UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended May 31, ~~2011~~2012

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

For the transition period from _____ to ______

Commission File No. 000-50916 ~~PEOPLES EDUCATIONAL HOLDINGS, INC. (Exact name of registrant as specified in its charter)~~

~~Delaware~~PEOPLES ~~(State~~EDUCATIONAL orHOLDINGS, ~~other jurisdiction of incorporation or organization) 41-1368898 (I~~INC.~~R.S. Employer Identification No.)~~

~~299 Market Street, Saddle Brook, NJ~~ (~~Address~~Exact name of ~~principal~~registrant ~~executive~~as ~~offices)~~specified in ~~07663~~its ~~(Zip Code~~charter)

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

Delaware	41-1368898
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

299 Market Street, Saddle Brook, NJ	07663
(Address of principal executive offices)	(Zip Code)

~~Securities~~Registrant's ~~registered~~telephone ~~pursuant~~number, toincluding area ~~Section~~code: 12(b201) ~~of the Act:~~712-0090

~~Title~~Securities ofregistered ~~each~~pursuant ~~class~~to ~~Common~~Section ~~Stock,~~12(b) ~~$0.02 par value Name~~ of ~~each~~the ~~exchange on which registered The NASDAQ Stock Market LLC~~Act: None

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

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

o ¨ Yes x No

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ~~x Yes o No~~

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o x Yes o ¨ No

x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o¨ Accelerated filer o¨ Non-accelerated filer o¨ (Do not check if a smaller reporting company) Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o ¨ Yes x No

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of November 30, ~~2010~~2011 (the last business day of the registrant’s most recently completed second fiscal quarter) was $1,~~965~~473,~~948~~261.

The number of shares outstanding of the issuer’'s common stock on August 0514, ~~2011~~2012 was 4,465,202.

Documents incorporated by reference: None.

TABLE OF CONTENTS

		Page No.	~~Page No.~~
PART I		1	1
ITEM 1.	BUSINESS	1	1
ITEM 2.	PROPERTIES	9	9
ITEM 3.	LEGAL PROCEEDINGS	9	10
PART II		10	10
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	10	10
ITEM 7.	MANAGEMENT’'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11	11
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	16	17
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	31	32
ITEM 9A.	CONTROLS AND PROCEDURES	31	33
ITEM 9B.	OTHER INFORMATION	32	34
PART III		32	34
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	32	34
ITEM 11.	EXECUTIVE COMPENSATION	35	37
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	38	40
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	39	41
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES.	39	41
PART IV		41	43
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	41	43
SIGNATURES		43	45

PART I

ITEM 1. BUSINESS

OVERVIEW AND COMPANY HISTORY

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

PE was founded in 1989 by James J. Peoples, the current Chairman of the Board, and Diane M. Miller, currently a member of the ~~current~~Board of Directors, served as Executive Vice President and Chief Creative Officer until May 31, 2012. It began operations in 1990 with the acquisition of a small supplementary product line. Effective November 1, 1998, PE merged into a subsidiary of PEH. All of PEH’s operations are currently conducted through PE. In November 2001, PEH reincorporated in Delaware. ~~Effective June 1, 2005, the common stock of PEH was approved for quotation and trading on the NASDAQ Capital Market under the symbol PEDH.~~

Test Preparation, Assessment and Instruction Product Group

Test Preparation and Assessment: We create and sell state-customized print and digital test preparation and assessment materials that help teachers prepare students for success in school and for required state proficiency tests for grades 1–12.

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

College Preparation Product Group

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

Literacy Product Group

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

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

*Advanced Placement is a registered trademark of the College Board.

INDUSTRY BACKGROUND

The National Center for Education Statistics (NCES) forecasts record public school enrollment through 2019. The fall 2013 public school enrollment is estimated at 49.9 million students, and a small but steady annual growth is projected through 2019, when elementary and secondary enrollments are expected to increase to 52.3 million students. Total public elementary and secondary enrollment is projected to set new records every year from 2010 to 2019. School ~~Enrollment~~publishers have shifted marketing and selling resources to meet changes in regional enrollments. For example, between 2007–2019, enrollments in the South and the West are projected to increase by between 12% and 13%. During the same time period, the Midwest and Northeast school enrollments are expected to decrease by 2.7% and 6.3%, respectively. The most recent NCES estimate has K–12 private school enrollment at 6 million students (estimated 2011 enrollment) growing to 6.25 million students by 2019. Rising immigration and the baby boom echo that began in the mid-1970s and peaked in 1990 are boosting school enrollments. As school enrollments grow, the unit sales of instructional materials are also expected to increase.

The National Center for Education Statistics (NCES) forecasts record public school enrollment through 2019. The fall 2012 public school enrollment is estimated at 49.8 million students, and a small but steady annual growth is projected through 2019, when elementary and secondary enrollments are expected to increase to 52.3 million students. Total public elementary and secondary enrollment is projected to set new records every year from 2010 to 2019. School publishers have shifted marketing and selling resources to meet changes in regional enrollments. For example, between 2007–2019, enrollments in the South and the West are projected to increase by somewhere between 12% and 13%. During the same time period, the Midwest and Northeast school enrollments are expected to decrease by 2.7% and 6.3%, respectively. The most recent NCES estimate has K–12 private school enrollment at 6 million students (estimated 2011 enrollment) growing to 6.25 million students by 2019. Rising immigration and the baby boom echo that began in the mid-1970s and peaked in 1990 are boosting school enrollments. As school enrollments grow, the unit sales of instructional materials are also expected to increase.

Educational Funding

The relationship between state and local school funding has been shifting over the last 30 years, with local funding ~~decreasing~~fluctuating toaround 43.5% and 44%, and state funding ~~rising~~decreasing to 4846.37%. Federal funds for schools have grown to 89.26% (National Center for Education Statistics, ~~2010~~2011).

State fiscal conditions ~~in fiscal 2011~~ are ~~somewhat improved when compared~~ beginning to ~~the~~improve, ~~difficult~~although ~~fiscal~~many ~~environment that~~ states ~~faced~~are innot ~~fiscal~~back ~~2009~~to ~~and~~pre-recession ~~fiscal 2010~~levels. ~~However,~~As asthe ~~states~~economy ~~enter~~slowly ~~fiscal 2012~~advances, ~~they~~state ~~face~~general ~~the~~fund ~~wind~~spending is ~~down~~expected ofto ~~significant~~increase, ~~funding~~although ~~that~~at ~~was~~a ~~provided~~slower ~~through~~rate than the ~~American~~historical ~~Recovery~~average. ~~and~~Fiscal ~~Reinvestment~~2012 ~~Act~~budgets ofhave ~~2009~~undergone ~~(ARRA).~~a ~~Furthermore,~~realignment to ~~state~~adjust ~~revenue~~for ~~collections~~a ~~continue~~declining toshare beof ~~impacted~~federal bydollars ~~the~~flowing ~~economic~~to ~~downturn~~states ~~while~~through ~~demand~~American ~~for~~Recovery ~~healthcare~~ and ~~social~~Reinvestment ~~services~~Act ~~remains~~of ~~high.~~2009 ~~Therefore,~~(ARRA) (The ~~even~~Fiscal ~~after~~Survey ~~an improvement over one~~ of ~~the~~States ~~worst~~Spring ~~time periods in state fiscal conditions since the Great Depression~~2012, ~~fiscal 2012 and fiscal 2013 should present many states with tough budget choices.~~NASBO)

~~State~~According ~~general fund spending is forecast~~ to ~~rise~~the ~~2.6%~~Fiscal inSurvey ~~fiscal~~of States, Fiscal 2012 ~~after~~was ~~rising~~the ~~5.2%~~first inyear ~~fiscal~~since ~~2011.~~the ~~Although~~recession 40where ~~states proposed~~ a ~~fiscal~~large ~~2012~~number ~~budget~~of ~~with~~states ~~general~~did ~~fund~~not ~~spending~~make ~~levels~~substantial ~~above~~mid-year ~~those~~education budget ofcuts. ~~fiscal~~To ~~2011~~date, ~~declines~~only ofeight ~~6.3%~~states ~~and~~have ~~3.8%~~reported ina ~~fiscal~~total ~~2010~~of ~~and fiscal 2009 respectively mean that state general fund spending still remains~~ $181.7 billion, orin ~~2.7%~~enacted ~~below~~mid-year ~~peak~~budget ~~fiscal~~cuts ~~2008~~for ~~levels. For K–12 educational funding specifically, in~~ fiscal ~~2011~~2012, compared 18with 23 states ~~made~~enacting ~~cuts to K–12 expenditures totaling~~ $17.8 billion ~~(as~~in ~~opposed~~mid-year tobudget 34cuts ~~states~~in ~~cutting~~fiscal ~~a total of $5.5 billion the previous year)~~2011, and 1639 states ~~have~~enacting ~~proposed~~$18.3 billion in cuts toin ~~K–12 spending for~~ fiscal ~~2012~~2010.

~~The~~State ~~federal~~general ~~2011~~fund ~~budget,~~spending ~~which~~is ~~began~~forecasted to ~~October~~rise 1,2.2% ~~2010,~~in ~~includes~~fiscal ~~discretionary~~2013 ~~educational~~after ~~spending~~rising ~~of $46~~3.83% ~~billion,~~in anfiscal ~~increase of 2~~2012.5% ~~over~~With ~~the~~39 ~~prior~~states ~~year.~~proposing ~~The~~a ~~2012~~fiscal ~~federal~~2013 ~~education~~ budget ~~includes~~with ~~$448.8~~general ~~billion~~fund spending ~~for~~levels ~~the~~above ~~Department~~those of ~~Education’s~~fiscal ~~discretionary programs~~2012, anstate ~~increase~~general offund $2spending ~~billion~~still orremains ~~4.3%~~below ~~over~~peak ~~2011.~~fiscal ~~The~~2008 $2levels ~~billion~~(due ~~increase~~to ~~includes~~large declines ~~$1.7~~in ~~billion~~fiscal ~~additional~~2009 ~~competitive funding for the Elementary~~ and ~~Secondary Education Act (ESEA~~2010), ~~the~~but ~~largest~~only ~~increase~~by ~~ever~~$4.6 ~~requested~~billion, ~~for~~or ~~programs~~less ~~under~~than ~~the 1965 law~~1%.

For K–12 educational funding specifically, in fiscal 2012, 7 states made cuts to K–12 expenditures totaling $385 million (as opposed to 18 states cutting a total of $1.8 billion in 2011, and 34 states cutting a total of $5.5 billion the in 2010), and 7 states have proposed cuts to K–12 spending for fiscal 2013, while 30 states have recommended increases to K-12 funding, with a net increase for fiscal 2013 of $7 billion for all states combined.

The federal 2011 education budget, which began October 1, 2010, included discretionary spending of $46.8 billion, an increase of 2.5% over the prior year. The 2012 federal education budget includes $48.8 billion for the Department of Education’s discretionary programs, an increase of $2 billion or 4.3% over 2011.

Elementary and Secondary Education Act (ESEA) / Common Core Standards

In 2001, the ESEA was reauthorized and became known to all as No Child Left Behind (NCLB). Under NCLB, states are required to establish rigorous, state-wide academic standards in reading, mathematics, and science for students in grades 3–8 and in high school. States are also required to conduct assessments to determine if these standards are being met on an annual basis.

The ~~2012~~ESEA ~~request~~legislation ~~for~~was ~~the~~initially ~~Department~~scheduled offor ~~Education aligns Federal education resources with key priorities and principles included~~ reauthorization in AOctober 2008, ~~Blueprint~~but ~~for~~has ~~Reform:~~been ~~The~~continually ~~Reauthorization of the Elementary and Secondary Education Act~~delayed. ~~The~~ ~~Blueprint~~While ~~proposes~~many ~~changes~~politicians inbelieve ~~the ESEA intended to help ensure~~ that ~~all children receive~~ the ~~world-class~~nation’s primary education law ~~they deserve and that America~~ needs to ~~compete~~be ~~successfully~~revised, inreauthorization ~~the~~legislation ~~global~~has ~~economy~~been ofdelayed ~~the~~with ~~21st~~NCLB ~~century.~~extended Tovia ~~accomplish these goals, the 2012 request would invest in~~ a ~~reformed~~series ~~ESEA~~of ~~focused~~Congressional ~~on raising standards, encouraging innovation, and rewarding success, while allowing States and districts more flexibility to invest resources where they will have the greatest impact~~continual resolutions.

The $14.8 billion request for the reauthorized Title I, Part A College- and Career-Ready Students program (formerly Title I Grants to Local Educational Agencies) would drive another key priority: graduating every student college- and career-ready (CCR). States would be required to adopt CCR standards in English language arts and mathematics and to implement high-quality assessments that are aligned with and capable of measuring individual student growth toward these standards.

The ~~$900~~2012 ~~million~~request ~~investment~~for the Department of Education aligns Federal education resources with key priorities and principles included in ~~Race~~A toBlueprint for Reform: The Reauthorization of the ~~Top~~Elementary ~~(RTTT)~~and ~~has~~Secondary ~~already~~Education ~~motivated~~Act. ~~states~~The Blueprint proposes changes in the ESEA intended to ~~reform~~help ~~their~~ensure ~~laws~~that all children receive the world-class education they deserve and ~~make~~that ~~new~~America ~~plans~~will be able to ~~better~~compete successfully ~~support~~in ~~educational~~the ~~improvement~~global ~~and~~economy of the 21st century. To accomplish these goals, the 2012 request would invest in a reformed ESEA focused on raising standards, encouraging innovation, and rewarding success, while allowing states and districts more flexibility to invest resources where they will have the greatest impact.

●The ~~Round~~$14.8 1billion ~~Winners~~request for the reauthorized Title I, Part A College- and Career-Ready Students program (formerly Title I Grants to Local Educational Agencies) would drive another key priority: graduating DEevery student college- and TNcareer-ready (CCR). States would be required to adopt CCR standards in English language arts and mathematics and to implement high-quality assessments that are aligned with and capable of measuring individual student growth toward these standards.

●The ~~Round~~Race 2to ~~Winners:~~the ~~DC,~~Top FL(RTTT) ~~,GA,~~initiative ~~HI,~~is MApoised to deepen the investments in the program’s five core reform areas—implementing rigorous standards and assessments, MDusing data to improve instruction and decision-making, NCrecruiting and retaining effective teachers and principals, NYturning around the lowest-performing schools, OHand improving State systems of early learning and care. In addition the program addresses the unmet financial demand of States and districts that have demonstrated a commitment to implementing comprehensive and ambitious plans in these areas. For fiscal 2013, RIthe RTTT funding request is $850 million compared to $549 million in fiscal 2012 and $698.6 million in fiscal 2011.

●As ~~Round~~Congress 1continues ~~and~~to 2debate ~~winners~~education reform ~~have~~through ~~adopted~~ESEA ~~rigorous common~~reauthorization, ~~college-~~some ~~and~~states ~~career-ready~~are ~~standards~~beginning into ~~reading~~push ~~and~~through ~~math,~~their ~~created~~own ~~pipelines~~reforms. ~~and~~One ~~incentives~~of tothe ~~put~~biggest areas of change at the ~~most~~state ~~effective~~level has been the passage of controversial new laws to limit teachers’ incollective ~~high-need~~bargaining ~~schools~~rights and to tie teachers’ tenure, advancement, and ~~all~~pay ~~have~~to ~~alternative~~their ~~pathways~~performance, including their ability to ~~teacher~~improve student test scores. Other changes include the creation/expansion of charter schools, school voucher programs, student academic standards, and ~~principal~~teacher ~~certification~~qualifications.

● Round 3: Eight states will compete using their old RTTT applications: AZ, CA, CO, IL, KY, LA, PA, and NJ. For the third round, financed by the fiscal 2011 budget, grants will range from $10 million to $50 million, depending on the state’s size and final number of grants, compared to $700 million that was available in the first two rounds.

As Congress continues to debate education reform through ESEA reauthorization, individual state legislatures have pushed through their own reforms. One of the biggest areas of change at the state level has been the passage of controversial new laws to limit teachers’ collective bargaining rights and to tie teachers’ tenure, advancement, and pay to their performance, including their ability to improve student test scores. Other changes include the creation/expansion of charter schools, school voucher programs, student academic standards, and teacher qualifications.

Within the requirements for RTTT, states must agree to adopt and implement a set of Common Core State Standards (CCSS). The standards development initiative is led by the National Governors Association and the Council of Chief State School Officers in partnership with Achieve, ACT, and the College Board. The CCSS have been finalized as of June 2010 and these standards are clearer, fewer, and higher than most states’ current standards. They lay the groundwork for children to live and compete in today’s global world. They are high quality, consistent, evidence based, and aligned with college and work expectations.

The adoption of the CCSS is voluntary for states; however as of June ~~2011~~2012, 4447 states and the District of Columbia have adopted and plan to implement the CCSS. States choosing to adopt the CCSS have agreed that the common core will represent at least 85% of the state’s standards in ~~mathematics and~~ English language arts (ELA) and mathematics. States must adopt the CCSS in their entirety, but they can add 15% state specificity as needed.

~~The assessments that will test the new CCSS will be first tested in 2012-13 and fully operational in 2014-15.~~ There are currently two assessment consortiums that states have joined: ~~they are~~ SMARTER Balanced Assessment Consortium (SBAC) and the Partnership for Assessment of Readiness of College and Career (PARCC). Each of these consortia will assess the standards in a slightly different manner~~. SBAC is creating a high-quality~~, ~~balanced multi-state assessment system based on the CCSS,~~ with ~~customizable~~some ~~components.~~key ~~They~~similarities ~~will~~including a ~~take~~focus anon ~~aggressive~~online ~~technology-based~~summative ~~approach.~~assessments ~~The~~for ~~tests will be given in~~ grades 3-8 and ~~11.~~high ~~The~~school ~~other~~in ~~assessment~~ELA ~~consortium,~~and ~~PARCC~~mathematics, isthe ~~developing~~use of a ~~distributed~~mix ~~summative~~of ~~model~~item ~~with~~types (including ~~high-quality~~selected ~~through-course~~response, ~~assessments~~constructed ~~that~~response, ~~will~~technology-enhances beand ~~combined~~complex ~~with~~performance ~~end-of-year~~tasks), ~~tests~~the touse ~~produce~~of aboth ~~more~~electronic and ~~complete~~human ~~picture~~scoring of, ~~student~~optional ~~performance~~interim ~~and~~assessments, aprofessional ~~performance-based~~development ~~assessment~~modules, ~~system.~~model ~~The~~curricular/instructional ~~majority~~units, ofonline reporting, ~~the~~and ~~assessments~~a ~~will~~digital belibrary ~~computer-based.~~for ~~The~~sharing ~~tests~~vetted ~~will~~resources beand ~~given~~tools. inBoth ~~grades~~consortia ~~3-11~~are asestimating ~~well~~costs asto ~~throughout~~be ~~high~~approximately $20 ~~school~~per asstudent, ~~end-of-course~~per ~~examinations~~year.

During this transition (from state standards to CCSS), our state-customized materials will still help educators teach their state standards and prepare students for the current assessments that continue to be administered. ~~This~~School ~~past~~year ~~school~~2012/2013 will mark the second year, wethat ~~also~~Peoples ~~launched~~Education has offered a print and digital online solution for grades 1-8 that supports the new CCSS. The implementation process continues to evolve; strategies vary by district. Even though states are just in the beginning process of implementing these new standards, for those that are making a priority to do that sooner, we have materials to help them. Our strategy has been, and will continue to be, one that will meet the needs of each state by providing quality materials that help all students succeed,. ~~are~~Our ~~price~~materials ~~sensitive, and can~~ meet a variety of needs. Our development process will continue to begin with research to understand the needs of individual states and then develop materials to help those students learn and achieve mastery of the adopted standards. Our focus is to offer schools and districts a blended product solution (print and digital) to meet their immediate needs, whether it is their state standards or the implementation of the new CCSS.

Supplementary Materials Market

The K–12 ~~instructional~~basal ~~materials~~and ~~market,~~supplemental ~~including~~ instructional materials ~~(textbooks and supplements)~~ market, ~~technology products (hardware, software, and internet), and other products (trade books, book clubs/fairs, periodicals, and tests),~~ totaled $163.42 billion in sales infor the ~~2009–2010~~twelve ~~school~~months ~~year.~~ended ItMay is31, ~~projected that sales in 2010–2011 will be approximately $17.3 billion~~2012, a ~~5.3%~~decline ~~increase compared to the prior year (Education Market Research (EMR), 2011). Sales~~ of ~~supplemental instructional materials are estimated to be at $4~~11.~~82 billion in 2009, down 1.~~9% ~~compared to the $4~~.91 ~~billion~~(American ~~reported~~Association ~~for~~of ~~2008. (EMR, 2011~~Publishers).

We believe that the supplemental market revenue performance will continue to reflect the economic environment. ~~and~~Additionally, we believe that growth opportunities will continue to exist as schools unify print and technology tools to pursue remediation, intervention, test preparation, and formative instruction.

Test Preparation, Assessment and Instruction Market

As required by law, all states have developed state content standards and high-stakes state tests (tests that ~~have major consequences or are~~ used as the basis for promotion or graduation). State standards are not static, and states frequently adjust their standards. There are significant differences from state-to-state in both content standards and tests used to assess student proficiency. A majority of the states are transitioning away from their state specific standards and are implementing a new set of standards called the Common Core State Standards. States have the option to add 15% state specificity to the global set of standards.

We develop and sell ~~test~~Test ~~preparation~~Preparation materials in language arts, reading, mathematics, science, and social studies and offer both instructional worktexts and print assessments (Diagnostic Practice Tests). Our Test Preparation books are 100% customized for each state. In practice, this means that no two of our Test Preparation books are identical. State-specific customization, along with the thoroughness and quality of our Test Preparation materials, provide us with a unique sales and marketing position. Under our same development process in which we develop state-specific products, we have created programs for the Common Core State Standards in reading and mathematics. These books are 100% customized to the Common Core State Standards.

Like our Test Preparation products, our Assessment products are also customized for each state. ~~The~~These Assessment materials ~~are~~include ~~also~~a ~~available~~robust formative assessment program that includes both pre-created assessments (in a populated assessment library), as well as standards-based practice items; each are delivered in a web-based digital ~~form~~format. ~~EPATH~~Measuring ~~Knowledge~~Up Live™ is the platform under which all of our digital products exist. The platform offers a suite of online tools, branded and strategically connected to the Measuring Up® print materials, for educators and students. ~~EPATH~~Measuring ~~Assess®~~Up Insight™ offers both formative and summative assessments, custom-assessment creation tools, and progress monitoring capabilities. ~~EPATH~~A ~~Discovery®~~derivative ~~(only~~product ~~available~~of inMeasuring ~~Texas~~Up Insight, is End-of-Course Online, which delivers similar functionality with an undivided focus on the High School, end-of-course content and ~~California)~~subject ~~offers~~matter; ~~online~~English ~~instruction~~I, Algebra, Biology, and Chemistry. Measuring Up MyQuest™ provides a student-driven, standards-based practice environment that ~~ultimately~~was ~~takes~~designed ~~our~~not ~~worktexts~~only to deliver relevant and ~~offers~~appropriate content, but to do so while keeping students engaged and motivated. The system was uniquely created to scale up or down based on student performance thus providing a ~~digital~~completely ~~version~~individualized ~~with~~and ~~interactive~~differentiated ~~elements~~practice experience. Measuring ~~Launched~~Up inReach™, the ~~fall~~newest ofaddition ~~2009,~~to ~~Practice~~our ~~Path~~Measuring Up Live™ ~~provides~~suite ~~skills~~offers ~~practice~~online instruction that ultimately takes our worktexts and ~~test~~offers ~~preparation~~a ~~that~~digital ~~levels~~version ~~the~~for ~~content~~added ~~based~~instructional onflexibility, bridging the ~~student’s~~gap ~~performance~~between the print and digital needs within a given classroom. Our programs allow teachers to generate unique instruments, review data, and to make instructional decisions that focus a student’s learning on the areas that need the most attention. They allow teachers to differentiate instruction as described in the Response to Intervention (RTI) requirement of the Individuals with Disabilities Education Act (IDEA).

Our Focused Instruction materials are also customized to meet specific state standards. Test preparation has a valuable place in the school, but student instruction is considerably more than just test preparation. Our Focused Instruction products are state-specific, standards-based materials that are used by teachers to deliver explicit, in-depth instruction in the skills and strategies essential to student proficiency in reading comprehension, critical reading, basic mathematics skills, mathematics problem solving, and vocabulary development. We also offer intervention kits, which integrate a variety of our Focused Instruction materials and provide a guide that specifically outlines what to do on each day and what materials/lessons to use. These kits are an excellent solution to intervention programs that are offered during the school day as well as Saturday programs and for summer school. Online tests support Focused Instruction materials, providing both formative assessment and targeted assessment.

The accountability pressure NCLB placed on schools to make Adequate Yearly Progress (AYP) has created a public window into our schools that is unprecedented. Aligning standards with classroom instruction and holding schools accountable has been permanently imprinted in our schools. The accountability pressure will continue especially with the adoption and implementation of the CCSS to fuel the market demand for supplemental test preparation, assessment, and instruction materials like those produced and sold by the Company. A recent survey of the K-12 test preparation market by EMR (2011) reported that 76.3% of the respondents use test preparation materials.

In 2009, sales of test preparation materials declined by 6.9% and online/digital content increased by 19% (EMR, 2011). Also noted, the vast majority of respondents use some type of formative assessment, assessment for current learning (as opposed to summative or assessment of past learning). A majority of the respondents (68.7%) said they are doing formative assessment. According to EMR’s study, among the various sub-groups, curriculum (76.7%) and testing (76.1%) supervisors were the most emphatic about using formative assessment, followed by the principals (72.1%). The primary purposes for using formative assessment are to provide diagnostic information to promote targeted instruction (77.3%), to identify students who need additional assistance (76.7%), to track students’ progress as they move towards proficiency (62.7%), to prepare students for state/standardized tests (55.5%), and to provide an early indicator or a predictive score in NCLB testing grades (32.9%). Our instructional worktexts, assessments, and online systems support the need for and delivery of formative assessment.

Aligning standards with classroom instruction and holding schools accountable has been permanently imprinted in our schools. The accountability pressure will continue especially with the adoption and implementation of the CCSS to fuel the market demand for supplemental test preparation, assessment, and instruction materials like those produced and sold by the Company. A recent survey of the K-12 market by EMR (2011) reported that 76.3% of the respondents use test preparation materials.

Literacy Market

We ~~entered the literacy market in March 2009. We~~ serve the K–8 supplemental literacy market with a comprehensive selection of research-based, cross-curricular leveled reading materials. All products support the requirements of the NCLB legislation, target specific learning objectives to achieve adequate yearly progress (AYP), and provide teachers with the ability to differentiate instruction as described in the RTI requirement of the IDEA.

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

A recent survey done by EMR (2011) reported that 62.9% of respondents used leveled reading books, and 29.1% of the respondents who are currently using basal reading programs (hardcover textbooks used in classrooms) feel the most important improvement to their current program is more leveled reading books. ~~We believe that the increased accountability for improving student performance aligns our products with this strong segment of the supplementary market.~~

College Preparation Market

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

According to the College Board, the total number of AP* test takers increased at an annual compound growth rate of over 10% from 1997 to 2010, rising from 0.9 million tests taken in 1997 to 3.2 million in 2010. In 2010, students from more than 17,000 secondary schools took AP* examinations. On average, these schools offer eight different AP* courses from which their students can choose.

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

PRODUCTS

We are a leading publisher and distributor of supplemental instructional materials for the kindergarten through high school sector (K–12). We design and produce materials in both print and digital formats, with a growing emphasis on Internet-based delivery. The materials are predominantly state-specific and standards-based, focused on state-required tests. We also distribute college preparation products developed both internally and by other publishers and literacy products developed by other publishers.

We operate as one business segment with three product groups.

Test Preparation, Assessment, and Instruction Product Group

Test Preparation and Assessment

· We create and sell print and digital products targeted to grades 1–12 to help students prepare for state proficiency tests. The Measuring Up® Test Preparation and Assessment print products are sold in ~~eleven~~ten states. Measuring Up® is positioned as standards-based, state-customized instruction and classroom assessment, designed to be an integral part of a school’s instructional program throughout the school year. In addition to the state specific Measuring Up series, we also produce products for the Common Core State Standards.

5· Measuring Up Live™ is a growing suite of online tools designed to meet unique needs of schools and districts. Measuring Up Insight™ provides formative assessment and ongoing progress-monitoring that allows educators to make data-driven decisions. End-of-Course Online brings a formative assessment option specifically designed for the end-of-course, high school market. Measuring Up MyQuest™ provides an easy-to-use, student-driven, standards-based practice program for review and mastery of key skills. Measuring Up Reach™ provides digital options for educators to deliver the standards-based instructional content previously only available in a print format. The Measuring Up Live™ suite of tools provides educators with online options to best meet the needs of their students and teachers, while providing state-customized content for assessment and instruction.

· EPATH Knowledge™ is a suite of online tools designed to meet unique needs of schools and districts. Our first offering, EPATH Assess ®, was developed in conjunction with Cisco Learning Systems. EPATH Assess® provides formative assessment and ongoing progress-monitoring that allows educators to make data-driven decisions. EPATH Discovery® delivers immediate online standards-based instructional intervention for students. Lastly, Practice Path™ provides an easy-to-use student-based interface for online standards and test-based skill building and practice. The EPATH Knowledge™ suite of tools provides educators with online options to best meet the needs of their students and teachers, while providing state-customized content for assessment and instruction.

Instruction

· There are two product lines within this group: Focused Instruction and remedial- and multicultural-related materials. Focused Instruction materials provide standards-based, state-specific supplemental instruction in particular subject areas such as reading comprehension, mathematics problem solving, and vocabulary development. Essential to this strategy is the market alignment of the Focused Instruction and Test Preparation and Assessment products so that both product lines are suitable for sale to an identical customer base with an identical sales force. We continue to sell our backlist remedial and multicultural materials, but we are not investing in new development for these products.

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

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

Year Ended May 31, 2011		56	%
Year Ended May 31, 2012	53%
Year Ended May 31, 2010		58	%
Year Ended May 31, 2011	56%

College Preparation Product Group

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

The loss of either major college publisher distribution agreement would have a material adverse effect on our revenue and operations. ~~One~~Both of the agreements ~~has~~have been in place ~~for~~ over ~~20 years and expires in September 2012. The other agreement has been in place for over~~ 15 years and both ~~expires~~expire in September ~~2012~~2013.

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

Year Ended May 31, 2011		37	%
Year Ended May 31, 2012	43%
Year Ended May 31, 2010		35	%
Year Ended May 31, 2011	37%

Literacy Product Group

InWe ~~March~~have ~~2009 we entered into exclusive sales and~~ distribution agreements within the United States for specific products from three publishers. These materials include an extensive selection of leveled reading materials; high-interest engaging resources for striving readers; series that integrate reading, science, and social studies; and selections and strategies for students who are in the process of learning English. Revenue from the Literacy product group, as a percentage of total revenue, was as follows:

Year Ended May 31, 2011		7	%
Year Ended May 31, 2012	4%
Year Ended May 31, 2010		7	%
Year Ended May 31, 2011	7%

PRODUCT DEVELOPMENT

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

Our editorial department has the responsibility for maintaining editorial quality, schedules, and budgets. Product development is carried out by a combination of in-house staff and contracted personnel with tight in-house control. We maintain an in-house system of computer-based technology that makes it possible to complete nearly the entire production cycle in-house~~, resulting in digitized material~~.

Once conceived, a product proposal is circulated to the management group for input. Depending on their input and ~~additional~~extensive market research, the proposal will go forward or be terminated. A pro forma financial statement is prepared to aid in determining whether the new title is desirable for publication.

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

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

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

CUSTOMER BASE

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

SALES, MARKETING, AND DISTRIBUTION

Overview

We conduct our sales activities through inside and outside sales groups (both employees and independent contractors), direct mail, Web initiatives, conventions, and workshops. We believe this system is well suited to the supplementary educational materials market. As we grow, our sales and marketing infrastructure, along with marketing spending for teacher workshops and staff development, sample books, exhibits, direct mail, and Web initiatives will increase.

~~Integrated~~ Catalog/Inside and Outside Sales Model

In the ~~2010-~~2011-2012 school year, approximately ~~232~~188,000 copies of 3836 catalogs and approximately ~~131~~66,000 copies of 2095 print promotional and direct mail pieces reached our various market niches. Catalogs and other direct mail pieces are mailed to internally maintained house lists and other appropriate contact individuals at K–12 schools and district sites throughout the United States. In the same school year, approximately 7083 electronic mailings, sent via e-mail (e-blasts), were deployed and targeted about 1.79 million K–12 educators.

Web Site

Our Web site (located at www.peopleseducation.com) is primarily used as a sales and marketing tool that offers product information. The site also includes additional resources for teachers, including state-specific links, sample lessons, and research information. Our web site for digital products is located at www.~~epathknowledge~~measuringuplive.com. Our Literacy brand can be found at www.BrightpointLiteracy.com, and our College Preparation materials can be found at www.PeoplesCollegePrep.com.

Sales Representatives

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

Warehouse and Distribution

~~During~~We ~~fiscal~~outsource ~~year 2010, we outsourced~~ warehousing and distribution/shipping services to two separate third-party warehouse and distribution companies — one located in Wayne, NJ and the other in Independence, KY. The Wayne, NJ facility warehouses and ships all products within the Test Preparation, Assessment and Instruction product group, the proprietary products from the College Preparation product group, and select titles within the Literacy product group. The Independence, KY facility warehouses and ships only products within the Literacy product group. Orders for nonproprietary College Preparation materials are billed by us and drop shipped by the college publishers to our customers. We operate and maintain our own internal data processing system; however, the services that the warehouse and distribution companies provide are significant to our operations.

COMPETITION

We face competition in each of our three product groups. The competitive landscape for each product group is as follows:

Test Preparation, Assessment and Instruction Product Group

Our Test Preparation, Assessment and Instruction products compete among a variety of companies that offer print and online learning tools. Schools and districts will purchase supplemental materials from a variety of companies to meet their standards-based and test preparation needs. Our competitors offer the following:

Supplemental standards-based instructional materials that are offered in print and/or digital formats

Supplemental test preparation materials that are offered in print and/or digital formats

Supplemental instructional materials that support intervention and remediation in print and/or digital formats

Formative and short cycle assessments that are offered via web

Traditional K–12 textbook companies which provide free supplemental materials

The majority of the products we offer fall within the test preparation, assessment and instruction categories. According to the EMR 2011 survey to educators, when asked to rank assessment categories, educators spend most (51.2%) for formative assessment, summative assessment, and preparation. Included in the categories are early childhood screening, I.Q./aptitude tests, formative assessment, test preparation, learning management systems, summative assessment, and other testing-related materials/services. EMR also states that the top-ranking publishers for test preparation are Harcourt/Steck-Vaugh, BuckleDown Publishing, Curriculum Associates, Triumph Learning, ECS Learning Systems, Options Publishing, Spectrum, American Book Company, and Peoples Education.

According to the reports of 164 supplemental companies participating in the 2011 EMR survey, overall sales of supplemental educational materials in 2009 totaled $4.8 billion, down 1.9% from 2008. Included in the $4.8 billion for 2009 was $1.7 billion in supplemental instructional materials. Out of the 24 different types of supplemental materials, the following ranks were assigned based on the total sales in 2009: assessment (print or online) ranked third, instructional software ranked fifth, consumable workbooks ranked sixth, supplemental textbooks ranked seventh, and test prep materials ranked eleventh.

Our competitive advantage in our defined market place is due to the following factors:

Legacy of assisting over 12 million students succeed with our flagship series, Measuring Up®, since 2000

Content highly customized to state standards

Quality instructional supplemental content customized to the state standards

Quality formative and summative assessments customized to state standards

Cost effective flexible options for intervention and remediation

Print (instruction) and digital (formative assessment/progress monitoring/practice) solutions that are linked

Quality of customer support

· ~~Free~~Training ~~training~~Support

· ~~Affordable~~Competitive pricing

College Preparation Product Group

Our College Preparation materials compete against a variety of companies. Our competitors offer the following:

College textbooks that are distributed into the HS market (print or digital)

· Traditional textbook companies that develop materials specifically for the ~~college~~College ~~preparation~~Preparation and Advanced Placement* courses

~~However,~~We we believe we are competitive based on our quality content, highly flexible inside sales team, and strong product offering that includes textbooks and supplements in a variety of formats ~~and the only resource for instructor access to our online instructor resources~~.

Literacy Product Group

Our Literacy products are ~~competitively~~ positioned in the supplemental reading market for grades K-8 for districts that are looking for leveled literacy resources to enhance or fill gaps in their existing programs. We compete against a variety of supplemental companies that offer reading materials for small group instruction. ~~The breadth and depth of our leveled reading collections, easy to use assessment, and the fresh look and feel of innovative new programs keep us in the forefront of this competitive market.~~

PROTECTION OF PROPRIETARY RIGHTS

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

EMPLOYEES

As of May 31, ~~2011~~2012, we had 9185 employees. We have never experienced a work stoppage and our employees are not covered by a collective bargaining agreement. We believe our relations with our employees are good.

ITEM 2.

PROPERTIES

We do not own any real property. We primarily conduct our operations out of our Saddle Brook, NJ facility. We lease approximately 23,000 square feet of office space at this location at an average rental of approximately $450,000 per year through October 2014.

We lease approximately 1,000 square feet of office space in Columbus, OH at an average rental of approximately $14,000 per year through November 2011.

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

ITEM 3.

LEGAL PROCEEDINGS

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

PART II

ITEM 5.

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

Market for Common Stock

Our common stock ~~has~~was ~~been~~ quoted for trading on the NASDAQ Capital Market under the symbol “PEDH” ~~since~~from June 1, 2005 to June 14, 2012, and ~~was~~has been quoted for trading on the ~~OTC~~OTCQB ~~Bulletin~~Marketplace operated ~~Board~~by ~~from~~OTC ~~September~~Market 10Groups, ~~2004~~Inc ~~through~~beginning ~~May~~June 3114, ~~2005~~2012. ~~Prior to September 10, 2004, there was no established public trading market for our common stock.~~ The following table sets forth the high and low closing sale prices of our common stock as reported by NASDAQ for the periods indicated.

	Year Ended May 31, 2011				Year Ended May 31, 2010
	Year Ended				Year Ended
	May 31, 2012				May 31, 2011
Quarter	High		Low		High		Low
1st	$	1.3047	$	0.8188	$	31.2030	$	10.4081
2nd	$	1.10	$	0.8283	$	31.0310	$	10.4082
3rd	$	20.2993	$	0.9052	$	2.3129	$	10.3090
4th	$	10.8580	$	10.0534	$	1.7585	$	01.7805

On July 2223, ~~2011,~~2012 the last reported bid price of our common stock on ~~NASDAQ~~OTCQB ~~Capital~~Marketplace ~~Market~~ was $10.2395 per share.

Holders

~~There~~As of July 20, 2012 there were approximately ~~542~~255 record holders and 522 beneficial holders of our common stock ~~as of July 25, 2011~~.

Dividends

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

Issuer Purchases of Equity Securities

The Company did not repurchase any of its common stock during the twelve months ended May 31, ~~2011~~2012.

In 2005, our Board of Directors approved a share repurchase program, permitting us to repurchase up to 100,000 shares of our common stock. As of May 31, ~~2011~~2012, 83,768 shares remained available for purchase under the program. No share repurchase plan or program expired, or was terminated, during the period covered by this report.

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

Forward–Looking Statements

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

Critical Accounting Estimates

Our critical accounting estimates are summarized in the footnotes to our consolidated financial statements. Some of our accounting estimates require management to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. These judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts, and other information from outside sources, as appropriate. Actual results may differ from these estimates under different assumptions and conditions. The most critical accounting estimates that require significant judgment are as follows:

Revenue Recognition and Allowance for Returns

Revenue is recognized when products are shipped, the customer takes title and assumes risk of loss, and collection of the related receivable is probable. The allowances for returns as of May 31, ~~2011~~2012 and ~~2010~~2011 were approximately $~~174~~33,000 and $~~153~~174,000, respectively. These allowances are recorded at the time of revenue recognition, if the right of return exists, and are recorded as a reduction of accounts receivable. This allowance is estimated by management based on our historical rate of returns. We recognize shipping and handling revenues as part of revenue, and shipping and handling expenses as part of cost of revenue on the consolidated statements of operations. Subscription based revenue on our digital products is recognized prorata over the life of the subscription agreement.

Deferred Prepublication Costs

Deferred prepublication costs are recorded at their original cost and amortized over a three or five-year period, based on the estimated lives of the related publications. The net carrying value of the deferred prepublication costs is periodically reviewed and compared to an estimate of future net undiscounted cash flows. As of May 31, ~~2011~~2012, the valuation allowance as compared to last year remained unchanged at $137,000. If future net undiscounted cash flows are not sufficient to realize the net carrying value of the asset, an impairment charge will be recognized.

Allowance for Doubtful Accounts

Credit to our customers is determined on a customer-by-customer basis. Trade receivables are carried at original invoice amount less an estimate made for the doubtful receivables based on a review of all outstanding amounts on a monthly basis. We determine the allowance for doubtful accounts after reviewing individual customer accounts as well as considering both historical and expected credit loss experience. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The allowance for doubtful accounts was $10,000 at both May 31, ~~2011~~2012 and ~~2010~~2011 and is believed to be adequate for any exposure to loss.

Allowance for Excess and Slow-Moving Inventory

We continuously monitor our inventory on hand for salability. This monitoring includes review of historical sales experience, projected sales activity by title, and any planned changes to a title that are known by us. Any inventory identified as slow-moving or non-salable is reserved or written down at that time. The reserves of approximately $~~896~~2,365,000 and $~~923~~896,000 at May 31, ~~2011~~2012 and ~~2010~~2011, respectively, are believed to be adequate to cover inventory loss exposure.

Income Taxes

We ~~recognize~~evaluate deferred tax assets ~~and~~for ~~liabilities~~impairment ~~based~~ on ~~the~~a ~~differences~~quarterly basis. ~~between~~During the ~~financial~~fourth ~~statements~~quarter, ~~carrying~~we ~~amounts~~increased ~~and~~our ~~the~~deferred tax ~~basis of~~ assets ~~and~~reserve ~~liabilities~~by $4.2 Wemillion, ~~provide~~resulting in a ~~valuation~~total ~~allowance~~reserve ~~for~~of $5.2 million or 100% of the gross deferred tax assets. ifThis wewas ~~determine,~~ based on ~~the~~a ~~weight~~variety of ~~available evidence~~factors, ~~that~~including itour isfourth ~~more~~quarter ~~likely~~and full ~~than~~fiscal ~~not~~2012, ~~that~~prior ~~some~~year’s orperformance ~~all~~and ofour ~~the~~expected ~~deferred~~future ~~tax~~performance. ~~assets~~We ~~will~~considered ~~not~~all beevidence ~~realized.~~currently ~~As of May 31~~available, both ~~2011~~positive and ~~2010~~negative, ain ~~valuation~~determining, ~~allowance~~based ~~has~~on ~~been provided in~~ the ~~amount~~weight of ~~$700~~that evidence,~~000~~ ~~related to~~ the ~~tax~~likelihood ~~benefit~~that ofthe ~~our~~deferred ~~available~~tax ~~federal~~asset ~~and~~would be ~~state~~realized. ~~Net~~During ~~Operating~~that ~~Losses~~review, ~~(NOLs).~~we ~~The~~determined ~~carrying~~that ~~value of~~ the ~~net~~level ~~deferred~~of ~~tax~~our ~~asset~~recent ~~assumes~~historical ~~that~~losses weoutweighed ~~will~~our beforecasted ~~able to generate sufficient~~ taxable earnings ~~income~~levels infor the ~~future.~~near Weand ~~perform~~long aterm. ~~comprehensive~~As ~~tax~~such, ~~review~~we ~~quarterly~~established ~~and~~a if100% ~~future~~deferred ~~levels~~tax ofvaluation ~~taxable~~allowance. ~~income~~Future ~~are~~profitability would ~~not~~enable ~~sufficient~~us orto ~~fail~~reduce tothe ~~materialize~~valuation inallowance ~~the~~and ~~near~~thereby ~~term,~~offset ~~management~~income ~~will~~tax ~~adjust~~expense ~~the~~that ~~valuation~~would ~~allowance~~otherwise ~~accordingly~~be recognized.

Stock-Based Compensation Expense

We recognize compensation expense based on the grant-date fair value of the awards. Compensation expense for stock options is recognized over the vesting period of the award. The grant-date fair value of the stock options is determined using the Black-Scholes option-pricing model, using assumptions determined by management to be appropriate. For stock options granted during fiscal year ~~2011~~2012, we used a term of 5 ~~to 7~~ years, volatility of 4045% to 4346%, and a risk free rate of 10.18% to 31.1%, resulting in a grant-date fair value of $0.34 28 to $0.9537 per share. For the fiscal year ended May 31, ~~2011~~2012, stock-based compensation expense was approximately $~~181~~206,000.

Year Ended May 31, ~~2011~~2012 vs. Year Ended May 31, ~~2010~~2011

OVERVIEW

In fiscal 2011 we had a net loss of $0.5 million or $0.12 per share, compared to net income of $0.3 million or $0.06 per share in the prior year. Net revenue declined by approximately 10% on a year-over-year basis due principally to an overall decline in educational spending.

NET REVENUE

(In Thousands)	Year Ended May 31,
	2011		2010		Variance			Variance %
	2012		2011		Variance			Variance %
Test Preparation, Assessment and Instruction	$	1713,~~421~~661	$	2017,~~211~~421	$	(23,~~790~~760	)		-1321.86	%
College Preparation		11,~~612~~082		1211,~~139~~612		(~~527~~530	)		-4.36	%
Literacy		~~2,237~~906		2,~~565~~237		(~~328~~1,331	)		-1259.85	%
Total Net Revenue	$	3125,~~270~~649	$	3431,~~915~~270	$	(35,~~645~~621	)		-1018.40	%

Test Preparation, Assessment, and Instruction

Revenue for this product group infor ~~fiscal~~the year ~~2011~~ was $13.7 million, compared to $17.4 million, aduring ~~decline~~the ofsame ~~13.8%~~period ~~from~~in the prior year. ~~Testing~~Test Preparation and Assessment revenue was $1512.62 million, a decrease of 10$3.4%3 ~~compared~~million tofrom the prior year, while Instruction revenue was $1.95 million, ~~down~~a ~~from~~decline of $2430,000 compared to the prior year.8 ~~million~~The revenue shortfall is primarily due to a decline in one of the ~~prior~~states in which we publish state-specific materials. This state is in the process of transitioning to new standards and new tests and during such transitions, schools and districts have reduced their expenditures from historical levels until the transition is complete. Although this change has had a short-term impact on our revenue, it creates future opportunities as educators are in need of products supporting these new standards and test. We recently released materials for the End of Course (EOC) exit exams in this state. This is the first year these EOC tests will count toward graduation, and there is a significant amount of attention from educators to prepare students for these tests. The initial feedback from the market on our EOC products has been favorable.

College Preparation

~~Revenue~~College Preparation revenue for ~~this~~the ~~product~~current ~~group~~year was $11.61 million, a ~~decrease~~decline of ~~4.3%~~$530,000 from the prior year. Distribution revenue, which accounts for approximately 95% of the total revenue within this group, was down 3.2%, and revenue from our proprietary products decreased by $145,000 on a year-over-year basis. Revenue decline is primarily due to the effects of decreased school spending as a result of school budget cuts. However, we are optimistic about the opportunities for future growth in this market niche and will continue to invest in new proprietary product development. Infor June 2011, we entered into an interim contract amendment with one of our college publishers while a new multi-year agreement is negotiated, whereby we would continue to perform all sales, marketing and administration functions, but the college publisher would invoice the customers directly, and remit to the Company the gross profit associated with that revenue. Under this ~~new arrangement, our gross margin would remain unchanged, but revenue and direct costs would decrease~~segment.

Literacy

Revenue for this ~~product~~ group was ~~generated~~ $~~2.2 million of revenue for the year~~906,000, compared to $2.62 million in the prior year. ~~Year-over-year~~ ~~decline~~Revenue isfrom ~~primarily~~this product group was affected significantly due to ~~decreased~~a decrease ~~school~~in ~~spending.~~federally Wefunded ~~anticipate~~literacy ~~growing~~initiatives, ~~the~~specifically ~~number~~ARRA offunding ~~products~~(American ~~within~~Recovery ~~this~~and ~~group~~Reinvestment ~~through~~Act ~~additional~~of ~~distribution~~2009) which ~~agreements~~was ~~and~~a ~~in-house~~funding ~~development~~source utilized by customers.

COST OF REVENUE

Cost of Revenue for fiscal ~~2011~~2012 was $1820.56 million (5980.24% of revenue), compared to $2018.45 million (5859.32% of revenue) in the prior year.

Cost of ~~Revenue~~revenue consists of two components: direct costs and ~~prepublication~~amortization ~~cost~~of ~~amortization~~prepublication costs. Direct costs consist of (1) product cost, which includes paper, printing, and binding, ~~and prepress costs~~ for proprietary print products and product purchases for nonproprietary products, (2) web-hosting fees for our digital products, (3) royalties on proprietary products, and (34) warehousing and shipping costs for all non-digital products.

· Direct costs as a percentage of revenue for fiscal ~~2011~~2012 were 4251.08%, aan ~~decrease~~increase from 42.90% in the prior year. The percentage decrease is due to two factors, a ~~$265~~shift in product revenue mix and an increase in inventory reserves. During the current year College Preparation revenue,~~000~~ ~~decrease~~which consists primarily of non-proprietary product represented 43% of revenue, an increase from 37% in the prior year. In addition, due to the beginning of shift in most states from state-specific standards to the common core standards, and the trends in the literacy market, we increased our inventory reserve and recognized $1.5 million of additional expense ~~over~~during the current year compared to the prior year.

· Prepublication costs include one-time expenses associated with developing and producing new or revised proprietary products. It includes all development expenses, including but not limited to writing, design, art, permissions, software development and any other costs incurred up to the release date of the product in print and/or digital format. Prepublication costs are capitalized and expensed on a straight-line basis over a three- or five-year period, based upon the product. We believe our amortization policy is in line with industry practice. For fiscal ~~2011~~2012, amortization expense ~~remained~~was ~~consistent~~$7.4 ~~with~~million and included $2.4 million of accelerated amortization, primarily related to our digital products. Amortization expense in the prior year atwas $5.4 million. The $2.4 million of accelerated amortization was primarily due to the write-down of underperforming older versions of digital assets.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

(In Thousands)	Year Ended May 31,
	2011		2010		Variance				Variance %
	2012		2011			Variance			Variance %
Selling and Marketing Expense	$	87,~~870~~675	$	98,~~345~~871		$	(~~475~~1,196	)		-513.15	%
General and Administrative Expenses		4,~~393~~648		4,~~474~~392			~~(81~~256	)		-15.8	%
Total Selling, General and Administrative Expenses	$	1312,~~263~~323	$	13,~~819~~263		$	(~~556~~940	)		-47.01	%

Selling, general, and administrative (SG&A) expenses for fiscal ~~2011~~2012 were $1312.3 million, which was a decline of 47.01% from the prior year. As a percentage of revenue, SG&A expenses for fiscal ~~2011~~2012 were 4248.40%, an increase of 25.86 percentage points from the prior year.

Selling and Marketing expenses for fiscal ~~2011~~2012 were $87.97 million, a decline of $~~475,000~~1.2 million and 513.15% from the prior year. Selling expenses decreased $27911,000 inprimarily ~~total~~ due to decreased revenue, resulting ~~offset~~in bylower ~~increased~~selling ~~sales infrastructure expenses~~commissions. Marketing expenses decreased $~~448~~284,000 primarily due to lower ~~product~~catalog ~~sampling,~~ and ~~decreased~~promotion ~~web-related~~expense, offset ~~internet~~by ~~expenses~~higher product sampling.

13General and Administrative expenses for the year were $4.6 million, an increase of $256,000 and 5.8% from the prior year. The increase is primarily due to the write-off of selected trademarks.

General and Administrative expenses for the year were $4.4 million, a year-over-year decrease of 1.8% as we continue to closely monitor expenses.

INTEREST EXPENSE

Interest expense for the year was $~~306~~313,000, which was ~~$29,000 lower than the prior year. The year-over-year change is due~~ comparable to ~~a lower fixed interest rate on~~ the swap portion of our term loan (5.3% to 1.25%) and lower average outstanding debt offset by the change in the fair-value of our swap agreement. Included in the current year interest was $11,000 of expense related to the change in the fair-value adjustment of our swap agreement, compared to $153,000 of income in the prior year.

INCOME TAX EXPENSE

Despite the net loss before taxes of $7.7 million, we recorded tax expense in the current year of $1.6 million as a result of the decision to fully-reserve for the company’s $5.2 million deferred tax asset. For the year ended May 31, ~~2011~~2012, the effective tax rate was ~~37.5~~38% ~~compared to 39~~.~~8% in the prior year.~~

NET LOSS

In fiscal 2012 we had a net loss of $9.3 million or $2.09 per share compared to a net loss of $0.5 million and $0.12 per share in the prior year. As a result of changes in the supplemental education market, specifically the transition to the Common Core Standards, we incurred additional inventory and prepublication amortization expense totaling $3.8 million. In addition, due to the decision to fully reserve for the Company’s deferred tax assets, we incurred tax expense of $1.6 million in the current year instead of a benefit of $2.8 million.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for fiscal ~~2011~~2012 was $52.39 million, compared to $85.13 million in the prior year. Net cash provided by operating activities in ~~2011~~2012 was primarily provided by ~~our~~the ~~profitability~~decrease ~~before depreciation, amortization, and stock-based compensation expense as well as decreases~~ in accounts receivable, inventory, and prepaid marketing expenses offset by ~~an increase in deferred taxes and~~ a decrease in accounts payable and accrued expenses.

Net cash used in investing activities, consisting primarily of expenditures for prepublication costs, was $52.19 million for fiscal ~~2011~~2012, which was $~~179,000~~2.1 ~~higher~~million lower than the prior year. The decrease ~~increase~~ from the prior year was a result of ~~expenditures~~lower ~~for~~prepublication ~~computer hardware and software~~expenditures.

Net cash ~~used~~provided inby financing activities was $~~357~~727,000 for fiscal 2012 ~~2011~~ consisting of $2.03 million inof ~~principal~~borrowing ~~payment~~under onthe ~~long~~line ~~term~~of ~~debt~~credit, offset by $1.6 million ofin ~~increased~~principal ~~borrowing~~payment on ~~the~~long ~~line of credit, as compared to $3~~term debt.~~2 million in the prior year.~~

We have a ~~$20~~Credit ~~million~~Facility ~~credit~~(“Facility”) ~~agreement~~ with Sovereign Bank (“Sovereign”). ~~Amounts~~At ~~borrowed~~May ~~under~~31, 2012, the ~~agreement~~Facility ~~are~~consisted ~~secured~~of bya ~~substantially~~Revolving ~~all~~Line of ~~the~~Credit ~~assets~~(“Revolver”) that ofprovided ~~the~~for ~~Company~~advances up to $9.0 ~~The~~million, ~~agreement~~all ~~provides~~of ~~for~~which was outstanding, and a Term Loan originally in the amount of $10.0 million, of which $1.95 million ~~revolving~~was ~~line~~outstanding. On August 15, 2012, we entered into an amendment to the Facility with Sovereign that extends the maturity date of ~~credit~~the $9.0 million Revolver and athe $101.95 million ~~term~~Term ~~loan~~Loan from December 31, 2012 to June 30, 2013. At August 15, 2012, $9.0 million was outstanding under the Revolver and $-0- was available for borrowing. Our borrowings from Sovereign are secured by substantially all of the Company’s assets.

The ~~revolving~~amendment ~~line~~also ofchanged ~~credit~~the ~~provides for advances up to $10 million. The~~ interest rate onunder the ~~revolving~~Revolver to ~~line~~6.25% ofthrough ~~credit~~December ~~ranges~~31, ~~from~~2012, ~~LIBOR~~and ~~plus 2~~9.0% tothereafter, ~~LIBOR~~interest ~~plus~~is 2payable monthly.~~25%,~~ orPrior ~~prime~~ to ~~prime~~the ~~plus 0.5%~~amendment, ~~with~~ the ~~exact~~ interest rate on the Revolver was based on ~~the~~LIBOR ~~ratio~~plus ofan ~~our~~interest ~~total~~rate ~~funded~~spread ~~debt~~of 2.0% to ~~EBITDA~~2.25% Atthrough ~~May~~August 3110, 2011, $62.775% ~~million~~to ~~was~~3.00% ~~outstanding~~through June ~~under~~30, ~~this facility~~2012, and $3.300% ~~million~~to ~~was available for borrowing~~3.25% Inthrough August ~~2011~~15, ~~certain~~2012, ~~terms~~with of the ~~loan~~exact ~~agreement~~interest ~~were~~rate ~~amended~~based ~~including~~on the ~~maturity~~ratio ~~date~~ of ~~the~~total ~~revolving~~funded ~~line~~debt to ofEBITDA. ~~credit~~At May 31, ~~which~~2012, ~~was~~the ~~extended~~interest ~~from~~rate ~~March~~on ~~2012~~the toRevolver ~~December~~was ~~2012~~3.15%.

The ~~term~~Term ~~loan~~Loan, ~~was~~as ~~originally~~amended, ~~for $10 million and matures in December 2012. The term loan~~ provides for 20principal ~~equal~~payments ~~quarterly~~in the ~~payments~~amount of ~~principal and interest~~$450,000 ~~which began~~ on ~~March~~August 31, ~~2008.~~2012, ~~The~~which ~~term~~was ~~loan~~paid, ~~bears interest at the same rate as the revolving line of credit for~~ $~~1.9 million of the $3.5 million outstanding at May 31~~250,000 ~~2011.~~on InOctober ~~May 2007~~1, we entered into a swap agreement to fix the interest rate on the balance of the term loan for three years at a rate of 5.3% plus an interest spread of 2.00% to 2.25% based upon our total funded debt to EBITDA ratio. This swap agreement expired on May 312012, ~~2010. On~~and ~~June~~November 31, ~~2010~~2012, weand ~~entered into a new swap agreement for~~ $~~3 million~~167,000 ~~expiring~~on inthe first ~~February~~day ~~2012, fixing our interest rate at 1.25% plus an interest spread~~ of ~~2.00%~~each tomonth 2thereafter.~~25%~~ ~~based~~Interest ~~upon~~is ~~our~~payable ~~total~~monthly ~~funded~~at ~~debt to EBITDA ratio. After February 2012,~~ the ~~interest~~same rate ~~reverts~~as toon athe ~~variable rate~~Revolver. ~~At May 31, 2011, $3.5 million was outstanding under this agreement.~~

OnIn ~~August~~June 102010, ~~2011,~~ we entered into ana ~~amendment~~swap ~~to its credit~~ agreement with ~~Sovereign~~respect to ~~Bank~~interest ~~which~~on ~~extends~~$3 ~~the~~million ~~maturity~~then ~~date~~outstanding ofunder the ~~revolving~~Term ~~line of credit from March 2012 to December 31~~Loan, ~~2012,~~fixing ~~increases~~our ~~the~~ interest rate byat 01.7525% ~~for~~plus ~~both~~an ~~the~~interest ~~revolving~~rate ~~line~~ spread of ~~credit~~2.00% ~~and~~to ~~the~~2.25% ~~term~~based ~~loan~~on ~~over~~ the ~~interest~~ratio ~~range in the original agreements, reduces the maximum amount~~ of ~~advances~~total ~~under~~funded ~~the~~debt ~~revolving line of credit~~ to ~~$9 million on March 1, 2012, and provides for an additional 0~~EBITDA.~~25%~~ ~~interest~~The ~~rate~~swap ~~increase~~agreement ~~effective~~expired ~~July~~in 1,February 2012.

The amended Facility contains certain financial covenants, calculated on a consolidated basis for the Company and its subsidiary, which, among other things, impose minimum levels of EBITDA, calculated monthly on a cumulative basis. These financial covenants restrict the payment of dividends on the Company’s common stock. In addition, the Company has agreed to take certain actions to obtain additional funding from sources other than Sovereign by October 1, 2012, to support its operations, and has agreed to take certain steps to cover any projected operating deficits if such financing is not obtained. We anticipate that such additional funding will be in the form of subordinated debt. We were not in compliance with certain of the covenants under the credit agreement at May 31, 2012, but such non-compliance was waived by Sovereign in connection with entering into the amended credit agreement.

~~The~~We ~~credit~~believe ~~agreement~~that ~~contains~~our ~~certain~~cash ~~financial~~and ~~covenants~~anticipated subordinated debt financing, together ~~calculated~~with oncash agenerated ~~consolidated~~from ~~basis~~operations, ~~for~~will ~~the~~be ~~Company~~sufficient ~~and~~to ~~its~~meet ~~subsidiary,~~our ~~which,~~normal ~~among~~cash ~~other~~needs ~~things,~~in ~~impose~~fiscal a2013. ~~maximum~~If ~~ratio~~we ofdo ~~total~~not ~~funded~~obtain the anticipated subordinated debt tofinancing ~~EBITDA~~or ~~and~~other afinancing, ~~minimum~~we ~~fixed~~may ~~charge~~be ~~coverage~~required ~~ratio.~~to ~~These~~curtail ~~financial~~portions ~~covenants~~of ~~restrict~~our operations. Subject to the ~~payment~~availability of ~~dividends~~such onfinancing, ~~the~~we ~~Company’s~~intend ~~common~~to ~~stock. We~~continue ~~were~~investing in ~~compliance~~prepublication ~~with~~costs ~~each~~for ofour ~~these~~proprietary ~~covenants~~products at our ~~May~~current ~~31,~~spending ~~2011 and 2010~~level.

We believe that our cash and borrowing availability under our lines of credit, together with cash generated from operations, will be sufficient to meet our normal cash needs in 2012. We intend to continue investing in prepublication costs for our proprietary products at our current spending level.

PRODUCT DEVELOPMENT

Product development expenditures in fiscal ~~2011~~2012 and ~~2010~~2011 were $2.8 million and $4.8 million respectively. We continue to actively develop new and revised products. We expect the current level of spending to continue in the future. Product development expenditures in ~~2011~~2012 consisted primarily of both print and digital products within the Testing, Assessment and Instruction product group, as we continued to introduce new and revised products within our existing states. The state test preparation market is changing with the adoption of the CCSS. However, the current high-stake tests will continue to be administered until 2014/2015, and there will continue to be a demand for higher academic performance from students. Our product development plan will reflect the market need to support the state-specific needs as it reflects the test in place today as well as the potential future needs as a result of the adoption and implementation of the CCSS. We also intend to expand our offering of web-based digital products. Presently, we publish Test Preparation and Assessment products for various grades in ten ~~eleven~~ states and CCSS products on a national basis.

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

We do not have plans in the upcoming year to develop new products for our Literacy product line,. asOur westrategic ~~intend~~growth toplan ~~grow~~calls ~~this~~for ~~product~~an ~~group~~emphasis byon ~~offering~~the ~~additional~~internal development of products ~~from~~within the ~~existing~~Test ~~publishers~~Preparation, ~~with~~Assessment ~~whom~~and Instruction product lines. Under favorable circumstances, we ~~currently~~would consider ~~have~~an ~~distribution~~acquisition ~~agreements~~to supplement our growth plan.

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

OFF-BALANCE SHEET ARRANGEMENTS

NONE

SEASONALITY

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

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

	1st Quarter Ended August 31			2nd Quarter Ended November 30			3rd Quarter Ended February 28		4th Quarter Ended May 31
	1st		2nd	3rd		4th
Test Preparation, Assessment and Instruction		30%			24%			22%		24%
	Quarter		Quarter	Quarter		Quarter
College Preparation		62%			16%			5%		17%
	Ended		Ended	Ended		Ended
Literacy		36%			16%			18%		30%
	August 31		November 30	February 28		May 31
Total Revenue		42%			20%			16%		22%
Test Preparation, Assessment and Instruction	31%		22%	22%		25%
College Preparation	63%		15%	6%		16%
Literacy	40%		18%	14%		28%
Total Revenue	40%		18%	14%		28%

1615

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Table of Contents

May 31, ~~2011~~2012 and ~~2010~~2011

Report of Independent Registered Public Accounting Firm (Rothstein, Kass & Company, P.C.)		18
Report of Independent Registered Public Accounting Firm	17
Consolidated Financial Statements:
Consolidated Balance Sheets as of May 31, 2011 and 2010		19
Consolidated Balance Sheets as of May 31, 2012 and 2011	18
Consolidated Statements of Operations for the years ended May 31, 2011 and 2010		20
Consolidated Statements of Operations for the years ended May 31, 2012 and 2011	19
Consolidated Statements of Changes in Stockholders’ Equity for the years ended May 31, 2011 and 2010		21
Consolidated Statements of Changes in Stockholders’ Equity for the years ended May 31, 2012 and 2011	20
Consolidated Statements of Cash Flows for the years ended May 31, 2011 and 2010		22
Consolidated Statements of Cash Flows for the years ended May 31, 2012 and 2011	21
Notes to Consolidated Financial Statements	22-31	~~23-32~~

1716

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Peoples Educational Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Peoples Educational Holdings, Inc. and Subsidiary (collectively, “the Company”) as of May 31, ~~2011~~2012 and ~~2010~~2011, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years ~~then ended~~. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our ~~audit~~audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Educational Holdings, Inc. and Subsidiary as of May 31, ~~2011~~2012 and ~~2010~~2011, and the results of its operations and its cash flows ~~for~~in ~~each of~~ the ~~years~~two ~~then~~year period ended May 31, in2012, in conformity with accounting principles generally accepted in the United States of America.

/s/ ROTHSTEIN, KASS ~~& COMPANY, P.C.~~

Roseland, New Jersey

~~August~~September 1513, ~~2011~~2012

1817

CONSOLIDATED BALANCE SHEETS

(In Thousands-Except Share Data)

	May 31,
	2011			2010
	2012			2011
ASSETS
Current Assets
Cash and Cash Equivalents	$	18665		$	~~110~~18
Accounts Receivable Net of Allowances for Doubtful Accounts and Returns		2,745			2,990
Accounts Receivable Net of Allowances for
Inventory		3,196			3,591
Doubtful Accounts and Returns		1,928			2,745
Prepaid Expenses and Other		322			264
Inventory		1,167			3,196
Prepaid Marketing Expenses		505			642
Prepaid Expenses and Other		193			322
Deferred Income Taxes		1,136			833
Prepaid Marketing Expenses		59			505
Total Current Assets		7,922			8,430
Deferred Income Taxes - (Note 7)		-			1,136
Equipment - At Cost, Less Accumulated Depreciation of $2,515 and $2,444, respectively		314			249
Total Current Assets		4,012			7,922
Equipment - At Cost, Less Accumulated Depreciation of $2,587 and $2,515, respectively		264			314
Other Assets
Deferred Prepublication Costs, Net		127,~~269~~689			12,~~864~~269
Deferred Income Taxes		501			477
Deferred Income Taxes - (Note 7)		-			501
Trademarks, Net		~~255~~131			~~189~~255
Prepaid Expenses and Other		~~108~~48			~~167~~108
Total Other Assets		137,~~133~~868			13,~~697~~133
Total Assets	$	2112,~~369~~144		$	2221,~~376~~369
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long Term Obligations	$	21,~~000~~950		$	2,000
Accounts Payable		43,~~340~~276			4,~~904~~340
Accrued Compensation		~~394~~500			~~153~~394
Other Accrued Expenses		~~520~~620			~~527~~520
Deferred Revenue		~~438~~483			~~404~~438
Total Current Liabilities		76,~~692~~829			7,~~988~~692
Long Term Obligations, Less Current Maturities		89,~~234~~000			8,~~584~~234
Total Liabilities		15,~~926~~829			1615,~~572~~926
Commitments and Contingencies
Stockholders’ Equity
Stockholders' Equity
Preferred Stock, authorized 1,500,000 shares; none issued		-			-
Common Stock, $0.02 par value; authorized 8,500,000 shares;
issued: 4,481,434 as of May 31, 2011 and 4,478,434 as of May 31, 2010		90			90
issued: 4,481,434 as of May 31, 2012 and 2011		90			90
Additional Paid In Capital		8,~~305~~511			8,~~120~~305
Accumulated Deficit		(212,~~888~~222	)		(2,~~342~~888	)
Treasury Stock, 16,232 shares for both periods, at cost		(64	)		(64	)
Total Stockholders’ Equity		5,443			5,804
Total Stockholders' Equity		(3,685	)		5,443
Total Liabilities and Stockholders’ Equity	$	21,369		$	22,376
Total Liabilities and Stockholders' Equity	$	12,144		$	21,369

See Notes to Consolidated Financial Statements

1918

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

	Years Ended May 31,
	Years Ended
	2011			2010
	May 31,
Revenue, Net	$	31,270		$	34,915
	2012			2011
Revenue, Net	$	25,649		$	31,270
Cost of Revenue
Direct Costs		13,~~139~~279			1413,~~981~~139
Prepublication Cost Amortization		5,364			5,384
Prepublication Cost Amortization, including impairment of $2.4 million in 2012		7,359			5,364
Total		1820,~~503~~638			2018,~~365~~503
Gross Profit		125,~~767~~011			1412,~~550~~767
Selling, General and Administrative Expenses		1312,~~263~~323			13,~~819~~263
Income (Loss) from Operations		(496	)		731
Loss from Operations		(7,312	)		(496	)
Nonoperating Expenses
Other Expenses, Net		7172			3771
Interest Expense		~~306~~313			~~277~~306
Total		~~377~~385			~~314~~377
Income (Loss) Before Income Taxes		(873	)		417
Loss Before Income Taxes		(7,697	)		(873	)
Income Tax Expense (Benefit)		(327	)		166
Income Tax Expense (Benefit)- (Note 7)		1,637			(327	)
Net Income (Loss)	$	(546	)	$	251
Net Loss	$	(9,334	)	$	(546	)
Net Income (Loss) per Common Share
Net Loss per Common Share Basic and Diluted	$	(2.09	)	$	(0.12	)
Basic and Diluted	$	(0.12	)	$	0.06
Weighted-average Number of Common Shares Outstanding Basic and Diluted		4,465			4,465
Weighted-average Number of Common Shares Outstanding
Basic		4,465			4,462
Diluted		4,465			4,465

See Notes to Consolidated Financial Statements

2019

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’' EQUITY

(In Thousands)

	Common Stock		Additional Paid-In Capital		Accumulated Deficit			Treasury Stock			Total
			Additional
Balance, May 31, 2009	$	90	$	8,060	$	(2,593	)	$	(64	)	$	5,493
	Common		Paid-In		Accumulated			Treasury
Stock-Based Compensation		-		60		-			-			60
	Stock		Capital		Deficit			Stock			Total
Net Income		-		-		251			-			251
Balance, May 31, 2010	$	90	$	8,120	$	(2,342	)	$	(64	)	$	5,804
Balance, May 31, 2010		90		8,120		(2,342	)		(64	)		5,804
Stock-Based Compensation		-		181		-			-			181
Stock Options Exercised		-		4		-			-			4
Net Loss		-		-		(546	)		-			(546	)
Balance, May 31, 2011	$	90	$	8,305	$	(2,888	)	$	(64	)	$	5,443
Stock-Based Compensation		-		206		-			-			206
Net Loss		-		-		(9,334	)		-			(9,334	)
Balance, May 31, 2012	$	90	$	8,511	$	(12,222	)	$	(64	)	$	(3,685	)

See Notes to Consolidated Financial Statements

2120

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Years Ended May 31,
	Years Ended
	2011			2010
	May 31,
	2012			2011
Cash Flows From Operating Activities
Net Income (Loss)	$	(546	)	$	251
Net Loss	$	(9,334	)	$	(546	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities
Depreciation		~~161~~163			~~223~~161
Amortization of Prepublication Costs and Trademarks		57,~~384~~535			5,~~400~~384
Stock-Based Compensation		~~181~~206			60181
Market Value Adjustment of Interest Rate Swap		(11	)		~~(153~~11	)
Deferred Income Taxes		~~(327~~1,637	)		~~153~~(327	)
Changes in Assets and Liabilities
Accounts Receivable		~~245~~817			~~(148~~245	)
Inventory		~~395~~2,029			~~628~~395
Prepaid Expenses and Other		1189			~~165~~1
Prepaid Marketing Expenses		~~137~~445			~~220~~137
Accounts Payable and Accrued Expenses		(~~330~~858	)		~~561~~(330	)
Deferred Revenue		3446			~~126~~34
Income tax refund attributable to net operating loss carryback		-			635
Net Cash Provided By Operating Activities		2,864			5,346
Net Cash Provided By Operating Activities		5,346			8,121
Cash Flows From Investing Activities
Purchases of Equipment		(~~226~~113	)		(85226	)
Expenditures for Intangibles		(8652	)		(3586	)
Expenditures for Prepublication Costs		(42,~~769~~779	)		(4,~~782~~769	)
Net Cash Used In Investing Activities		(52,~~081~~944	)		(45,~~902~~081	)
Cash Flows From Financing Activities
Net (Payments) Borrowings Under Line of Credit		1,639			(1,117	)
Net Borrowings Under Line of Credit		2,277			1,639
Exercise of Stock Options		4-			-4
Principal Payments On Long Term Debt		(21,~~000~~550	)		(2,~~034~~000	)
Net Cash Used In Financing Activities		(357	)		(3,151	)
Net Cash Provided By (Used In) Financing Activities		727			(357	)
Net Increase (Decrease) in Cash and Cash Equivalents		~~(92~~647	)		68(92	)
Cash and Cash Equivalents
Beginning of Year		~~110~~18			42110
End of Year	$	18665		$	~~110~~18
Supplemental Cash Flow Information
Cash Payments for:
Interest	$	~~286~~321		$	~~487~~286

See Notes to Consolidated Financial Statements

2221

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Significant Accounting Policies

Nature of business: Peoples Educational Holdings, Inc. (PEH), through its wholly owned subsidiary, Peoples Education, Inc. (PE), publishes and markets its own supplementary educational textbooks and digital programs for K-12 school market. The materials are predominantly state specific and standards-based, focused on state-required tests, offering instruction, practice, and formative assessment tools in both print and digital formats. PE publishes its own proprietary materials, and distributes on an exclusive basis for other publishers, college textbooks and supplements to the high school Advanced Placement*, (*Advanced Placement is a registered trademark of the College Board) honors and college preparation market. PE also distributes ~~on an exclusive basis~~ for three publishers supplemental literacy materials for grades K–8. Marketing channels include direct and commission sales representatives, telemarketing, direct mail, and catalogs. PE and PEH are together referred to herein as the “Company”.

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

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

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

Revenue recognition and accounts receivable: Revenue is recognized when products are shipped, the customer takes title and assumes risk of loss, and collection of related receivable is probable. The allowances for returns as of May 31, ~~2011~~2012 and ~~2010~~2011 were approximately $~~174~~33,000 and $~~153~~174,000, respectively. These allowances are recorded at the time of revenue recognition, if the right of return exists, and are recorded as a reduction of accounts receivable. The Company recognizes shipping and handling revenues as part of revenue, and shipping and handling expenses as part of cost of revenue on the consolidated statements of operations. The Company recognizes its subscription based revenue on its digital products over the life of the agreement.

The Company provides credit to its customers determined on a customer-by-customer basis. Trade receivables are carried at original invoice amount less an estimate made for the doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts after reviewing individual customer accounts as well as considering both historical and expected credit loss experience. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The allowance for doubtful accounts was $10,000 at May 31, ~~2011~~2012 and ~~2010~~2011, respectively.

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

Year Ended May 31, 2012	41	%
Year Ended May 31, 2011	35	%
Year Ended May 31, 2010	33	%

Inventory: Inventory is stated at the lower of cost or market, which is determined using the first-in, first-out method. Inventory consists entirely of finished goods. Inventory on the consolidated balance sheet is reflected net of reserves for write-downs or non-salability of approximately $896,000 and $923,000 at May 31, 2011 and 2010, respectively.22

23Inventory: Inventory is stated at the lower of cost or market, which is determined using the first-in, first-out method. Inventory consists entirely of finished goods. Inventory on the consolidated balance sheet is reflected net of reserves for write-downs or non-salability of approximately $2,365,000 and $896,000 at May 31, 2012 and 2011, respectively.

Deferred prepublication costs: Prepublication costs include one-time expenses associated with developing and producing new or revised proprietary products. It includes all development expenses, including but not limited to writing, design, art, permissions, and any other costs incurred up to the release date of the product in print and/or digital format. Prepublication costs are capitalized and are amortized over either a three or five year period (the estimated minimum lives of the ~~related publication~~product) using the straight-line method beginning on release date of the product. At both May 31, ~~2011~~2012 and ~~2010~~2011, the Company had an allowance against these assets of $137,000. If future net undiscounted cash flows are not sufficient to realize the net carrying value of a specific publication, an impairment charge is recognized.

Prepaid marketing expense: The costs of catalogs and promotional materials, which have not been completed or delivered to customers, are carried as a prepaid expense until the actual date of completion and mailing. Prepaid samples consist of workbooks that will be distributed to educators over the next year. Sample workbooks are expensed as they are distributed.

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

Accounting for long-lived assets: Long-lived assets, such as equipment, deferred prepublication costs, and other assets with finite lives, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with “Accounting for the Impairment or Disposal of Long-Lived Assets”. This is accomplished by comparing their carrying value with the estimated future undiscounted net cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected future undiscounted net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds fair value (estimated discounted future cash flows or appraisal of assets) of the long-lived assets. The Company has not experienced any such losses in the years presented.

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

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

The Company complies with the provisions of “Accounting for Uncertainty in Income Taxes”. The Company reviewed all income tax positions taken or that they expect to take for all open tax years and determined that their income tax positions are appropriately stated and supported for all open years. Under the Company’s accounting policies, it would recognize interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable tax settlements within income tax expense. As of May 31, ~~2011~~2012, the Company recorded no accrued interest or penalties related to uncertain tax positions.

The fiscal tax years 2005 through ~~2010~~2011 remain open to examination by the Internal Revenue Service and various state taxing jurisdictions to which the Company is subject. The Company expects no significant change in the amount of unrecognized tax benefit, accrued interest or penalties within the next twelve months.

Basic and diluted net loss per share: Basic per share amounts are computed, generally, by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted per share amounts assume the conversion, exercise, or issuance of all potential common stock instruments (see Note 8 for information on stock options) unless their effect is anti-dilutive, thereby reducing the loss per share or increasing the income per share. Due to the net loss in 2011, diluted shares were the same as basic shares since the effect of options and warrants would have been anti-dilutive.23

24Basic and diluted net loss per share: Basic per share amounts are computed, generally, by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted per share amounts assume the conversion, exercise, or issuance of all potential common stock instruments (see Note 9 for information on stock options) unless their effect is anti-dilutive, thereby reducing the loss per share or increasing the income per share. Due to the net losses in 2012 and 2011, diluted shares were the same as basic shares since the effect of options and warrants would have been anti-dilutive.

Stock-based compensation: The Company accounts for share based payments in accordance with ASC 718 “Share-Based Payment”, which requires compensation cost relating to share-based payment transactions be recognized in the financial statements based on the estimated fair value of the equity or liability instrument issued. Share-based expense recognized includes: (a) share-based expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of ASC 718 and (b) share-based expense for all awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of ASC 718.

The Company uses the Black-Scholes option pricing model to estimate the fair value of such awards which requires forfeitures of share-based awards to be estimated at the time of the grant and revised in subsequent periods, if actual forfeitures differ from initial estimates. Therefore, expenses related to share-based payments and recognized in the years ended May 31, ~~2011~~2012 and ~~2010~~2011 have been reduced for estimated forfeitures. Forfeitures were estimated based on historical experience. See Note 89 to the Consolidated Financial Statements for more information regarding the assumptions used in estimating the fair value of stock options.

Fair value measurements: On June 1, 2008, the Company adopted a new accounting standard regarding fair value measurements for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in the Company’s financial statements. The Financial Accounting Standards Board issued a one year deferral of the fair value measurement requirements for non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis at the time of issuance. The Company adopted the remainder of the new standard on June 1, 2009. The accounting standard requires that the Company determine the appropriate level in the fair value hierarchy for each fair value measurement.

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

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

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

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

The consolidated financial statements include the following financial instruments and methods and assumptions used in estimating their fair values: for cash and cash equivalents, the carrying amount is fair value, and for accounts receivable, accounts payable, line of credit and long term debt, the carrying amounts approximate their fair values due to either the short-term nature of these instruments or the variable nature of the interest rate. A portion of the term loan ~~has~~was ~~been~~ effectively converted to a fixed rate of interest, and is the Company’s only financial liability accounted for at fair value on a recurring basis. (See “Derivative financial instruments” below for further information regarding the fair value of the related interest rate swap agreement) At May 31, 2011, ~~and 2010,~~ the Company has determined that the fair value of the swap, based on LIBOR and swap rates, falls within Level 2 in the fair value hierarchy. The swap expired prior to May 31, 2012. No separate comparison of fair values versus carrying values is presented for the aforementioned financial instruments, since their fair values are not significantly different than their balance sheet carrying amounts. In addition, the aggregate fair values of all financial instruments would not represent the underlying value of the Company.

Derivative financial instruments: “Accounting for Derivative Instruments and Hedging Activities” defines derivatives and requires that they be carried at fair value on the balance sheet. On May 23, 2007 the Company entered into an interest rate swap agreement to effectively convert $5.0 million of their term loan from a variable rate to a fixed rate for a term of three years. This agreement expired on May 31, 2010. On June 3, 2010, the Company entered into a new swap agreement to effectively convert $3.0 million of their term loan from a variable rate to a fixed rate for a term to expire in February 2012. The change in market value of the interest rate swap is recognized on the balance sheet within long term obligations and by a charge or credit to interest expense. The change in the market value for the years ended May 31, 2011 and 2010 resulted in an expense of approximately $11,000, and income of approximately $153,000, respectively. 24

25Derivative financial instruments: “Accounting for Derivative Instruments and Hedging Activities” defines derivatives and requires that they be carried at fair value on the balance sheet. On June 3, 2010, the Company entered into a swap agreement to effectively convert $3.0 million of their term loan from a variable rate to a fixed rate for a term that expired in February 2012. The change in market value of the interest rate swap is recognized on the balance sheet within long term obligations and by a charge or credit to interest expense. The change in the market value for the years ended May 31, 2012 and 2011 resulted in income of approximately $11,000, and expense of approximately $11,000, respectively.

Recently Adopted Accounting Pronouncements:

InManagement ~~October~~does ~~2009,~~not the FASB issued FASB Accounting Standards Update (“FASB ASU”) No. 09-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force)” (“FASB ASU 09-13”). FASB ASU 09-13 updates the existing multiple-element arrangement guidance currently in FASB ASC 605-25 (“Revenue Recognition-Multiple-Element Arrangements”). This new guidance eliminates the requirement believe that ~~all~~any ~~undelivered~~recently elements have objective and reliable evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to the items that have already been delivered. Furtherissued, ~~companies~~but ~~will be required to allocate revenue in arrangements involving multiple deliverables based on the estimated selling price of each deliverable, even though such deliverables are~~ not sold separately by either the company itself or other vendors. This new guidance also significantly expands the disclosures required for multiple-element revenue arrangements. The revised guidance will be effective, ~~for~~accounting ~~the first annual period beginning on or after June 15~~standards, ~~2010.~~if ~~The~~currently ~~adoption~~adopted ~~of FASB~~would ~~ASU 09-13 did not~~ have ana ~~impact~~material effect on the Company’s consolidated financial ~~position, results of operations and cash flows~~statements.

InNote January 2010, the FASB issued FASB ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). This update requires additional disclosures about (1) the different classes of assets and liabilities measured at fair value, (2~~) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3 fair value measurements~~. ~~ASU~~Liquidity ~~2010-06 is effective for interim~~ and ~~annual~~Capital reporting periods beginning after December 15, 2009. The Company has complied with the additional disclosures required by this standard. The adoption of this standard had no impact on the Company’s consolidated financial position, results of operations and cash flows.Resources

~~Note~~The Company has incurred losses of approximately $9.3 million and $0.5 million for the years ended May 31, 2012 and 2011, respectively. The May 31, 2012 year end loss primarily consisted of approximately $2. ~~Deferred~~4 ~~Prepublication~~million ~~Costs~~of accelerated amortization on prepublication costs, a $4.5 million increase in deferred tax valuation allowance and approximately $1.5 million of inventory write offs during the year. At May 31, 2012, the Company had cash and cash equivalents of approximately $665,000, a working capital deficit of approximately $2.8 million and an accumulated deficit of approximately $12.2 million. At May 31, 2012, the Credit Facility (“Facility”) with Sovereign Bank (“Sovereign”) consisted of a Revolving Line of Credit (“Revolver”) that provided for advances up to $9.0 million, all of which was outstanding, and a Term Loan originally in the amount of $10.0 million, of which $1.95 million was outstanding. The Company was not in compliance with certain of the covenants under the Facility at May 31, 2012, but such non-compliance was waived by Sovereign in connection with entering into the amended Facility on August 15, 2012 (see Note 5 for further discussion). The Company's Facility with Sovereign expires on June 30, 2013. The Company has agreed to take certain actions to obtain additional funding from sources other than Sovereign by October 1, 2012, to support its operations, and has agreed to take certain steps to cover any projected operating deficits if such financing is not obtained. There can be no assurance that such actions will be available in general or on terms acceptable to the Company.

~~Deferred~~Note ~~prepublication costs are recorded at their original cost and amortized over a three or five-year period, based on the estimated lives of the related publications~~3. Deferred ~~The~~Prepublication net carrying value of the deferred prepublication costs is periodically reviewed and compared to an estimate of future undiscounted cash flows. If future undiscounted cash flows are not sufficient to support the net carrying value of the asset, an impairment charge will be recognized. At both May 31, 2011 and 2010 the Company had an allowance of $137,000, reducing prepublication costs to their estimated net realizable value.Costs

Deferred prepublication costs are recorded at their original cost and amortized over a three or five-year period, based on the estimated lives of the related product. The net carrying value of the deferred prepublication costs is periodically reviewed and compared to an estimate of future undiscounted cash flows. If future undiscounted cash flows are not sufficient to support the net carrying value of the asset, an impairment charge will be recognized. At both May 31, 2012 and 2011 the Company had an allowance of $137,000, reducing prepublication costs to their estimated net realizable value.

The activities in deferred prepublication costs were as follows:

(In Thousands)
	Year Ended May 31,
	2011			2010
	2012			2011
Balance, Beginning	$	12,~~864~~269		$	1312,~~466~~864
Prepublication Cost Additions		42,~~769~~779			4,~~782~~769
Amortization Expense		(5,364	)		(5,384	)
Amortization Expense, including impairment of $2.4 million in 2012		(7,359	)		(5,364	)
Balance, Ending	$	127,~~269~~689		$	12,~~864~~269

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

(In Thousands)
For the year ending May 31,
2012	$	4,963
2013	$	3,006
2013		3,439
2014		2,152
2014		2,130
2015		1,485
2015		1,252
2016		811
2016 and thereafter		485
2017 and thereafter		235
	$	127,~~269~~689

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

Note 34. Trademarks

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

(In Thousands)
	Year Ended May 31,
	2011			2010
	2012			2011
Balance, Beginning	$	~~189~~255		$	~~170~~189
Additions		8652			3586
Amortization Expense		(20176	)		(1620	)
Balance, Ending	$	~~255~~131		$	~~189~~255

Note 45. Financing Arrangements

The Company has a ~~$20~~Facility ~~million credit agreement~~ with Sovereign Bank (“Sovereign”). At ~~Amounts~~May ~~borrowed~~31, ~~under~~2012, the ~~agreement~~Facility ~~are~~consisted ~~secured~~of bya ~~substantially~~Revolver that provided for advances up to $9.0 million, all of which was outstanding, and a Term loan originally in the ~~assets~~amount of $10.0 million, of which $1.95 million was outstanding. On August 15, 2012, the Company. entered ~~The~~into ~~agreement~~an ~~provides~~amendment ~~for~~to athe ~~$10~~Facility ~~million~~with ~~revolving~~Sovereign ~~line~~that extends the maturity date of ~~credit~~the $9.0 million Revolver and athe $101.95 million Term Loan from December 31, 2012 to June 30, 2013. At August 15, 2012, $9.0 million ~~term~~was ~~loan~~outstanding under the Revolver and $-0- was available for borrowing. The Company’s borrowings under the Facility are secured by substantially all of the Company’s assets.

The ~~revolving~~amendment ~~line~~also ofchanged ~~credit~~the ~~provides~~interest ~~for~~rate ~~advances~~under upthe Revolver to ~~$10~~6.025% ~~million~~through ~~and~~December ~~expires~~31, in2012, ~~March~~and ~~2012~~9.0% ~~The~~thereafter with interest ~~rate~~payable onmonthly. Prior to the ~~revolving~~amendment, ~~line~~the ofinterest ~~credit~~rate on ~~ranges~~the ~~from~~Revolver was based on LIBOR plus an interest rate spread of 2.0% to ~~LIBOR plus~~ 2.25% through August 10, or2011, ~~prime~~2.75% to ~~prime~~3.00% ~~plus~~through June 030, 2012, and 3.500% to 3.25% through August 15, 2012, with the exact interest rate based on the ratio of ~~the~~total ~~Company’s~~funded ~~Total Funded Debt~~ debt to EBITDA. At May 31, ~~2011~~2012, ~~$6.7~~the ~~million was outstanding under this facility at an~~ interest rate ofon ~~2.5%,~~the ~~and~~Revolver ~~$3.3 million~~ was ~~available for borrowing~~3.15%.

OnThe ~~August~~Term 10Loan, ~~2011~~as amended, ~~the~~provides ~~Company~~for ~~entered~~principal ~~into~~payments in ~~an amendment to its credit agreement with Sovereign Bank which extends~~ the ~~maturity~~amount ~~date~~ of ~~the~~$450,000 ~~revolving~~on ~~line~~August ~~of credit from March 2012 to December~~ 31, 2012, ~~increases~~which ~~the~~was ~~interest~~paid, ~~rate~~$250,000 byon ~~0.75%~~October ~~for~~1, ~~both~~2012, ~~the~~and ~~revolving~~November ~~line~~1, of2012, ~~credit~~ and ~~the term loan over the interest range in the original agreements~~$167,000 on ~~reduces~~ the ~~maximum~~first ~~amount~~day of ~~advances~~each ~~under~~month ~~the~~thereafter. ~~revolving~~Interest ~~line~~is ofpayable ~~credit~~monthly toat $9the ~~million~~same ~~on March 1, 2012 and provides for an additional 0.25% interest~~ rate ~~increase~~as ~~effective~~on ~~July~~the ~~1, 2012~~Revolver.

The term loan was originally for $10 million and matures in December 2012. The term loan provides for 20 equal quarterly payments of principal and interest, which began on March 31, 2008. The term loan bears interest at the same rate as the revolving line of credit for $1.9 million of the $3.5 million outstanding. In ~~May~~June ~~2007~~2010, the Company entered into a swap agreement with respect to ~~fix the~~ interest ~~rate~~ on ~~the balance of the term loan for three years at a rate of 5.~~$3% ~~plus~~million anthen ~~interest~~outstanding ~~spread~~under ~~of 2.00% to 2.25% based upon~~ the ~~Company’s~~Term ~~total funded debt to EBITDA ratio. This swap agreement expired on May 31~~Loan, ~~2010. On June 3, 2010, the Company entered into a new swap agreement for $3.0 million, expiring in February 2012,~~ fixing ~~the~~its interest rate at 1.25% plus an interest rate spread of 2.00% to 2.25% based ~~upon~~on the ~~Company’s~~ratio of its total funded debt to EBITDA ~~ratio~~. ~~After~~ ~~February~~The ~~2012,~~swap ~~the~~agreement ~~interest~~expired ~~rate~~in ~~reverts~~February ~~to a variable rate~~2012. ~~At May 31, 2011, $3.5 million was outstanding under this agreement.~~

The credit agreement contains certain financial covenants, calculated on a consolidated basis for the Company and its subsidiary, which, among other things, impose a maximum ratio of total funded debt to EBITDA, and a minimum fixed charge coverage ratio. These financial covenants restrict the payment of dividends on the Company’s common stock. The Company is in compliance with each of these covenants at May 31, 2011.26

27The amended Facility contains certain financial covenants, calculated on a consolidated basis for the Company and its subsidiary, which, among other things, impose minimum levels of EBITDA, calculated monthly on a cumulative basis. These financial covenants restrict the payment of dividends on the Company’s common stock. In addition, the Company has agreed to take certain actions to obtain additional funding from sources other than Sovereign by October 1, 2012, to support its operations, and has agreed to take certain steps to cover any projected operating deficits if such financing is not obtained. The Company anticipates that such additional funding will be in the form of subordinated debt. The Company was not in compliance with certain of the covenants under the Facility at May 31, 2012, but such non-compliance was waived by Sovereign in connection with entering into the amended Facility.

Long term debt at May 31, ~~2011~~2012 and ~~2010~~2011 consisted of the following:

(In Thousands)	May 31,
	2011			2010
	2012			2011
Market value of interest rate swap	$	11-		$	-11
Notes payable under line of credit (see above)		69,~~723~~000			56,~~084~~723
Term loan (see above)		31,~~500~~950			53,500
		10,234			10,584
		10,950			10,234
Less current maturities		(21,~~000~~950	)		(2,000	)
	$	89,~~234~~000		$	8,~~584~~234

(In Thousands)
Years ending May 31:
2012	$	2,000
2013		8,234
	$	10,234

Note 6. Net Revenue by Product Group

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

(In Thousands)	~~Year Ended May 31,~~
	2011		2010
	Year Ended May 31,
Test Preparation, Assessment and Instruction	$	17,421	$	20,211
	2012		2011
College Preparation		11,612		12,139
Test Preparation, Assessment and Instruction	$	13,661	$	17,421
Literacy		2,237		2,565
College Preparation		11,082		11,612
Total Net Revenue	$	31,270	$	34,915
Literacy		906		2,237
Total Net Revenue	$	25,649	$	31,270

Note 7. Income Taxes

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

(In Thousands)	~~Year Ended May 31,~~
	2011			2010
	Year Ended May 31,
Current	$	-		$	13
	2012			2011
Deferred		(327	)		153
Current	$	-		$	-
Total	$	(327	)	$	166
Deferred		1,637			(327	)
Total	$	1,637		$	(327	)

2827

For the years ended May 31, ~~2011~~2012, and ~~2010~~ 2011, the income tax provision (benefit) differs from the amount of income tax expense (benefit) determined by applying the U.S. federal income tax rate to pretax loss, due to the following:

(In Thousands)

(In Thousands)
	Year Ended May 31,
	2012			2011
Computed federal income tax benefit at statutory rate	$	(2,886	)	$	(327	)
Valuation Allowance		4,607			-
State income tax benefit, net of federal effect		(25	)		(68	)
Effect of lower rates		(59	)		7
Other, including nondeductible expenses, net		-			61
	$	1,637		$	(327	)

	Year Ended May 31,
	2011			2010
Computed federal income tax benefit at statutory rate	$	(327	)	$	146
State income tax benefit, net of federal effect		(68	)		21
Effect of lower rates		7			(5	)
Other, including nondeductible expenses, net		61			4
	$	(327	)	$	166

The Company established a valuation allowance in accordance with the provisions of “Accounting for Income Taxes”. In evaluating its ability to realize the net deferred tax assets, the Company considers all available evidence, both positive and negative, including its past operating results, tax planning strategies and forecasts of future taxable income. In considering these sources of taxable income, the Company made certain assumptions and judgments that are based on the plans and estimates used to manage their underlying businesses. A valuation allowance has been provided for deferred tax assets based on past operating results, expected timing of the reversals of existing temporary book/tax basis differences, alternative tax strategies and projected future taxable income.

The Company ~~established~~evaluates ~~a valuation allowance in accordance with the provisions of “Accounting for Income Taxes”. In evaluating its ability to realize the net~~ deferred tax assets, for ~~the~~impairment ~~Company~~on ~~considers~~a ~~all~~quarterly ~~available evidence, both positive and negative, including its past operating results, tax planning strategies and forecasts of future taxable income~~basis. InDuring ~~considering~~that ~~these sources of taxable income~~review, the Company ~~made~~determined ~~certain assumptions and judgments~~ that ~~are based on~~ the ~~plans~~level ~~and~~of ~~estimates~~its ~~used~~recent tohistorical ~~manage~~losses outweighed ~~their~~its ~~underlying~~forecasted ~~businesses.~~taxable Aearnings ~~valuation~~levels ~~allowance has been provided~~ for ~~deferred~~the ~~tax~~near ~~assets~~and ~~based~~long onterm. ~~past~~As ~~operating results~~such, ~~expected timing of~~ the ~~reversals~~Company ofestablished ~~existing~~a ~~temporary~~100% ~~book/~~deferred tax ~~basis~~valuation ~~differences, alternative tax strategies and projected future taxable income~~allowance. ~~Although~~A ~~realization~~return isto ~~not~~profitability ~~assured~~would ~~for~~enable the ~~remaining~~Company ~~deferred~~to ~~tax~~reduce ~~assets,~~ the ~~Company~~valuation ~~believes~~allowance itand isthereby ~~more~~offset income ~~likely~~tax ~~than~~expense ~~not~~ that ~~they~~would ~~will~~otherwise be ~~realized in the future~~recognized. During the year ended May 31, ~~2009~~2012, the Company recorded a valuation allowance of $04.75 million. The valuation allowance relates to uncertainty in the realizability of certain federal and state deferred tax assets.

The carrying value of the net deferred tax asset assumes that the Company will be able to generate sufficient taxable income in the future. The Company performs a comprehensive tax review quarterly and if future levels of taxable income are not sufficient or fail to materialize in the near term, management will adjust the valuation allowance accordingly.

On November 6, 2009, H.R. 3548, the Worker, Homeownership, and Business Assistance Act of 2009 (the “Act”) was enacted. Although the Act deals principally with the extension of unemployment benefits and mortgage relief, it also extends to all businesses the five-year net operating loss carryback previously available only to small businesses. The Act provides that a business of any size may elect to carryback net operating losses incurred in 2008 or 2009 (but not both) for three, four or five years.

After considering the fiscal 2008 federal income tax return filed with the IRS and the expected fiscal 2009 net operating losses, the Company determined that it had a carryback of approximately $1.9 million of tax-basis net operating losses from fiscal 2008, which resulted in a refund of approximately $635,000. During the third quarter of fiscal 2010, the Company filed Form 1120X with the IRS and received the refund in February 2010. The Company’s deferred tax asset was reduced by the refund amount.

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

(In Thousands)

(In Thousands)
	May 31,
	2012			2011
Deferred tax assets:
Allowance for doubtful accounts	$	4		$	4
Allowance for sales returns		27			67
Allowance for prepublication costs		998			53
Inventory		1,008			408
Federal and state net operating loss carryforward		3,101			1,681
Other		139			291
Deferred tax valuation allowance		(5,186	)		(700	)
		91			1,804
Deferred tax liabilities:
Equipment		(33	)		(24	)
Allowance for purchase returns		(10	)		(52	)
Prepaid expenses		(48	)		(91	)
		(91	)		(167	)
Net deferred tax assets	$	-		$	1,637

	May 31,
	2011			2010
Deferred tax assets:
Allowance for doubtful accounts	$	4		$	4
Allowance for sales returns		67			59
Allowance for prepublication costs		53			53
Inventory		408			405
Federal and state net operating loss		1,681			1,470
Other		291			145
Deferred tax valuation allowance		(700	)		(700	)
		1,804			1,436
Deferred tax liabilities:
Equipment		(24	)		(4	)
Allowance for purchase returns		(52	)		(45	)
Prepaid expenses		(91	)		(77	)
		(167	)		(126	)
Net deferred tax assets	$	1,637		$	1,310

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

(In Thousands)

(In Thousands)
	May 31,
	2012		2011
Current assets	$	-	$	1,136
Noncurrent assets		-		501
Net deferred tax assets	$	-	$	1,637

	May 31,
	2011		2010
Current assets	$	1,136	$	833
Noncurrent assets		501		477
Net deferred tax assets	$	1,637	$	1,310

As of May 31, 2012, the Company had approximately $7.3 million of federal net operating loss (NOL) carryforwards available to reduce federal taxable income which expire at various dates from May 31, 2013 through May 31, 2032.

As of May 31, ~~2011~~2012, the Company had approximately $49.03 million of ~~federal~~state net operating loss (NOL) carryforwards available to reduce ~~federal~~state taxable income which expire at various dates from May 31, ~~2012~~2013 through May 31, ~~2029~~2032.

As of May 31, 2011, the Company had approximately $7.3 million of state net operating loss (NOL) carryforwards available to reduce state taxable income which expire at various dates from May 31, 2012 through May 31, 2016.

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

Note 78. Commitments

Operating leases: The Company leases its various facilities and certain office equipment under non-cancelable operating lease arrangements. On March 31, 2011, the Company subleased a portion of its office facility located in Saddle Brook, NJ for the remaining term of the original lease, which expires in October 2014.

30As of May 31, 2012, future minimum rental obligations under operating leases are as follows:

As of May 31, 2011, future minimum rental obligations under operating leases are as follows:

(In Thousands)
	Minimum Lease		Sublease		Net Lease
Years ending May 31:	Commitments		Income		Commitments
2013	$	465	$	56	$	409
2014		470		81		389
2015		196		34		162
	$	1,131	$	171	$	960

~~(In~~Rent ~~Thousands)~~expense under operating leases was $468,000 and $507,000 for the years ended May 31, 2012 and 2011 respectively.

	Minimum Lease		Sublease		Net Lease
Years ending May 31:	Commitments		Income		Commitments
2012	$	464	$	48	$	416
2013		465		56		409
2014		470		81		389
2015		196		34		162
	$	1,595	$	219	$	1,376

Rent expense under operating leases was $507,000 and $554,000 for the years ended May 31, 2011 and 2010 respectively.

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

Note 89. Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC Topic 718 by recognizing the fair value of stock-based compensation in the statement of operations. The fair value of the Company’s stock option awards are estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award. In addition, the calculation of compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of stock-based awards is amortized over the vesting period of the award.

There was no tax benefit related to expense recognized during the periods ended May 31, ~~2011~~2012 and ~~2010~~2011, as the Company is in a net operating loss position. As of May 31, ~~2011~~2012, there was approximately $~~481~~334,000 of total unrecognized compensation cost related to unvested stock-based compensation awards granted under the equity compensation plan which will be amortized over the weighted average remaining requisite service period. Such amount does not include the effect of future grants of equity compensation, if any. Of the $~~481~~334,000 unrecognized compensation cost, the Company expects to recognize approximately 3551% in fiscal ~~2012~~2013, 3447% in fiscal ~~2013~~2014, and 312% in fiscal ~~2014~~2015.

In connection with a stock offering in 2005, the underwriter was granted warrants to purchase 50,000 shares of Company common stock at an exercise price of $7.56 per share. Such warrants became exercisable in June 2006, and expired in June 2010.29

The ~~1998~~shareholders approved the adoption of the 2009 Stock Plan (~~1998~~2009 Plan) ~~permitted~~on ~~the~~January ~~granting~~8, of2009, ~~incentive~~and ~~stock~~approved ~~options~~an ~~and~~amendment ~~nonqualified~~to ~~options~~the 2009 Plan on February 10, 2011. AThe ~~total~~amendment increased the number of shares reserved for issuance under the 2009 Plan by 1,000,000 shares ofto 1,250,000 shares. The 2009 Plan permits the ~~Company~~granting of ~~common~~incentive stock ~~were~~options ~~reserved~~meeting ~~for~~the ~~issuance~~requirements ~~pursuant~~of toSection 422 of the Internal Revenue Code of 1986, as amended and nonqualified options ~~granted~~that ~~under~~do not meet the ~~1998~~requirements ~~Plan~~of Section 422. Options issued under the ~~1998~~2009 Plan ~~were~~are generally granted with an exercise price equal to the fair market value of the Company’s stock on the date of grant and ~~expired~~expire up to 10 years from the date of grant. These options generally ~~vested~~vest and ~~became~~become exercisable over a three-year period. ~~The~~At ~~1998~~May ~~Plan~~31, ~~expired in 2008. Following such expiration~~2012, ~~no additional~~ options ~~could~~to bepurchase ~~granted under the 1998 Plan~~971,636 shares ~~but~~were ~~options~~ outstanding ~~under~~and ~~the 1998 Plan continued to be exercisable in accordance with their terms. At May 31~~275,364 ~~2011~~shares ~~there~~ were noavailable ~~outstanding~~for ~~options~~grant under ~~this~~the ~~plan~~2009 Plan.

~~The shareholders approved the adoption of the 2009~~ Stock-based ~~Plan~~compensation ~~(2009~~expense ~~Plan) on January 8, 2009, and approved an amendment to the 2009 Plan on February 10, 2011. The amendment increased the number~~ of ~~shares reserved for issuance under the 2009 Plan by 1~~$206,000~~,000~~ ~~shares~~and ~~to 1~~$181,~~250,~~000 ~~shares.~~was recognized ~~The~~for ~~2009 Plan permits~~ the granting of incentive stock options meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as amended and nonqualified options that do not meet the requirements of Section 422. Options issued under the 2009 Plan are generally granted with an exercise price equal to the fair market value of the Company’s stock on the date of grant and expire up to 10 years ~~from~~ended ~~the date of grant. These options generally vest and become exercisable over a three-year period. At~~ May 31, ~~2011,~~2012 ~~options to purchase 922,636 shares were outstanding~~ and ~~327~~2011,~~364~~ ~~shares were available for grant under the 2009 Plan~~respectively.

Stock-based compensation expense of $181,000 and $60,000 was recognized for the years ended May 31, 2011 and 2010, respectively.

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

	2011		2010
	2012			2011
Dividend Yield	~~0.0%~~	0.0%	~~0.0%~~		0.0%
Risk Free Interest Rate	~~1.1% to 3.1%~~	0.8% to 1.1%	~~2.2% to 2.6%~~		1.1% to 3.1%
Expected Life of Options	~~5 to 7 Years~~	5 Years	~~5 Years~~		5 to 7 Years
Expected Volatility Factor	~~40% to 43%~~	45% to 46%	~~39% to 44%~~		40% to 43%

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

A summary of stock option activity is as follows:

	Weighted-					Weighted-
	Average					Average
	Grant					Exercise
	Fair Value		Shares			Price
Outstanding at May 31, 2009	$	1.97		787,636		$	3.29
Outstanding at May 31, 2010	$	1.91		835,636		$	3.21
Granted		0.70		122,800			2.46
Exercised		-		-			-
Forfeited		1.98		(74,800	)		3.00
Outstanding at May 31, 2010		1.91		835,636			3.21
Granted		0.90		787,836			2.62
Exercised		0.54		(3,000	)		1.53
Forfeited		2.06		(700,836	)		3.37
Outstanding at May 31, 2011		0.87		919,636			2.59
Exercisable at May 31, 2011	$	0.85		248,659		$	2.53
Granted		0.34		72,000			0.85
Exercised		-		-			-
Forfeited		1.06		20,000			3.06
Outstanding at May 31, 2012		0.84		971,636			2.51
Exercisable at May 31, 2012	$	0.84		491,568		$	2.50

~~The~~Note ~~Company~~10. ~~maintains a defined contribution plan subject to the provisions of the Employee~~ Retirement Income Security Act (ERISA). All employees are eligible to participate following the completion of sixty days of service. Eligible participants may elect to contribute a portion of their compensation to the plan, subject to the Internal Revenue Code limitations for 401(k) plans. Participants direct the investment of their contributions into various investment options offered by the plan. The Company may make discretionary contributions to the plan in which all eligible employees will receive a portion of the Company’s contribution. There were no discretionary contributions made by the Company to the plan during the years ended May 31, 2011 and 2010.Plan

~~Note~~The 10Company maintains a defined contribution plan subject to the provisions of the Employee Retirement Income Security Act (ERISA). ~~Subsequent~~All ~~Events~~employees are eligible to participate following the completion of sixty days of service. Eligible participants may elect to contribute a portion of their compensation to the plan, subject to the Internal Revenue Code limitations for 401(k) plans. Participants direct the investment of their contributions into various investment options offered by the plan. The Company may make discretionary contributions to the plan in which all eligible employees will receive a portion of the Company’s contribution. There were no discretionary contributions made by the Company to the plan during the years ended May 31, 2012 and 2011.

On August 10, 2011, the Company entered into an amendment to its credit agreement with Sovereign Bank which extends the maturity date of the revolving line of credit from March 2012 to December 31, 2012, increases the interest rate by 0.75% for both the revolving line of credit and the term loan over the interest range in the original agreements, reduces the maximum amount of advances under the revolving line of credit to $9 million on March 1, 2012 and provides for an additional 0.25% interest rate increase effective July 1, 2012.30

Note 11. Subsequent Events

On August 15, 2012, the Company entered into an amendment to its credit agreement with Sovereign Bank which includes a revolving line of credit providing for advances up to $9.0 million, maturing on June 30, 2013, and a $1.95 million term loan maturing on June 30, 2013. Under the amended credit agreement, the interest rate for both the revolving line of credit and the term loan increases to 6.25% immediately, and to 9.0% after December 31, 2012, and the Company has agreed to take certain actions to obtain additional funding from sources other than Sovereign Bank.

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

NONE

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”).

The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information relating to the Company, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were operating effectively.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the fourth quarter of the fiscal year ended May 31, ~~2011~~2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Controls over Financial Reporting

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

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

Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of May 31, ~~2011~~2012. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.

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

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. We are a “smaller reporting company” under the rules of the Securities and Exchange Commission and are not required to include an attestation report.

ITEM 9B. OTHER INFORMATION

On ~~August~~July 1027, ~~2011~~2012, the Company ~~entered~~voluntarily ~~into~~filed anForm ~~amendment~~15 towith the ~~its~~Securities ~~credit~~and ~~agreement~~Exchange ~~with~~Commission ~~Sovereign~~(“SEC”) ~~Bank~~to ~~which~~suspend ~~extends~~ the ~~maturity~~Company’s ~~date~~SEC ofreporting ~~the~~obligations. ~~revolving~~Upon ~~line~~the filing of ~~credit~~the ~~from~~Form ~~March 2012 to December 31~~15, ~~2012, increases~~ the ~~interest~~Company’s ~~rate~~obligation byto ~~0.75%~~file ~~for~~periodic ~~both~~and ~~the~~current ~~revolving~~reports ~~line~~with ~~of credit and~~ the ~~term~~SEC, ~~loan~~including ~~over~~reports ~~the~~on Form ~~interest~~10-Q ~~range~~and inForm ~~the original agreements~~8-K, ~~reduces~~and ~~the~~future ~~maximum~~reports ~~amount~~on ofForm ~~advances~~10-K, ~~under~~was ~~the~~immediately ~~revolving~~suspended. ~~line~~The ofCompany ~~credit~~is eligible to $9file ~~million~~Form on15 ~~March~~because its 1,common ~~2012~~stock ~~and~~is ~~provides~~held ~~for~~of anrecord ~~additional~~by ~~0.25%~~fewer ~~interest~~than ~~rate~~300 ~~increase effective July 1, 2012~~persons.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

Name	Age	Position with the Company
G. Thomas Ahern	53	Director (1)
Brian T. Beckwith	56	Director, President and Chief Executive Officer
Brian T. Beckwith	55	Director, President and Chief Executive Officer
John C. Bergstrom	52	Director (1)(2)(3)
John C. Bergstrom	51	Director (1)(2)(3)
Richard J. Casabonne	67	Director (3)
Richard J. Casabonne	66	Director (3)
Anton J. Christianson	60	Director (2)(3)
Anton J. Christianson	59	Director (2)(3)
Michael L. DeMarco	48	Executive Vice President and Chief Financial Officer
Michael L. DeMarco	47	Executive Vice President and Chief Financial Officer
James P. Dolan	63	Director (1)(2)
James P. Dolan	62	Director (1)(2)
Frank R. Gatti	65	Director (1)
Diane M. Miller	5960	Director~~, Executive Vice President and Chief Creative Officer~~
James J. Peoples	7475	Director, Chairman, and Senior Advisor

(1) Member of Audit Committee

(2) Member of Compensation Committee

(3) Member of Governance Committee

GBrian T. ~~Thomas~~Beckwith ~~Ahern~~ has been a Director of the Company since ~~2006.~~2001, Heand has ~~been~~served ~~CEO~~as President and Chief Executive Officer of ~~Coughlan~~the ~~Companies~~Company ~~and~~since ~~Capstone,~~December a2001. ~~major~~Mr. ~~publisher~~Beckwith ofhas ~~children’s~~over 30 ~~books~~years ~~and~~of ~~online~~media ~~interactive~~industry ~~content~~experience, ~~through~~including ~~their~~positions ~~imprints;~~in ~~Capstone~~market ~~Press~~research, ~~Compass~~consumer ~~Point~~marketing, ~~Books~~operations, ~~Picture~~business ~~Window~~development, and ~~Stone~~general ~~Arch~~management. ~~Books~~Prior ~~and~~to ~~Heinemann~~joining ~~Raintree~~the Company, ~~since~~he ~~2007.~~was ~~Mr.~~a ~~Ahern~~principal ~~has~~in ~~more~~Beckwith ~~than~~& 20Associates, ~~years~~a ofpublishing ~~executive~~advisory ~~management~~firm specializing in start-ups, ~~technology~~acquisitions, and ~~sales~~Internet ~~experience~~business development. ~~Prior~~From 1998 to ~~joining Coughlan Companies~~2000, he ~~served~~was asPresident ~~CEO~~and Chief Operating Officer of ~~SwiftKnowledge~~Grolier, Inc., a ~~web-based~~$450 ~~business~~million ~~intelligence~~publisher ~~software~~and ~~company~~direct ~~from~~marketer ~~2002~~of children’s books and other educational products. From 1991 to ~~2007~~1997, Mr. HeBeckwith ~~also~~served ~~was~~in ~~Executive~~various ~~Vice~~senior ~~President,~~management ~~Sales~~positions with K-III (Primedia) including President and ~~Marketing~~Chief Executive ~~for~~Officer ~~PLATO~~of ~~Learning~~the ~~(NASDAQ:~~Special ~~TUTR),~~Interest aMagazine ~~highly~~Group. ~~successful~~Mr. ~~educational~~Beckwith ~~software~~has ~~company~~also ~~based~~held inmanagement ~~Bloomington~~positions with News Corporation, CBS MNMagazines, ~~from~~and ~~1990~~Ziff-Davis ~~to 2001~~Publishing. MrHe holds a B.A. ~~Ahern~~summa iscum alaude ~~Communications~~from ~~graduate~~New ofEngland ~~Northwestern~~College and an M.B.A. from Fordham University’s ~~(BA~~Graduate ~~1980)~~School of Business.

Brian T. Beckwith has been a Director of the Company since 2001, and has served as President and Chief Executive Officer of the Company since December 2001. Mr. Beckwith has over 25 years of publishing industry experience, including positions in market research, consumer marketing, operations, business development, and general management. Prior to joining the Company, he was a principal in Beckwith & Associates, a publishing advisory firm specializing in start-ups, acquisitions, and Internet business development. From 1998 to 2000, he was President and Chief Operating Officer of Grolier, Inc., a $450 million publisher and direct marketer of children’s books and other educational products. From 1991 to 1997, Mr. Beckwith served in various senior management positions with K-III (Primedia) including President and Chief Executive Officer of the Special Interest Magazine Group. Mr. Beckwith has also held management positions with News Corporation, CBS Magazines, and Ziff-Davis Publishing. He holds a B.A. summa cum laude from New England College and an M.B.A. from Fordham University’s Graduate School of Business.32

John C. Bergstrom has been a Director of the Company since 1998. He has been a partner in RiverPoint Investments, Inc., a St. Paul, MN-based business and financial advisory firm since 1995. Mr. Bergstrom is also a director of The Dolan Company. (NYSE:DM), Znomics, Inc. (OTC:ZNOM), Tecmark, Inc., Instrumental, Inc., JobDig, Inc., Creative Publishing Solutions, Inc., ~~and~~ Cramer, LLC, and Early Learning Labs, Inc. Mr. Bergstrom is also active in the non-profit sector and currently serves as a board member of Goodwill Easter Seals Minnesota and Chicagoland Habitat for Humanity. Mr. Bergstrom is a graduate of Gustavus Adolphus College, B.A., and the University of Minnesota, M.B.A.

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

Anton J. Christianson has been a Director of the Company since 1998. He is the Chairman of Cherry Tree Companies, established in 1980, a financial advisory firm offering investment management, investment banking, and wealth management services. Mr. Christianson controls Adam Smith Companies, LLC, Adam Smith Management, LLC, Adam Smith Fund, LLC, and Adam Smith Growth Partners, LP, which are affiliates of Cherry Tree Companies and investors in Peoples Educational Holdings, Inc. He serves as a director of AmeriPride Services, Inc., The Dolan Company (NYSE:DM), Titan Machinery, Inc. (NASDAQ: TITN), Arctic Cat, Inc. (NASDAQ: ACAT), and Znomics, Inc. (NASDAQ: ZNOM). Mr. Christianson ~~also served as a director of Capella Education Company (NASDAQ: CPLA) from 1993 to 2006 and Fair Isaac Corporation (NYSE: FICO) from 1999 to 2009. Mr. Christianson~~ is a graduate of St. John’s University, Collegeville, Minnesota, and earned an M.B.A. from Harvard Business School.

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

James P. Dolan has been a Director of the Company since 1999. Since 1992, he has been Chairman, President and Chief Executive Officer and founder of The Dolan Company, (NYSE:DM) in Minneapolis, a specialized business services and information company that publishes daily and weekly business newspapers in 2120 U.S. markets and operates a number of services businesses including National Default Exchange, a leading provider of mortgage default processing services to the foreclosure bar; DiscoverReady, a leading provider of electronic discovery services to large companies and their legal counsel; and Counsel Press, the nation’s largest appellate legal services provider. From 1989 to 1993, he was Executive Vice President of the Jordan Group, New York City, an investment bank specializing in media. He previously held executive positions with News Corporation in New York, Sun-Times Company of Chicago, and Centel Corp., Chicago, and was an award-winning reporter and editor at newspapers in San Antonio, New York, Chicago, Sydney, and London. He serves as a director of several private companies and is a journalism graduate of the University of Oklahoma.

~~Diane~~Frank MR. ~~Miller~~Gatti ishas ~~co-founder~~been ~~and~~ a Director of the Company since January 2012. ~~She~~He has ~~served~~been asa ~~Executive~~member ~~Vice~~of ~~President~~the Finance Committee of the ~~Company~~Board ~~since~~of ~~1990;~~The Conference Board, an objective and ~~Chief~~independent source ~~Creative~~of ~~Officer~~economic and business knowledge, since ~~2005~~January 2011. ~~Her~~He ~~educational~~is ~~publishing~~also ~~experience~~an ~~encompasses~~advisor ~~general~~to ~~management,~~Accenture ~~product~~for ~~development,~~their ~~strategic~~CFO ~~planning~~Network and has served on Pace University’s MS/Publishing Advisory Board since its inception. In addition, ~~market~~he ~~research~~was a member of the Board of Directors of Blackboard, ~~writing~~Inc., ~~curriculum~~a ~~development,~~global ~~editorial~~provider of enterprise software applications and related products/services to education, government ~~marketing~~and industry, ~~production~~and served on its Transaction, Nominating/Governance and ~~professional~~Audit ~~development.~~(chair) ~~Prior~~Committees tofrom ~~forming~~the April 2004 IPO to the ~~Company,~~October Ms2011 sale. ~~Miller~~He was ~~publisher~~Chief Financial Officer and a member of ~~Globe~~the ~~Books~~Officer of the President of ETS, a ~~remedial~~global $1.3 billion assessment, ~~supplementary~~licensure ~~educational~~and ~~publisher~~certification ~~owned~~company, byfrom ~~Simon~~October ~~and~~1997 ~~Schuster~~to his retirement in May 2011. Prior to ~~joining~~ETS, ~~Globe~~he ~~Books~~held senior financial positions at The New York Times Company, ~~she~~including ~~was~~Corporate ~~Senior~~Vice ~~Editor~~President of/ ~~Reading~~Financial ~~for~~Management ~~Harcourt~~commencing in ~~Brace~~January ~~Jovanovich~~1996. MsMr. ~~Miller~~Gatti ~~has~~holds ~~classroom~~a BBA in accounting degree, earned an MBA in finance and ~~research~~marketing ~~experience~~and ashas ~~well~~completed several executive education programs in planning, strategic marketing and financial management at the Harvard Business School. Mr. Gatti is a ~~graduate~~Certified ~~with~~Public ~~honors~~Accountant. ofHis ~~Centre~~leadership ~~College~~and management accomplishments have been recognized by the Rutgers Business School, NJBiz, the Executive Council of ~~Kentucky~~New York and Pace University.

Diane M. Miller is co-founder and a Director of the Company. She is currently an educational consultant. She served as Executive Vice President of the Company from 1990 until May 31, 2012; and Chief Creative Officer from 2005 to May 31, 2012. Her educational publishing experience included both print and digital in the following areas: general management, product development, strategic planning, market research, writing, curriculum development, editorial, marketing, production, and professional development. Prior to forming the Company, Ms. Miller was publisher of Globe Books, a remedial, supplementary educational publisher owned by Simon and Schuster. Prior to joining Globe Books, she was Senior Editor of Reading for Harcourt Brace Jovanovich. Ms. Miller has classroom and research experience as well, and is a graduate with honors of Centre College of Kentucky.

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

Board Committees

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

35The Audit Committee is currently composed of Messrs. Bergstrom (Chair), Gatti, and Dolan. The committee meets with our independent registered public accounting firm and representatives of management to review the internal and external financial reporting of the Company, considers comments by the auditors regarding internal controls and accounting procedures and management's response to these comments, and approves any material non-audit services to be provided by our independent registered public accounting firm. Our Board of Directors has determined that Mr. Bergstrom is an audit committee financial expert as defined in Item 407(d)(5) of Regulation S-K. Each member of the Audit Committee is independent pursuant to the independence standards promulgated by the NASDAQ Stock Market.

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

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that, during the fiscal year ended May 31, ~~2011~~2012, all required Section 16(a) filings applicable to its officers, directors, and 10% stockholders were timely made.

Code of Ethics

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

We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Business Conduct and Ethics by posting such information on our website, at the address and location specified above and, to the extent required by the listing standards of the NASDAQ Capital Market, by filing a Current Report on Form 8-K with the SEC, disclosing such information.34

36The Code of Business Conduct and Ethics is posted on our website at www.peopleseducation.com under the captions About Us, Investor Relations, Corporate Governance.

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Business Conduct and Ethics by posting such information on our website, at the address and location specified above.

ITEM 11. EXECUTIVE COMPENSATION

Summary of Cash and Certain Other Compensation

The following table shows, for fiscal ~~2011~~2012 and ~~2010~~2011, the compensation earned by or awarded to Brian T. Beckwith, the Company’s Chief Executive Officer and President; Michael L. DeMarco, the Company’s Executive Vice President and Chief Financial Officer; and Diane M. Miller, Executive Vice President and Chief Creative Officer, the only other executive officer of the Company (collectively with Mr. Beckwith and Mr. DeMarco, the “Named Executives”).

	Summary Compensation Table For Fiscal Year
	Ended May 31, 2011 and 2010
Name and Principal Position	Year	Salary		Incentitive Plan Compensation		(a) Option Awards		(b) All Other Compensation		Total
Brian T. Beckwith	2011	$	330,424	$	-	$	69,335	$	22,407	$	422,166
President and Chief Executive Officer	2010	$	320,800	$	-	$	11,668	$	18,799	$	351,267
Michael L. DeMarco	2011	$	218,566	$	-	$	19,756	$	20,072	$	258,394
Executive Vice President and	2010	$	212,200	$	-	$	6,154	$	16,165	$	234,519
Chief Financial Officer
Diane M. Miller	2011	$	190,550	$	-	$	21,202	$	27,467	$	239,219
Executive Vice President and	2010	$	185,000	$	-	$	4,894	$	23,920	$	213,814
Chief Creative Officer

Summary Compensation Table for Fiscal Year Ended May 31, 2012 and 2011

(a) These amounts reflect the expense recognized for financial statement reporting purposes for fiscal 2011 and 2010 in accordance with ASC 718, unreduced by the estimated service-based forfeitures. The other assumptions used in calculating these amounts are set forth in Note 8 to the Consolidated Financial Statements for the fiscal year ended May 31, 2011.

				Non-Equity
				Incentitive		(a)		(b)
				Plan		Option		All Other
Name and Principal Position	Year	Salary		Compensation		Awards		Compensation		Total

Brian T. Beckwith	2012	$	322,084	$	-	$	87,937	$	21,650	$	431,671
President and Chief Executive Officer	2011	$	330,424	$	-	$	69,335	$	22,407	$	422,166

Michael L. DeMarco	2012	$	213,049	$	-	$	21,704	$	20,930	$	255,683
Executive Vice President and Chief Financial Officer	2011	$	218,566	$	-	$	19,756	$	20,072	$	258,394

Diane M. Miller	2012	$	185,740	$	-	$	26,810	$	28,685	$	241,235
Executive Vice President and Chief Creative Officer	2011	$	190,550	$	-	$	21,202	$	27,467	$	239,219

(ba) ~~Each~~These ofamounts reflect the ~~named~~expense ~~executives~~recognized ~~receives~~for afinancial ~~car~~statement ~~allowance~~reporting ~~and~~purposes ~~the~~for ~~non-business~~fiscal ~~portion~~2012 ofand ~~this~~2011 ~~allowance~~in isaccordance ~~included~~with asASC ~~taxable~~718, ~~income~~unreduced toby the ~~named~~estimated ~~executive~~service-based forfeitures. The ~~Company~~other ~~also~~assumptions ~~covers~~used ~~the~~in ~~cost~~calculating ofthese ~~medical~~amounts ~~and~~are ~~dental~~set ~~insurance~~forth ~~premiums~~in ~~payable~~Note by9 to the ~~named~~Consolidated ~~executive.~~Financial InStatements ~~addition,~~for the ~~Company~~fiscal ~~provided~~year ~~supplemental~~ended ~~life~~May ~~insurance to Ms. Miller. The policy premium of $1~~31,~~995~~ ~~for both 2011 and 2010 was taxable income to Ms~~2012. ~~Miller.~~

(b)

Each of the named executives receives a car allowance and the non-business portion of this allowance is included as taxable income to the named executive. The Company also covers the cost of medical and dental insurance premiums payable by the named executive. In addition, the Company provided supplemental life insurance to Ms. Miller. The policy premium of $1,995 for both 2012 and 2011 was taxable income to Ms. Miller.

Our compensation program uses stock options to provide long-term incentives and rewards to our executives, other employees, and directors. At our Annual Meeting of Stockholders on February 10, 2011, our stockholders approved an increase in the number of shares available for issuance under our 2009 Stock Plan to enable the Board to implement a stock option replacement program and continue our long-term incentive program. Under the stock option replacement program, we granted new stock options for a total of 712,836 shares to our directors, officers and other employees to replace options that had recently expired or were cancelled in exchange for new options. The replacement options were granted at exercise prices of $2.00 or $3.00 per share, which exceeded the market price of our stock on the date of grant. The exercise prices of the options they replaced were in a range from $3.05 to $6.00 per share. The replacement options, which are scheduled to expire in 2018, replaced options that had expired or were scheduled to expire in 2011, 2012, and 2013.

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Outstanding Equity Awards at May 31, ~~2011~~ 2012

The following table provides a summary of equity awards outstanding for each of the Named Executives as of the end of fiscal ~~2011~~2012:

	Option Awards
	Number of
	Number of Securities
	Securities
	Underlying
	Underlying
	Unexercised Options						Option
	Unexercised					Option
							Exercise		Option
	Options					Exercise	Option
	(#)			(#)			Price		Expiration
	(#)		(#)			Price	Expiration
Named Executive	Exercisable			Unexercisable			($)		Date
Named Executive	Exercisable		Unexercisable			($)	Date
Brian T. Beckwith		3,750			11,250	(12)	$	0.92	10/13/2016
Brian T. Beckwith	16,400		49,200	(1)		$ 2.00	2/10/2018
President and Chief Executive Officer		32,800			32,800	(1)	$	2.00	2/10/2018
President and	65,600		196,800	(2)		$ 3.00	2/10/2018
		131,200			131,200	(2)	$	3.00	2/10/2018
Chief Executive Officer	4,250		12,750	(3)		$ 1.00	8/9/2015
		8,500			8,500	(3)	$	1.00	8/9/2015
	8,500		8,500	(4)		$ 1.96	8/20/2014
		12,750			4,250	(4)	$	1.96	8/20/2014
Michael L. DeMarco	~~3,500~~	1,500	~~10,500~~	~~(5)~~	4,500	~~$ 2.00~~(13)	~~2/10/2018~~$	0.92	10/13/2016
Executive Vice President and	14,000		42,000	(6)		$ 3.00	2/10/2018
Executive Vice President and Chief Financial Officer		3,500			10,500	(5)	$	2.00	2/10/2018
Chief Financial Officer	2,000		6,000	(7)		$ 1.00	8/9/2015
		14,000			42,000	(6)	$	3.00	2/10/2018
	3,000		9,000	(8)		$ 3.00	10/14/2014
		2,000			6,000	(7)	$	1.00	8/9/2015
	4,000		4,000	(9)		$ 1.96	8/20/2014
		3,000			9,000	(8)	$	3.00	10/14/2014
Diane M. Miller	4,500		13,500	(10)		$ 2.00	2/10/2018
		4,000			4,000	(9)	$	1.96	8/20/2014
Executive Vice President and	18,000		54,000	(11)		$ 3.00	2/10/2018
Diane M. Miller		1,500			4,500	(13)	$	0.92	10/13/2016
Chief Creative Officer	2,000		6,000	(7)		$ 1.00	8/9/2015
Executive Vice President and Chief Creative Officer		4,500			13,500	(10)	$	2.00	2/10/2018
	4,000		4,000	(9)		$ 1.96	8/20/2014
		18,000			54,000	(11)	$	3.00	2/10/2018
		2,000			6,000	(7)	$	1.00	8/9/2015
		4,000			4,000	(9)	$	1.96	8/20/2014

(1) Becomes exercisable with respect to 16,400 shares on each February 10, ~~2012,~~ 2013, and 2014.

(2) Becomes exercisable with respect to 65,600 shares on each February 10, ~~2012~~, 2013 and 2014.

(3) Becomes exercisable with respect to 4,250 shares on each August 9, ~~2011,~~ 2012 and 2013.

(4) Becomes exercisable with respect to 4,250 shares on ~~each~~ August 20, ~~2011 and~~ 2012.

(5) Becomes exercisable with respect to 3,500 shares on each February 10, ~~2012,~~ 2013 and 2014.

(6) Becomes exercisable with respect to 14,000 shares on each February 10, ~~2012~~, 2013 and 2014.

(7) Becomes exercisable with respect to 2,000 shares on each August 9, ~~2011,~~ 2012 and 2013.

(8) Becomes exercisable with respect to 3,000 shares on each June 15, ~~2011,~~ 2012 and 2013.

(9) Becomes exercisable with respect to 2,000 shares on ~~each~~ August 20, ~~2011 and~~ 2012.

(10) Becomes exercisable with respect to 4,500 shares on each February 10, ~~2012,~~ 2013, and 2014.

(11) Becomes exercisable with respect to 18,000 shares on each February 10, 2012, 2013, and 2014.

	(11)	Becomes exercisable with respect to 18,000 shares on each February 10, 2013, and 2014.
	(12)	Becomes exercisable with respect to 3,750 shares on each October 13, 2012, 2013, and 2014.

(13)

Becomes exercisable with respect to 1,500 shares on each October 13, 2012, 2013, and 2014.

Potential Payments Upon Termination

Brian T. Beckwith, our President and Chief Executive Officer, entered into an employment agreement in 2001, which was amended in July 2004. The agreement, as amended, provides for a term ending in December 2008 with automatic renewals thereafter from year to year unless terminated by either party by 180 days’ prior notice before the end of each contract year. Pursuant to these arrangements, the term of the agreement has been extended to December ~~2012~~ 2013. The agreement contains non-competition and non-solicitation covenants which at the Company’s option continue in effect for a period ending one year after Mr. Beckwith ceases to be employed. In consideration for these covenants, Mr. Beckwith will receive on a monthly basis, 60% of his monthly salary in effect at the time his employment ceased. If Mr. Beckwith is terminated by the Company without cause, or if Mr. Beckwith resigns for good reason, Mr. Beckwith is entitled to 18 months of severance at his then-current annual salary. If we provide Mr. Beckwith notice of non-renewal, Mr. Beckwith is entitled to 12 months of severance at his then-current annual salary. The agreement also provides for, under certain circumstances, our repurchase right and Mr. Beckwith’s put right to the Company with respect to Company stock owned by Mr. Beckwith, following termination of his employment, which he has acquired upon exercise of stock options and held for at least one year.

3836

Michael L. DeMarco, our Executive Vice President and Chief Financial Officer, entered into an employment agreement in May 2002, which was most recently amended in June 2007. The agreement, as amended, provides for a term ending in May 2008, with automatic renewals thereafter from year to year unless terminated by either party by 180 days’ prior notice before the end of each contract year. Pursuant to these arrangements, the term of the agreement has been extended to May ~~2012~~2013. The agreement contains non-competition and non-solicitation covenants which at the Company’s option continue in effect for a period ending one year after Mr. DeMarco ceases to be employed by the Company. In consideration for these covenants, Mr. DeMarco will receive on a monthly basis, 60% of his monthly salary in effect at the time his employment ceased. If Mr. DeMarco is terminated without cause or resigns for good reason, Mr. DeMarco is entitled to 12 months salary as severance at his then-current annual salary.

Diane M. Miller, our Executive Vice President and Chief Creative Officer, until May 31, 2012 entered into an employment agreement in 1990, which was amended and restated in November 2004. The agreement ~~provides~~provided for a term ending in November 2007, with automatic renewals thereafter for successive one-year periods unless terminated by either party at least 180 days prior to the end of the contract year. ~~Pursuant to these arrangements, the term of the agreement has been extended to November 2012.~~ The agreement contains non-competition and non-solicitation covenants which at the Company’s option continue in effect for a period ending one year after Ms. Miller ceases to be employed. In consideration for these covenants, Ms. Miller will receive on a monthly basis, 60% of her monthly salary in effect at the time her employment ceased. If Ms. Miller is terminated without cause or if Ms. Miller resigns for good reason, Ms. Miller is entitled to 12 months of severance at the rate in effect at the time her employment ceased. We have a right of first refusal with respect to any share transfers of Company stock by Ms. Miller to a competitor. Ms. Miller resigned from her position with the Company effective May 31, 2012 and under the provisions of her agreement will receive one year of severance, in the amount of $190,550.

Compensation of Non-Management Directors

We use a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on the Board of Directors. For ~~2011~~2012, each non-management member of the Board of Directors ~~received~~earned on a quarterly basis $3,183 for services as a director, plus $530 for each committee on which they served, plus an additional $530 for each committee of which they were the chair. Mr. Peoples earned ~~received~~ an addition $1,061 per quarter for his duties as the Board of Directors Chairman. Mr. Bergstrom ~~received~~earned an additional $5,150 per quarter for his services on the audit and compensation committee. Non-employee directors were also reimbursed for certain expenses in connection with attendance at Board and committee meetings. In addition, each non-employee director receives nonqualified options to purchase our common stock at an option price equal to the fair market value of our common stock on the date that the option is granted. The options ~~are~~become exercisable in annual increments of 25% each over a four-year period during the term of the options, which was five years.

InOn ~~February~~January ~~2011~~20, ~~each of the non-management directors was granted new stock options under the stock option replacement program described above to replace options that had expired or were scheduled to expire in 2011,~~ 2012 ~~or 2013. Options were granted as follows at the indicated exercise prices: Mr. Ahern (3~~,~~600~~ ~~shares at $2.00 per share; 14~~Messrs Bergstrom,~~400~~ ~~shares at $3.00 per share); Mr. Bergstrom (4~~Casabonne,~~567~~ ~~shares at $2.00 per share; 18~~Christianson,~~267~~ ~~shares~~Dolan atand ~~$3.00~~Peoples ~~per~~each ~~share);~~were ~~Mr.~~granted ~~Casabonne (7~~2,~~767~~000 ~~shares~~options at ~~$2.00~~a ~~per~~strike ~~share;~~price ~~31,067~~of ~~shares at~~ $30.0070. ~~per share);~~ Mr. ~~Christianson (4~~Gatti,~~567~~ ~~shares~~who was atappointed ~~$2.00~~to ~~per~~the ~~share;~~Board ~~18,267~~on ~~shares~~January ~~at $3.00 per share); Mr. Dolan (4~~20,~~567~~ ~~shares~~2012 atreceived ~~$2.00 per share; 18~~12,~~267~~000 ~~shares~~options atunder ~~$3.00~~the ~~per~~same ~~share);~~terms ~~and~~as Mrabove. ~~Peoples (800 shares at $2.00 per share; 3,200 shares at $3.00 per share).~~

Non-Management Director Compensation for the Fiscal Year Ended May 31, ~~2011~~2012:

	Fees Earned or Paid in Cash			(a) Option Awards			All Other Compensation				Total
				Option			All Other
G. Thomas Ahern	$	14,852		$	4,776		$	-			$	19,628
	Fees Earned			Awards			Compensation
John C. Bergstrom	$	43,940		$	6,713		$	-			$	50,653
G. Thomas Ahern	$	3,713	(e)	$	265	(a)	$	-
Richard J. Casabonne	$	14,852		$	8,795		$	41,200		(b)	$	64,847
John C. Bergstrom	$	43,940		$	6,591	(a)	$	-
Anton J. Christianson	$	19,096		$	6,713		$	-			$	25,809
Richard J. Casabonne	$	14,852		$	10,003	(a)	$	41,200	(b)
James P. Dolan	$	16,972		$	13,248		$	-			$	30,220
Anton J. Christianson	$	19,096		$	6,591	(a)	$	-
James J. Peoples	$	16,972		$	2,075		$	41,200		(c)	$	60,247
James P. Dolan	$	16,972		$	11,563	(a)	$	-
Frank R. Gatti	$	6,188	(c)	$	840	(a)	$	-
James J. Peoples	$	16,972		$	1,189	(a)	$	41,200	(d)

(a) These amounts reflect the expense recognized for financial statement reporting purposes for fiscal ~~2011~~2012 in accordance with ASC 718, unreduced by the estimated service-based forfeitures. The other assumptions used in calculating these amounts are set forth in Note 89 to the Consolidated Financial Statements for the fiscal year ended May 31, ~~2011~~2012.

3937

(b) Mr. Casabonne ~~received~~earned an additional $10,300 per quarter for his services related to marketing and product development.

(c) Mr. ~~Peoples~~Gatti ~~received~~service anon ~~additional~~the ~~$10,300~~Board ~~per~~commenced ~~quarter~~January ~~for~~13, ~~his services related to business development~~2012.

(d)

Mr. Peoples earned an additional $10,300 per quarter for his services related to business development.

(e)

Mr. Ahern resigned from the Board effective September 13, 2011.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth information provided to the Company as to the beneficial ownership of our Common Stock as of July 15, ~~2011~~2012 by (i) the only stockholders known to the Company to hold 5% or more of such stock, and (ii) each of the directors, the Named Executives set forth in the Summary Compensation Table in Item 11, and directors and officers as a group.

	Common Stock
	Beneficially
Beneficial Owner	Owned		Total (%)
Anton J. Christianson (1) (2)		1,~~796~~812,~~561~~021		40.14	%
NAP & CO - c/o Delaware State Pension Fund (3)		603,151		13.5	%
James J. Peoples (1) (4)		~~575~~577,~~081~~581		12.9	%
Dolphin Offshore Partners, Inc. (5)		361,887		8.1	%
Diane M. Miller (1) (4)		~~281~~311,516		6.39	%
Brian T. Beckwith (1) (4)		~~134~~237,~~054~~754		25.91	%
Michael L. DeMarco (1)		31,352		*
John C. Bergstrom (1)		66,483		1.5	%
John C. Bergstrom (1)		52,523		1.2	%
Michael L. DeMarco (1)		61,750		1.4	%
James P. Dolan (1)		2848,~~457~~542		*1.1	%
Richard J. Casabonne (1)		1223,~~207~~417		*
G. Thomas Ahern (1)		11,000		*
Frank R. Gatti (1)		3,000		*
Directors and Officers as a group (9 persons) (1) (2)		23,~~922~~142,~~751~~064		6264.2	%

* Less than 1%

(1) Includes shares of Common Stock subject to outstanding stock options exercisable within 60 days as follows: Mr. Christianson, 1019,~~707~~167 shares; Mr. Peoples, 36,~~500~~000 shares; Ms. Miller, 3060,500 shares; Mr. Beckwith, 99197,~~000~~500 shares; Mr. DeMarco, 2959,~~502~~500 shares; Mr. Bergstrom, 1017,~~707~~667 shares; Mr. Dolan, 2642,~~957~~042 shares; Mr. Casabonne, 1223,~~207~~417 shares; Mr. ~~Ahern~~Gatti, 73,000 and directors and officers as a group, ~~230~~428,~~080~~793 shares.

(2) Mr. Christianson’s ownership includes ownership of 1,~~713~~720,915 shares held by Adam Smith Fund LLC, 70,619 shares held by Adam Smith Growth Partners and 1,320 shares held individually. The managing member of Adam Smith Growth Partners is Adam Smith Companies, LLC. Mr. Christianson, as manager of Adam Smith Companies, LLC, has voting and investment powers with respect to the securities owned by Adam Smith Growth Partners. The managing member of Adam Smith Fund, LLC is Adam Smith Management, LLC, whose managing member is Adam Smith Companies, LLC. Mr. Christianson, as manager of Adam Smith Companies, LLC, has investment and voting powers with respect to the securities owned by Adam Smith Fund, LLC. Mr. Christianson, Adam Smith Companies, LLC, and Adam Smith Management, LLC disclaim beneficial ownership of the securities held by Adam Smith Growth Partners and Adam Smith Fund, LLC except to the extent of their pecuniary interest in such securities. The address of Mr. Christianson and each of the Adam Smith entities is 301 Carlson Parkway, Suite #103, Minnetonka, MN 55305.

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(3)

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

(4)

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

(5)

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

Equity Compensation Plan Table

The following table sets forth aggregate information regarding the Company’s equity compensation plans as of May 31, ~~2011~~2012.

Number of securities to be issued upon exercise of outstanding options, warrants and rights

~~Weighted-average exercise price of outstanding options, warrants and rights~~

~~Number~~Weighted-average ofexercise ~~securities~~price ~~remaining~~of ~~available~~outstanding ~~for~~options, ~~future~~warrants ~~issuance~~and ~~under equity compensation plans (excluding securities reflected in column (a))~~rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

Plan Category

(a)

~~(b)~~

(cb)

(c)

Equity compensation plans approved

Equity compensation plans approved by security holders

971,636

2.51

275,364

by security holders

919,636

$2.59

327,364

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

Certain Relationships and Related Transactions

None

Director Independence

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

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

In connection with the fiscal years ended May 31, ~~2011~~2012, and May 31, ~~2010~~2011 Rothstein, Kass ~~& Company, P.C.~~ provided various audit and non-audit services to the Company and billed the Company for these services as follows:

	(a)		Audit Fees. Fees for audit services totaled approximately $84,500 and $80,000 in fiscal 2011 and fiscal 2010, respectively, which included the fees for the annual audits and the reviews of the Company’s quarterly reports on Form 10-Q.
	(b)		Audit-Related Fees. There were no fees incurred for audit-related services in fiscal 2011 or fiscal 2010.

(a)

Audit Fees. Fees for audit services totaled approximately $90,000 and $84,500 in fiscal 2012 and fiscal 2011, respectively, which included the fees for the annual audits and the reviews of the Company’s quarterly reports on Form 10-Q.

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	(c)		Tax Fees. There were no fees incurred for tax services, including certain tax compliance assistance in fiscal 2011 or fiscal 2010.
	(d)		All Other Fees. There were no other services in fiscal 2011 or fiscal 2010 provided by Rothstein, Kass & Company, P.C. not included in the above.

(b)

Audit-Related Fees. There were no fees incurred for audit-related services in fiscal 2012 or fiscal 2011.

In(c) ~~connection~~Tax ~~with~~Fees. ~~the~~There ~~fiscal~~were ~~year~~no ~~ended~~fees ~~May~~incurred ~~31,~~for ~~2010,~~tax ~~McGladrey & Pullen~~services, ~~LLP~~including ~~and~~certain ~~its~~tax ~~related~~compliance ~~entity~~assistance ~~RSM~~in ~~McGladrey,~~fiscal ~~Inc.,~~2012 ~~provided~~or ~~various~~fiscal ~~audit and non-audit services to the Company and billed the Company for these services as follows:~~2011.

(a) Audit Fees. Fees for audit services totaled approximately $20,000 in fiscal 2010 including fees for the August 31, 2010 review of the Company’s quarterly reports on Form 10-Q. (b) Audit-Related Fees. Fees for audit-related services totaled approximately $ 5,000 in fiscal 2010. These services related to responding to technical and accounting questions and the related research, meetings with management and transition relating to the Company’s appointment of Rothstein, Kass & Company, P.C. as the Company’s independent registered public accounting firm. (c) Tax Fees. Fees for tax services, including certain tax compliance assistance, totaled $-0- for fiscal 2010. (d) All Other Fees. There were no other services ~~provided~~in byfiscal ~~McGladrey~~2012 &or ~~Pullen,~~fiscal ~~LLP~~2011 orprovided ~~RSM~~by ~~McGladrey,~~Rothstein ~~Inc.,~~Kass not included ~~above,~~ in ~~fiscal~~the ~~2010~~above.

The Audit Committee preapproves all audit and permissible non-audit services provided by the independent registered public accounting firm on a case-by-case basis. All of the services provided by the independent registered public accounting firms during fiscal ~~2011~~2012 and fiscal ~~2010~~ 2011, including services related to Audit-Related Fees and Tax Fees have been approved by the Audit Committee under its pre-approval process. The Audit Committee has considered whether the provision of services related to the Audit-Related Fees, Tax Fees and All Other Fees was compatible with maintaining the independence of Rothstein, Kass ~~& Company, P.C.~~ and ~~McGladrey & Pullen, LLP and~~ determined that such services did not adversely affect the independence of either firm.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)

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

(1)

Financial Statements. See Item 8 above.

(2)

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

EXHIBIT NO.		DESCRIPTION
EXHIBIT
NO.		DESCRIPTION
3.1		Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-KSB for the year ended December 31, 2001).
3.2		Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K dated May 23, 2007).
10.1‡		Registrant’s 2009 Stock Plan, as amended February 10, 2011 (incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 (Reg. No. 333-178318) dated December 5, 2011).
10.2‡		Amended and Restated Employment Agreement between Peoples Education, Inc. and Diane M. Miller dated July 1, 2001 (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-KSB for the year ended December 31, 2001), as amended by Amendment to Employment Agreement dated November 19, 2004 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated November 22, 2004).
10.3‡		Amended and Restated Employment Agreement between the Company and Michael L. DeMarco dated May 17, 2002 (incorporated by reference to Exhibit 10 to the Registrant’s Form 10-QSB for the quarter ended June 30, 2002) as amended by Amendment to Employment Agreement dated October 4, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated October 4, 2005) and by Second Amendment to Employment agreement dated June 1, 2007 (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K dated June 1, 2007).
10.4‡		Employment Agreement between the Company and Brian T. Beckwith dated December 18, 2001 (incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-KSB for the year ended December 31, 2001), as amended by Amendment to Employment Agreement dated July 30, 2004 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-QSB for the quarter ended June 30, 2004).
10.5		Loan Agreement dated February 15, 2007, by and between Peoples Educational Holdings, Inc. and Sovereign Bank (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated February 15, 2007).
10.6		$10 million Revolving Credit Promissory Note dated February 15, 2007 payable by Peoples Educational Holdings, Inc. to Sovereign Bank (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K dated February 15, 2007).
10.7		$10 million Term Promissory Note dated February 15, 2007 payable by Peoples Educational Holdings, Inc. to Sovereign Bank (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K dated February 15, 2007).
10.8		Security Agreement dated February 15, 2007, by and between Peoples Educational Holdings, Inc., Peoples Education, Inc. and Sovereign Bank (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K dated February 15, 2007).

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10.9		Guaranty and Suretyship Agreement dated February 15, 2007, by Peoples Educational Holdings, Inc. and Peoples Education, Inc. in favor of Sovereign Bank (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K dated February 15, 2007).
10.10		Pledge of Stock Agreement dated February 15, 2007, by Peoples Educational Holdings, Inc. in favor of Sovereign Bank (incorporated by reference to Exhibit 10.6 to the Registrant’s Form 8-K dated February 15, 2007).
14		Code of Ethics (incorporated by reference to Exhibit 14 to the Registrant’s Form 10-KSB for the year ended December 31, 2003).
21		Subsidiaries of the Registrant: Peoples Education, Inc., a Delaware corporation (100% owned.
23.1*		Consent of Rothstein, Kass & Company, P.C.
31.1*		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

‡ Management contract or compensatory plan.

* Filed herewith.

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SIGNATURES

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

	PEOPLES EDUCATIONAL HOLDINGS, INC.
Date: August 15, 2011		/s/ Brian T. Beckwith
Date: September 13, 2012
		Brian T. Beckwith, Chief Executive Officer, President
	/s/ Brian T. Beckwith
		(principal executive officer) and Director
	Brian T. Beckwith, Chief Executive Officer, President (principal executive officer) and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on ~~August~~September 1513, ~~2011~~2012.

/s/ Brian T. Beckwith Brian T. Beckwith, Chief Executive Officer, President and Director /s/ Michael L. DeMarco Michael L. DeMarco, Executive Vice President and Chief Financial Officer /s/ James J. Peoples James J. Peoples, Chairman and Director /s/ Diane M. Miller Diane M. Miller, ~~Executive Vice President, Chief Creative Officer and~~ Director /s/ John C. Bergstrom John C. Bergstrom, Director /s/ Richard J. Casabonne Richard J. Casabonne, Director /s/ Anton J. Christianson Anton J. Christianson, Director /s/ James P. Dolan James P. Dolan, Director /s/ GFrank R.~~Thomas~~ ~~Ahern~~Gatti GFrank R. ~~Thomas Ahern~~Gatti, Director

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Filing Compare · PEOPLES EDUCATIONAL HOLDINGS