                |  |                                                                         |       |      |  |       |  
|Total           |  |                                                                         | 100.0 |      |  | 100.0 |  
|                |  |                                                                         |       |      |  |       |  

|                                                        |  |                                                                                          |         |      |   |          |  |          |         |  |  |       | 
|------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- | ------- | ---- | - | -------- |  | -------- | ------- |  |  | ----- | 
|                                                        |  | Sales increases, net of
  provisions for returns, for the six months ended September 30, |         |      |   |          | 
|                                                        |  |                                                                                          |         |      |   |          | 
|Sales channel                                           |  | 2008                                                                                     |         | 2007 |   | Variance |  | % change
|                                                        |  |                                                                                          |         |      |   |          |  |         
|Direct-to-consumer
  (returnable)                       |  | $                                                                                        | 322,887 |      | $ | 45,938   |  | $        | 276,949 |  |  | NMF   | 
|                                                        |  |                                                                                          |         |      |   |          |  |          |         |  |  |       | 
|Internet
  Accounts (MFLP)                              |  |                                                                                          | 190,478 |      |   | 0        |  |          | 190,478 |  |  | NMF   | 
|                                                        |  |                                                                                          |         |      |   |          |  |          |         |  |  |       | 
|Direct Response
  (MFLP)                                |  |                                                                                          | 158,007 |      |   | 0        |  |          | 158,007 |  |  | NMF   | 
|                                                        |  |                                                                                          |         |      |   |          |  |          |         |  |  |       | 
|Domestic Mass
  Market Distributors                     |  |                                                                                          | 205,719 |      |   | 119,093  |  |          | 86,626  |  |  | 72.7  | 
|                                                        |  |                                                                                          |         |      |   |          |  |          |         |  |  |       | 
|Domestic
  Warehouse Club (returnable & non-returnable) |  |                                                                                          | 126,949 |      |   | 55,110   |  |          | 71,839  |  |  | 130.4 | 

Direct-to-consumer returnable sales increased by
$276,949 over the prior year due to a roll out order from a major television
home shopping channel as a result of successful product testing a year ago.

Sales of Music For Little People audio and educational
music products sold directly to consumers via a catalog and an ecommerce
website accounted for sales of $348,485. The purchase of Music For Little
People was completed in March 2008 and as such there were no sales in the prior
year.

Sales to Mass Market Distributors increased 72.7% to
$205,719 versus the prior year as a result of successful sales of select
products in key big box retailer plan-o-grams.

17

---



Domestic warehouse club distributor sales increased
130.4% from $55,110 in the prior year to $126,949 in the current 6 month
period.

|                                     |  |                                                                                          |         |      |   |          |  |          |          |   |  |       |   
|------------------------------------ |  | ---------------------------------------------------------------------------------------- | ------- | ---- | - | -------- |  | -------- | -------- | - |  | ----- | --
|                                     |  | Sales decreases, net of
  provisions for returns, for the six months ended September 30, |         |      |   |          | 
|                                     |  |                                                                                          |         |      |   |          | 
|Sales channel                        |  | 2008                                                                                     |         | 2007 |   | Variance |  | % change
|                                     |  |                                                                                          |         |      |   |          |  |         
|Domestic Supermarkets & Drugstores   |  | $                                                                                        | 0       |      | $ | 445,354  |  | $        | (445,354 | ) |  | NMF   |   
|                                     |  |                                                                                          |         |      |   |          |  |          |          |   |  |       |   
|Canadian Book Distributors           |  |                                                                                          | 8,305   |      |   | 162,311  |  |          | (154,006 | ) |  | (94.9 | %)
|                                     |  |                                                                                          |         |      |   |          |  |          |          |   |  |       |   
|Direct-to-Consumer Book Distributors |  |                                                                                          | 261,104 |      |   | 386,101  |  |          | (124,997 | ) |  | (32.4 | ) 

Domestic supermarkets and drugstore sales were
$445,354 in the prior current six month period; there were no sales in the
current year due to a non-repeating order from a major drug chain.

Sales to Canadian book distributors decreased $154,006
versus the prior year primarily as a result of the lack of a pallet program for
the all important Holiday season.

Direct-to-consumer book distributor sales declined for
the six month period as well as a result of the cessation of operations of the
major display marketer and softening retail sales.

Other channels of trade experienced minor sales
decreases including international mass market distributors, international trade
book distributors, domestic toy and gift distributors and domestic book
retailers.

COST OF SALES.

Three months ended September 30, 2008

The Companys cost of sales for the quarter ended
September 30, 2008 increased $20,209 from $964,205 in the prior year to
$984,414 in the current year, an increase of 2.1%, as a result of the decreased
sales volume and increased warehousing and fulfillment expenses related to the
Music for Little People acquisition completed in March of 2008. Cost of sales
as a percentage of net sales increased from 51.4% to 62.4% in the current
quarter as a result of a change in the sales mix and the increased warehousing
and fulfillment expenses related to the direct-to-consumer acquisition of Music
for Little People. This portion of the business is seasonal, with the bulk of
its yearly sales taking place in the December quarter. Increases in product
costs from pricing pressures by the Companys Asian printers, product
development costs and warehousing costs contributed to the percentage increase.
To cover cost increases for the Companys products, a selective price increase
of 10% to 20% was implemented effective August 1, 2008.

18

---



In the current quarter are expenses for warehousing
and shipping supplies from the Companys outsourced fulfillment center in
Missouri employed to service the direct-to-consumer and library sales for Music
for Little People. There were no such expenses in the comparable prior quarter.

Six months ended September 30, 2008

The Companys cost of sales for the six months ended
September 30, 2008 increased $248,689 from $1,616,025 in the prior year to
$1,864,714 in the current year, an increase of 15.4%, as a result of a 9.2%
increase in sales, increased warehousing costs to service distribution of Music
for Little People products, and product cost increases from the Companys Asian
printers. Cost of sales as a percentage of net sales increased from 56.6% to
59.8% in the current quarter as a result.

GROSS PROFIT.

Three months ended September 30, 2008

The resulting gross profit for the quarter ended
September 30, 2008 decreased 35.1% to $592,821 versus the prior quarters gross
profit of $913,382. Gross margin was 37.6% in the current quarter versus 48.6%
in the quarter ended September 30, 2007.

Six months ended September 30, 2008

Gross profit for the six months ended September 30,
2008 increased 1.1% to $1,251,805 versus the prior years gross profit of
$1,238,461. Gross margin was 40.2% in the current year versus 43.4% for the six
months ended September 30, 2007.

SELLING, GENERAL & ADMINISTRATIVE COSTS.

Three months ended September 30, 2008

The Companys selling, general, and administrative
costs decreased 6.5% or $48,978 to $708,071 for the three months ended
September 30, 2008 versus $757,049 for the three months ended September 30,
2007. As a percentage of net sales, selling, general and administrative
expenses increased from 40.3% of net sales from the prior year to 44.9% of net
sales in the current fiscal year. The increase in selling, general and
administrative expenses as a percentage of net sales was largely due to the
decreased sales and the overhead impact of managing the Companys outsourced
fulfillment center in Missouri for Music for Little People products and for the
additional employees the company added with this acquisition completed in March
of 2008.

19

---



Six months ended September 30, 2008

The Companys selling, general, and administrative
costs increased 4.3% or $63,777 to $1,553,558 for the six months ended
September 30, 2008 versus $1,489,781 for the six months ended September 30,
2007. As a percentage of net sales, selling, general and administrative
expenses decreased from 52.2% of net sales from the prior year to 49.8% of net
sales in the current year.

INCOME / LOSS FROM OPERATIONS.

Three months ended September 30, 2008

For the quarter ended September 30, 2008, the loss
from operations was $115,249 versus income of $156,334 for the prior years
quarter.

Six months ended September 30, 2008

For the six months ended September 30, 2008, the loss
from operations was $301,753 versus a loss of $251,320 for the prior year.
Again, this is primarily attributed to the acquisition, as noted above. It is
not expected that the acquisition will contribute positively to income from
operations until the quarter ending December 31, 2008.

OTHER EXPENSE.

Three months ended September 30, 2008

The Companys other expense for the quarter ended
September 30, 2008 was $21,370 versus $19,453 for the quarter ended September
30, 2007.

Six months ended September 30, 2008

The Companys other expense for the six months ended
September 30, 2008 was $53,423 versus $52,423 for the six months ended
September 30, 2007.

NET INCOME / LOSS.

Three months ended September 30, 2008

As a result of the items discussed above, the
Companys net loss for the quarter ended September 30, 2008 was $136,620
compared to net income of $136,880 for the comparable prior quarter.

Six months ended September 30, 2008

As a result of the items discussed above, the
Companys net loss for the six months ended September 30, 2008 was $355,176
compared to a net loss of $303,743 for the comparable prior six months.

20

---



Impact of New Accounting
Pronouncements

In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies
the accounting for uncertainty in tax positions. FIN 48 requires the
recognition of a tax position when it is more likely than not that the tax
position will be sustained upon examination by taxing authorities, based upon
the technical merits of the position. The provisions of FIN 48 are effective
for the Company on April 1, 2007. The Company does not expect the adoption of
FIN 48 to have a material impact on the financial statements.

In September 2006, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS
157), which provides guidance for using fair value to measure assets and
liabilities. SFAS 157 defines fair value and establishes a framework for
measuring fair value; however, SFAS 157 does not expand the use of fair value
in any new circumstances. The provisions of SFAS 157 are effective for the
Company on April 1, 2008. The Company does not expect the adoption of SFAS 157
to have a material impact on the financial statements.

In February
2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159), which permits entities to choose to measure
many financial assets and liabilities at fair value. The fair value option may
be applied, subject to certain exceptions, on an instrument by instrument
basis; is irrevocable; and is applied only to entire instruments and not to
portions of instruments. The provisions of SFAS 159 are effective for us as of
April 1, 2008. We do not expect the adoption of SFAS 159 to have a material
impact on our financial statements.

In December
2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)),
which establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. The Statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141(R) is
effective for us as of April 1, 2009. The provisions of SFAS 141(R) will impact
us only if we are party to a business combination after SFAS 141(R) has been
adopted.

Critical Accounting
Estimates

Managements discussion and analysis of financial
condition and results of operations are based upon the Companys financial
statements which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures. On an ongoing basis, the Company evaluates its estimates
and judgments based on historical experience and various other factors that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The Company
annually reviews its financial reporting and disclosure practices and
accounting policies to ensure that its financial reporting and disclosures
provide accurate and transparent information relative to the current economic
and business environment. The Company believes that of its significant
accounting policies (see summary of significant accounting policies more fully
described on Note 2 of notes to our financial statements), the following
policies involve a higher degree of judgment and/or complexity:

Pre-Publication Costs

Pre-publication costs are deferred and amortized on an
accelerated method over their expected revenue generating lives.

21

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Prepaid Catalog Costs

Catalogs and brochures are amortized over the period
benefited, not to exceed the publication date of the subsequent brochure or
twelve months, whichever is less.

Inventory

The company reviews its inventory for obsolescence and
provides for obsolescence when the inventory becomes unsaleable over a
reasonable time.

Reserve for Returns

The Company maintains allowances for product returns.
These allowances are based on historical experience and known factors regarding
specific information from customers or a products known sell-through
performance in the marketplace. If product return rates exceeded the
established allowances, additional allowances would be required. The Company
attempts to resell all returned product whenever possible.

Liquidity and Capital Resources

|                                        |  |                                        |            |      |   |           |   |          |            |   |  |       |   
|--------------------------------------- |  | -------------------------------------- | ---------- | ---- | - | --------- | - | -------- | ---------- | - |  | ----- | --
|                                        |  | For the quarters ended
  September 30, |            |      |   |           |  
|                                        |  |                                        |            |      |   |           |  
|                                        |  | 2008                                   |            | 2007 |   | Variance  |   | % change
|                                        |  |                                        |            |      |   |           |   |         
|                                       
|Net assets
  (deficiency)               |  | $                                      | (507,845   | )    | $ | 212,342   |   | $        | (720,187   | ) |  | NMF   |   
|                                        |  |                                        |            |      |   |           |   |          |            |   |  |       |   
|Working capital
  (deficiency)          |  |                                        | (1,682,094 | )    |   | (100,133  | ) |          | (1,782,227 | ) |  | NMF   |   
|                                        |  |                                        |            |      |   |           |   |          |            |   |  |       |   
|Accounts
  receivable, net              |  |                                        | 1,588,449  |      |   | 1,652,449 |   |          | (64,000    | ) |  | (3.9  | %)
|                                        |  |                                        |            |      |   |           |   |          |            |   |  |       |   
|Accounts payable
  and accrued expenses |  |                                        | 1,673,397  |      |   | 1,416,978 |   |          | 256,419    |   |  | 18.1  | % 
|                                        |  |                                        |            |      |   |           |   |          |            |   |  |       |   
|Royalties and
  commissions payable     |  |                                        | 351,330    |      |   | 480,468   |   |          | (129,138   | ) |  | (26.9 | %)

At September 30, 2008 the Company had a deficiency of
net assets of $507,845 versus net assets of $212,342 at September 30, 2007.
Working capital deteriorated by $1,782,227 from a deficiency of $100,133 to a
deficiency of $1,682,094 at September 30, 2008.

Accounts receivable decreased from $1,652,449 at
September 30, 2007 to $1,588,449 at September 30, 2008, a decrease of $64,000.
Accounts payable and accrued expenses increased $256,419 versus the prior year
from $1,416,978 to $1,673,397 at September 30, 2008. Royalties and commissions
payable decreased $129,138 versus the prior year from $480,468 at September 30,
2007 to $351,330 at September 30, 2008 primarily as a result of the sales mix
and the decreased level of sales.

22

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On March 7, 2008 the Company purchased certain
direct-to-consumer and school and library assets from the childrens audio
publisher, Musical Kidz LLC doing business as Music for Little People. The
acquired assets included trademark rights, its mail order catalog, house
mailing list, email addresses, and the URLs for Music for Little People
(http://www.musicforlittlepeople.com). Musical Kidz is the publisher of
childrens music distributed on the record label, Music for Little People
(MFLP). The Company also purchased $100,000 of inventory (see the Companys
Annual Report on Form 10-KSB for the year ended March 31, 2008 for more
information).

Expected cash flows from operations supplemented by
anticipated lending sources are forecast to be adequate in covering the
Companys operations. Although the Company does not expect to run out of
available funds in the coming fiscal year, it does expect that the need for
capital will continue to eclipse the limits of its revolving bank credit
facility of $850,000, and the increased shareholder notes of $1,832,341 if
revenue growth is to be realized. The Company continues to explore alternative
financing options other than those from its principal shareholder in the event
that cash flow does not materialize in line with current expectations.
Additional working capital would be required to fund new growth opportunities
through a strategic acquisition and/or new educational publishing initiatives.
It is believed a strategic or private equity investor or even a consolidation
with another publisher or new media entity would allow the Company to better
position itself for growth by providing working capital for future publishing
initiatives.

As of November 14, 2008, the balance on the Companys
revolving line of credit was $789,706 out of $850,000 available. As of
September 30, 2008 the balance on the Companys revolving line of credit was
$676,206 out of $850,000 available to the Company.

As of November 18, 2008 the Companys backlog was
approximately $2,109,000.

In the most recent quarter the Company received an
additional $106,800 in short-term notes from its principal shareholder (William
W. Burnham, Chairman of the Board). The note is a demand note.

23

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Forward-looking
Statements

We have made forward-looking statements in this report
that are subject to a number of risks and uncertainties, including without
limitation, those described in our Annual Report on Form 10-KSB for the year
ended March 31, 2008 and other risks and uncertainties indicated from time to
time in our filings with the SEC. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements include the information
concerning possible or assumed future results of operations. Also, when we use
words such as believes, expects, anticipates or similar expressions, we
are making forward-looking statements. Readers should understand that the
following important factors, in addition to those discussed in the referenced
SEC filings, could affect our future financial results, and could cause actual
results to differ materially from those expressed in our forward-looking
statements:

* The implementation of our strategies;

* The availability of additional capital;

* Variations in stock prices and interest rates;

* Fluctuations in quarterly operating results; and

* Other risks and uncertainties described in our
filings with the SEC.

We make no commitment to disclose any revisions to
forward-looking statements, or any facts, events or circumstances after the
date hereof that may bear upon forward-looking statements.

| |         |                  
| | ------- | -----------------
| | PART II | OTHER INFORMATION

|                                            | 
|------------------------------------------- | 
|Item 1.     Legal Proceedings              
|                                            | 
|None.                                      
|                                            | 
|Item 2.     Changes in Securities          
|                                            | 
|None.                                      
|                                            | 
|Item 3.     Defaults upon Senior Securities
|                                            | 
|None                                       

24

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|                                                                | 
|--------------------------------------------------------------- | 
|Item 4.     Submission of Matters to a Vote of Security Holders
|                                                                | 
|None                                                           
|                                                                | 
|Item 5.     Other Information                                  
|                                                                | 
|None                                                           
|                                                                | 
|Item 6.     Exhibits and Reports on Form 8-K.                  

|     |                                                                                                                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)  | Exhibits                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                          
|3a.  | Certificate of Incorporation (incorporated by
  reference to the Companys registration statement on Form S-18 (file number
  33-14379B)).                                                                               
|     |                                                                                                                                                                                                                          
|3b.  | Certificate of Amendment of Certificate of
  Incorporation (incorporated by reference to the Companys registration
  statement on Form S-18 (file number 33-14379B)).                                                   
|     |                                                                                                                                                                                                                          
|3c.  | By-laws of Company (incorporated by reference to the
  Companys registration statement on Form S-18 (file number 33-14379B)).                                                                                           
|     |                                                                                                                                                                                                                          
|3d.  | Certificate of Incorporation of Norwest
  Manufacturing Company (incorporated by reference to the Companys
  registration statement on Form S-18 (file number 33-14379B)).                                              
|     |                                                                                                                                                                                                                          
|3e.  | Certificate Amending Certificate of Incorporation of
  Norwest Manufacturing Company dated December 5, 1979 (incorporated by
  reference to the Companys registration statement on Form S-18 (file number
  33-14379B)).
|     |                                                                                                                                                                                                                          
|3f.  | Certificate Amending Certificate of Incorporation of
  Trudy Toys Company, Inc. dated March 27, 1984 (incorporated by reference to
  the Companys registration statement on Form S-18 (file number 33-14379B)).         
|     |                                                                                                                                                                                                                          
|31.1 | Certification of Chief Executive Officer Pursuant to
  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                    
|     |                                                                                                                                                                                                                          
|31.2 | Certification of Chief Financial Officer Pursuant to
  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                    
|     |                                                                                                                                                                                                                          
|32.1 | Certification of Chief Executive Officer Pursuant to
  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                                                                   
|     |                                                                                                                                                                                                                          
|32.2 | Certification of Chief Financial Officer Pursuant to
  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                                                                   
|     |                                                                                                                                                                                                                          
|(b)  | Reports on Form 8-K                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                          
|     | None.                                                                                                                                                                                                                    

25

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SIGNATURES

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

|                        |                   |                                   
|----------------------- | ----------------- | ----------------------------------
|                        | TRUDY CORPORATION
|                        | (REGISTRANT)     
|                        |                   |                                   
|Date: November 19, 2008 | By:               | /s/ Ashley C. Andersen            
|                        |                   |                                   
|                        |                   | Ashley C. Andersen,               
|                        |                   | President, Chief Executive Officer

26

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