10-Q

Large accelerated filer o

Accelerated filer o

Non-accelerated filer þ

Smaller reporting company o

(Do not check if a smaller reporting company)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 333-109381

Haights Cross Communications, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		13-4087398
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation)		Identification Number)

10 New King Street
White Plains, NY		10604
(Address of Principal Executive Offices)		(Zip Code)

(914) 289-9400
(Registrant’s Telephone Number, Including Area Code)

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. Yes þ No o

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

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

The registrant had 9,958,112 shares of Common Stock, par value $0.0003 per share, outstanding as of November 14, 2008.

HAIGHTS CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(In thousands)
Revenue	$	49,077		$	47,583		$	135,087		$	128,616
Costs and expenses:
Cost of goods sold		12,975			12,945			36,641			35,615
Marketing and sales		9,916			9,966			30,910			28,639
Fulfillment and distribution		3,200			3,112			9,938			9,087
General and administrative		7,311			10,846			20,095			22,236
Restructuring charges		19			19			303			57
Amortization of pre-publication costs		4,181			3,671			12,065			10,215
Depreciation expense and amortization of intangibles		1,024			939			3,177			2,773

Total cost and expenses		38,626			41,498			113,129			108,622

Income from operations		10,451			6,085			21,958			19,994
Other (income) expense:
Interest expense		11,212			14,520			33,353			50,161
Interest income		(242	)		(754	)		(1,271	)		(2,403	)
Amortization of deferred financing costs		1,154			871			2,671			2,664
Loss (gain) on troubled debt restructuring		—			(115,595	)		32			(115,595	)
Other expense (income)		(107	)		247			(109	)		250

Total other (income) expenses		12,017			(100,711	)		34,676			(64,923	)

Income (loss) before (provision) benefit for income taxes and discontinued operations		(1,566	)		106,796			(12,718	)		84,917
(Provision) benefit for income taxes		(215	)		(712	)		2,639			(3,001	)

Income (loss) before discontinued operations		(1,781	)		106,084			(10,079	)		81,916
Discontinued operations:
Income (loss)from operations of discontinued operations, net of taxes of $0.3 million in 2008		1,071			937			290			(1,867	)
Income (loss) on disposal of discontinued operations, net of taxes of $1.2 million in 2008		119			(8	)		15,643			(85	)

Income (loss) on disposal of discontinued operations		1,190			929			15,933			(1,952	)

Net income (loss)		(591	)		107,013			5,854			79,964
Gain on recapitalization		—			34,353			—			34,353
Preferred stock dividends and accretion		—			(411	)		—			(2,182	)

Net income (loss) available to common stockholders	$	(591	)	$	140,955		$	5,854		$	112,135

See accompanying notes to unaudited consolidated financial statements.

HAIGHTS CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
	2008 (Unaudited)			2007 (Audited)
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	40,834		$	61,784
Accounts receivable, net		23,941			21,444
Inventory, net		19,531			16,914
Direct response advertising costs		2,768			2,470
Prepaid royalties		5,244			6,005
Prepaid expenses and other current assets		2,198			2,004
Escrow receivable (Note 7)		4,758			—
Assets of discontinued operations		92			51,035

Total current assets		99,366			161,656
Pre-publication costs, net		40,054			36,678
Property and equipment, net		7,077			7,878
Goodwill		115,001			115,001
Intangible assets, net		15,155			16,805
Deferred financing costs, net		6,780			6,499
Other assets		392			255

Total assets	$	283,825		$	344,772

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued liabilities	$	22,037		$	25,311
Accrued interest		2,039			8,948
Deferred subscription revenue		4,366			4,798
Current portion of long term debt (Note 12)		—			124,850
Deferred tax liability-current portion		202			—
Liabilities of discontinued operations		1,772			18,773

Total current liabilities		30,416			182,680
Long term liabilities:
Term loans (Note 12)		108,200			—
11 3/4% senior notes		140,118			171,670
12 1/2% senior discount notes		129,649			118,362
Deferred tax liability-long term		16,606			18,474
Other long term liabilities		123			415

Total long term liabilities		394,696			308,921
Commitments (Note 14)
Stockholders’ deficit:
Common stock, $.0003 par value, 30,000,000 shares authorized, 9,958,112 shares issued and outstanding at September 30, 2008 and 9,966,229 shares issued and outstanding at December 31, 2007		3			3
Accumulated other comprehensive income		315			755
Accumulated deficit		(141,605	)		(147,587	)

Total stockholders’ deficit		(141,287	)		(146,829	)

Total liabilities and stockholders’ deficit	$	283,825		$	344,772

See accompanying notes to unaudited consolidated financial statements.

HAIGHTS CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended
	September 30,
	2008			2007
	(In thousands)
Operating activities from Continuing Operations
Net loss (loss) from continuing operations	$	(10,079	)	$	81,916
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:
Gain on troubled debt restructuring – non cash		—			(115,595	)
Non-cash interest expense		11,287			25,059
Allowance for doubtful accounts		2,187			2,044
Allowance for obsolescence		866			2,163
Depreciation and amortization of property and equipment, pre-publication costs and intangibles		15,242			12,988
Amortization of deferred financing costs		2,671			2,931
Amortization of premium on 113/4% senior notes		(352	)		(357	)
Income tax benefit allocation—non-cash		(5,627	)		—
Deferred taxes— non-cash		2,487			3,011
Restricted stock compensation expense		128			1,407
Other non-operating income — non-cash		(1,063	)		422
Changes in operating assets and liabilities:
Accounts receivable		(4,684	)		(10,145	)
Inventory		(3,505	)		(1,664	)
Prepaid expenses, royalty advances and other current assets		566			(971	)
Direct response advertising costs		(297	)		(277	)
Other assets		(137	)		—
Accounts payable, accrued and other liabilities		(3,946	)		1,967
Accrued interest		(6,909	)		(5,010	)
Deferred subscription revenue		(432	)		1,822

Net cash provided by (used in) operating activities from continuing operations		(1,597	)		1,711

Investing activities from Continuing Operations
Additions to pre-publication costs		(15,547	)		(14,523	)
Additions to property and equipment		(839	)		(1,129	)
Additions to intangible assets		(24	)		(24	)
Proceeds from the sale of business		48,716			—
Proceeds from the sale of assets		1,183			6

Net cash used in investing activities from continuing operations		33,489			(15,670	)

Financing activities from Continuing Operations
Transaction cost-troubled debt restructuring and recapitalization		—			(1,932	)
Proceeds from issuance of New Term Loan		108,200			—
Repayment of Term Loans		(124,850	)		(975	)
Repayment of Senior Notes		(31,200	)		—
Additions to deferred financing costs		(2,951	)		(88	)

Net cash used in financing activities from continuing operations		(50,801	)		(2,995	)

Effect of exchange rates on cash		(296	)		132
Cash flows of discontinued operations
Operating cash flows		(906	)		(878	)
Investing cash flows		(839	)		(3,812	)

Net cash used in discontinued operations		(1,745	)		(4,690	)

Net decrease in cash and cash equivalents		(20,950	)		(21,512	)
Cash and cash equivalents at beginning of period		61,784			69,847

Cash and cash equivalents at end of period	$	40,834		$	48,335

See accompanying notes to unaudited consolidated financial statements.

HAIGHTS CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, unless noted otherwise, except for per share data)

1. Basis of Presentation

Haights Cross Communications, Inc., a Delaware corporation (together with its subsidiaries, “we,” “our,” the “Company” or “Haights Cross Communications”), whose predecessor was formed in January 1997, is a holding company that conducts all of its operations through its direct and indirect subsidiaries, including, without limitation, its wholly-owned subsidiary Haights Cross Operating Company (“Haights Cross”). Between November 2007 and January 2008, we initiated a sale process for all of our operating businesses. On June 30, 2008 we sold the subsidiary that contained our Oakstone Publishing business, which operated our Medical Education segment. On August 27, 2008 we sold the subsidiary that contained our Sundance Newbridge business, which operated our K-12 Supplemental Education segment. As a result of these dispositions, the results of Oakstone Publishing and Sundance Newbridge have been reclassified as discontinued operations for all periods presented in the consolidated financial statements. On July 1, 2008 we announced the suspension of our sale process to offer for sale our Triumph Learning and Recorded Books businesses.

The Company is a developer and publisher of products for the K-12 Education and library markets. The Company’s products include state-specific test preparation materials, skills assessment and intervention books and unabridged audiobooks. The Company’s products are sold primarily to schools and libraries.

The Company’s business is subject to moderate seasonal fluctuations as a result of many factors, including general economic trends; the traditional cyclical nature of educational material sales; school, library, and consumer purchasing decisions; the unpredictable funding of schools and libraries by federal, state, and local governments; consumer preferences and spending trends; and the timing of introductions of new products. The Company’s revenue and income from operations have historically been higher during the second and third calendar quarters.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the consolidated results for the interim periods presented. The unaudited consolidated results of operations of interim periods are not necessarily indicative of results for a full fiscal year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements included with our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions regarding assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

2. Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R establishes revised principles and requirements for how the Company will recognize and measure assets and liabilities acquired in a business combination. SFAS 141R is effective for business combinations completed on or after the beginning of the Company’s 2009 fiscal year. The Company will adopt SFAS 141R at the beginning of its 2009 fiscal year, as required, and is currently evaluating the impact of such adoption on its consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective at the beginning of the Company’s 2009 fiscal year. The Company does not believe that the adoption of SFAS 160 will have an impact on the Company’s consolidated financial statements.

On January 1, 2008, the Company adopted certain provisions of FASB Statement of Financial Accounting Standard No. 157, Fair Value Measurements (“SFAS 157”), which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. The provisions of SFAS 157 adopted on January 1, 2008 relate to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis. As of September 30, 2008 the Company did not have any fair valued financial item under the scope of SFAS 157 and therefore the provision of SFAS 157 adopted on January 1, 2008 did not have an impact on the Company’s consolidated financial statements.

The provisions of SFAS 157 related to other nonfinancial assets and liabilities will be effective for the Company on January 1, 2009, and will be applied prospectively. The Company is currently evaluating the impact, if any, these additional SFAS 157 provisions will have on the Company’s consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS 115 (“SFAS 159”), which permits but does not require us to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. As the Company has not elected to fair value any of its financial instruments under the provisions of SFAS 159, the adoption of this statement does not have any impact on the Company’s consolidated financial statements.

3. Recapitalization Transaction

On August 10, 2007, we consummated a recapitalization agreement (the “Recapitalization Agreement”). Under the terms of the Recapitalization Agreement, holders of our previously outstanding Preferred B converted their shares of Preferred B into approximately 82% of our outstanding shares of common stock, holders of our previously outstanding Preferred A, Preferred C and Preferred Warrants converted their shares and warrants into shares of common stock and common stock warrants representing approximately 15% of our outstanding shares of common stock, and certain members of management acquired new shares of common stock under the terms of management stock purchase agreements representing approximately 3% of our outstanding common stock. In connection with the foregoing, all previously outstanding shares of common stock were effectively eliminated through the reclassification into one share of common stock in a reverse split and all outstanding Common Warrants and options to purchase common stock were similarly effectively eliminated by the reverse split of the common stock. As a result of the closing of the transactions contemplated by the Recapitalization Agreement, the Company has only outstanding common stock and common stock warrants, and no shares of Preferred A, Preferred B or Preferred C, or stock options, remain outstanding.

4. Stock Based Compensation

Total stock-based compensation expense is recognized as a “general and administrative expense” in the consolidated statements of operations on a ratable basis over the vesting period for each option. The Company did not issue any form of Stock Options for the three and nine months ended September 30, 2008 and 2007. For the three and nine months ended September 30, 2008 and 2007, compensation expense recorded relating to the grant of stock options was de minimus. However as described below Restricted Shares were issued to the directors and related compensation expense was recorded.

In connection with the consummation of the Recapitalization Agreement (See Note 3), our stock option plan was terminated and all outstanding options canceled. We do not intend at this time to grant stock options in the future.

Additionally, pursuant to Management Stock Purchase Agreements dated August 10, 2007, Paul Crecca and Peter Quandt purchased, for $0.001 per share, 75,000 and 225,000 shares of restricted stock, respectively. Mr. Quandt’s 225,000 shares of common stock were deemed to be fully vested at the time of his resignation. Mr. Crecca’s restricted shares are subject to a three year vesting period. Each non-employee member of the Board of Directors received a restricted stock award of 8,117 shares of our common stock with the Chairman receiving 12,175 shares. The restricted stock granted pursuant to all of these awards was to vest in February 2008. During the year ended December 31, 2007 for $0.001 per share director Eugene I. Davis purchased 12,175 shares of restricted stock, and directors John A. McKenna, Jr., Curry E. Ford and T.J. Vigliotta have purchased 8,117 shares of restricted stock each. In January 2008, prior to the vesting of his restricted stock, Mr. Vigliotta elected to forfeit all of his restricted stock. In January 2008, prior to the vesting of his restricted stock, Mr. Ford elected to forfeit all of his restricted stock in exchange for an issuance by the Company to Glenview Capital Management, LLC, of an equivalent amount under the same terms and conditions. Subsequently, we issued to Glenview Capital Management, LLC, which has designated Mr. Ford to serve as our director, a restricted stock award of 8,117 shares. All outstanding restricted stock awards fully vested on February 10, 2008 for issuances to Mr. Davis and Glenview Capital Management, LLC and February 21, 2008 for the issuance to Mr. McKenna. Total stock-based compensation expense is recognized as a “general and administrative expense” in the consolidated statements of operations on a ratable basis over the vesting period.

The compensation expense recorded for these restricted shares was $0 and $0.1 million for the three and nine months ended September 30, 2008, respectively and $1.4 million during the quarter ended September 30, 2007.

5. Inventory

Inventory consists of the following:


	September 30,		December 31,
	2008		2007
Raw materials	$	1,396	$	1,114
Work-in-process		693		429
Finished goods		20,084		17,919

		22,173		19,462
Less allowance for obsolescence		2,642		2,548

Inventory, net	$	19,531	$	16,914

6. Pre-publication Costs

Pre-publication costs consist of the following:


	September 30,			December 31,
	2008			2007
Pre-publication costs	$	102,487		$	87,519
Less accumulated amortization		(62,433	)		(50,841	)

Pre-publication costs, net	$	40,054		$	36,678

7. Dispositions

Oakstone Publishing

On June 30, 2008, the Company sold the Oakstone Publishing business, reported within the Medical Education segment. The sale of this business was in accordance with the strategic plan initiated by our Board of Directors upon the completion of our recapitalization in August 2007. The Oakstone Publishing business published and marketed to doctors and dentists subscription based continuing education materials on a variety of medical, dental and allied health specialty topics and publishes and markets subscription based wellness information, such as newsletters and calendars, to companies seeking to improve employee awareness of health and wellness issues.

The results of operations of the Oakstone Publishing business have been classified as discontinued operations in the accompanying consolidated financial statements for all periods presented.

The operating results of the Oakstone Publishing business for the three and nine months ended September 30, 2008 and 2007 were as follows:


	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008			2007
	(Unaudited)
Revenue	$	—	$	8,927	$	14,523		$	23,557
Cost of goods sold		—		2,656		4,329			6,785
Marketing and sales		—		2,586		5,290			7,039
Fulfillment and distribution		—		876		1,802			2,466
General and administrative		—		856		1,951			2,580
Amortization of pre-publication costs		—		219		756			909
Depreciation expense		—		237		650			832

Income from operations of Oakstone Publishing before provision for income taxes		—	$	1,497	$	(255	)	$	2,946
Provision for income taxes		—		—		(313	)		(313	)

Net income (loss) from operation of Oakstone Publishing	$	—	$	1,497	$	(568	)	$	2,633

On June 30, 2008, the assets and liabilities of the Oakstone Publishing business were sold for gross proceeds of $47.5 million, consisting of consideration received from the buyer of $42.8 million and $4.8 million placed in an escrow account to satisfy working capital adjustments and indemnification obligations, if any. A gain of $15.1 million, as shown below, presented as a gain on disposal of discontinued operations, was recorded on the sale. At September 30, 2008, there was $0.4 million of accrual remaining which represents liabilities of the Oakstone Publishing business. The escrow account balance of $4.8 million is subject to downward purchase price adjustments, up to the full balance, based on adjustments to working capital and the representations and warranties made in the purchase agreement. Claims made against this escrow balance will reduce the gain on sale on the Oakstone Publishing business. The Company and the buyer of the Oakstone Publishing business are in discussions regarding such adjustments to the escrowed amount. The carrying amounts of Oakstone Publishing assets and liabilities as of June 30, 2008 were as follows:


	June 30,
	2008
	(Unaudited)
Assets and liabilities:
Working capital, net (excluding cash)	$	26,394
Pre-publication costs, net		1,884
Property and equipment, net		1,720

Net assets on date of sale	$	29,998


Calculation of gain on sale:
Proceeds	$	47,552
Tax provision		(1,001	)
Less: transaction costs		(1,457	)
Less: book value of net assets sold		(29,998	)

Gain on disposal of Oakstone Publishing	$	15,096

The gain on disposal of discontinued operations includes the effect of the write-off of deferred tax assets and liabilities associated with Oakstone Publishing.

Sundance Newbridge

On August 27, 2008 we sold the assets of the subsidiary that contained our Sundance Newbridge business, which operated our K-12 Supplemental Education segment. The Sundance imprint publishes supplemental educational materials for shared reading, guided reading, independent reading, phonics, and comprehension skills for students in PreK-8. Sundance also markets non-proprietary, supplemental literature products for students in grades K-6. The Newbridge imprint publishes nonfiction, guided reading materials, Big Books and teachers’ guides in the content areas of standards-based science, social studies, and math for students in PreK-8.

The results of operations of the Sundance Newbridge business have been classified as discontinued operations in the accompanying consolidated financial statements for all periods presented.

The operating results of the Sundance Newbridge business for the three and nine months ended September 30, 2008 and 2007 were as follows:


	Three months ended					Nine months ended
	September 30,					September 30,
	2008		2007			2008		2007
	(Unaudited)
Revenue	$	3,301	$	7,176		$	14,079	$	22,309
Cost of goods sold		553		2,323			3,054		7,092
Marketing and sales		596		2,622			3,657		8,945
Fulfillment and distribution		325		873			1,631		2,560
General and administrative		484		826			1,618		2,603
Restructuring charges		72					1,310		—
Amortization of pre-publication costs		164		864			1,720		4,940
Depreciation expense		36		226			231		668

Income (loss) from operations of Sundance Newbridge before provision for income taxes		1,071	$	(558	)	$	858	$	(4,499	)

Net income (loss) from operation of Sundance Newbridge	$	1,071	$	(558	)	$	858	$	(4,499	)

On August 27, 2008, the assets of the Sundance Newbridge business were sold for gross proceeds of $5.9 million. A gain of $0.8 million, as shown below, presented as a gain on disposal of discontinued operations, was recorded on the sale. At September 30, 2008, there was $1.8 million of accrual remaining which represents liabilities of the Sundance Newbridge business.


	September 30,
	2008
	(Unaudited)
Calculation of gain on sale:
Proceeds	$	5,912
Tax provision		(159	)
Less: transaction costs		(303	)
Less: book value of net assets sold		(4,246	)
Less: assumed liabilities		(428	)

Gain on disposal of Sundance Newbridge	$	776

We also entered into a post acquisition service agreement with the purchaser of Sundance Newbridge under which Triumph Learning provides warehouse, distribution and customer service to the purchaser under an arms length agreement. The revenues and expenses of this arrangement are reported in other income and expense and included $0.2 million of revenues and $0.2 million of expense in the quarter ended September 30, 2008.

In addition to gain on the disposal of Oakstone Publishing and Sundance Newbridge, a $0.1 and $0.2 million expense for Chelsea House was recorded for three and nine month periods ending September 30, 2008, respectively. Chelsea House was discontinued during 2005. Total income on disposal of discontinued operations, for the three and nine month periods ending September 30, 2008 was $1.2 million and $15.9 million, respectively.

8. Goodwill

Goodwill and other intangible assets with indefinite lives are tested for impairment annually and more frequently if impairment indicators exist, as required by Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). First, the fair value of the reporting unit is compared to its carrying value. If the fair value is less than the carrying value, a second step is performed. In the second step, an implied goodwill value is determined by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. If the implied fair value of the goodwill as calculated is less than the carrying amount of the goodwill, an impairment charge is recorded for the difference.

9. Intangibles

Intangible assets consist primarily of customer relationships, non-compete agreements and trademarks. Intangible assets with finite lives are amortized on a straight-line basis to expense over their useful lives of three to ten years. The Company reassesses the estimated remaining useful lives of these assets in accordance with SFAS No. 142 and has determined that such estimated lives are appropriate. A summary of intangible assets is as follows:


		September 30,			December 31,
Definite Life Assets	Lives	2008			2007
Customer list	10 years	$	20,380		$	20,380
Non-compete agreements	3-5 years		850			850
Other	5 years		161			137

			21,391			21,367
Less: accumulated amortization			(8,977	)		(7,303	)

			12,414			14,064
Trademarks	Indefinite		2,741			2,741

Net intangible assets		$	15,155		$	16,805

Amortization expense for each of the three-month periods ended September 30, 2008 and 2007 was $0.6 million and for each of the nine-month periods ended September 30, 2008 and 2007, was $1.7 million. Accumulated amortization amounts by asset type as of September 30, 2008 were $8.2 million for customer list, $0.7 million for non-compete agreements and $0.1 million for other intangible assets. Accumulated amortization by asset class as of December 31, 2007 was $6.7 million for customer lists, $0.5 million for non-compete agreements and $0.1 million for other intangible assets.

Based on the current amount of intangibles subject to amortization, the estimated amortization expense for each of the succeeding five years is as follows:


	Total
Amortization of intangibles:
Remainder of 2008		557
2009		2,182
2010		2,050
2011		2,045
2012		2,040
Thereafter		3,540

	$	12,414

10. Restructuring Charges

During the first quarter of 2006, the Company initiated a restructuring project under which it consolidated the Iowa-based warehousing, customer service and order fulfillment functions of its Buckle Down Publishing business with our existing shared service facility in Northborough, Massachusetts. The objective of the warehouse consolidation was to reduce payroll costs and avoid expected increases in lease costs, while providing faster and more accurate order and delivery services. The restructuring project resulted in costs associated with the severance of seven employees based in Iowa, the movement of inventory to the new facility and net lease payments that are being made through the end of the lease term. The Company completed the restructuring process during the second quarter of 2006 and incurred a total restructuring charge of approximately $0.4 million in connection with this effort. Restructuring activity for the warehouse and order fulfillment consolidation relates to Buckle Down Publishing and is therefore reported within the Test-prep and Intervention segment.

On September 28, 2007, the Board of Directors authorized a restructuring of Options Publishing and Triumph Learning, whereas the management of Options Publishing was merged into Triumph Learning and the warehouse functions of Options Publishing would be consolidated into the shared services division; the accounting functions will be taken over by the Triumph Learning general accounting group located in New York City; customer services, warehousing and fulfillment will be incorporated in to the shared service facility in Northborough, MA; and the manufacturing and product purchasing functions will be consolidated into a new shared manufacturing group that is being formed in our Iowa City location. The purpose of this restructuring is to save operational costs and to improve the product development process. Furthermore, certain functions of Triumph Learning will be moved to other locations to improve processes, leverage shared resources and take advantage of lower cost facilities. The accounts receivable and cash applications functions will be relocated to Northborough, MA; and the manufacturing functions located in NY will be moved into the previously discussed shared manufacturing function in Iowa City. Additionally, as of January 1, 2008, the Triumph Learning accounting group took over certain accounting functions from Sundance Newbridge related to the shared service facility in Northborough, MA. The Company completed the restructuring process during the first quarter of 2008 and expects to incur a total restructuring charge of approximately $1.1 million in connection with this effort.

Restructuring activity related to the Options Publishing merger with Buckle Down Publishing relates to Options Publishing and is therefore is reported within the Test-prep and Intervention segment.

The cost of the restructuring activity by type of cost for three and nine months ended September 30, 2008 and 2007 is as follows:


	Severance			Lease			Relocation
	and			Terminations			and			Total
	Related			Costs			Other			Consolidation
Buckle Down –– Warehouse and Order Fulfillment Consolidation
Amount expected to be incurred	$	65		$	180		$	162		$	407

2007
Accrued restructuring liability as of December 31, 2006		—			105			—			105
Restructuring expense		—			19			—			19
Cash paid		—			(27	)		—			(27	)

Accrued restructuring liability as of March 31, 2007		—			97			—			97
Restructuring expense		—			19			—			19
Cash paid		—			(27	)		—			(27	)

Accrued restructuring liability as of June 30, 2007		—			89			—			89
Restructuring expense		—			19			—			19
Cash paid		—			(28	)		—			(28	)

Accrued restructuring liability as of September 30, 2007	$	—		$	80		$	—		$	80

2008
Accrued restructuring liability as of December 31, 2007		—			71			—			71

Restructuring expense		—			19			—			19
Cash paid		—			(28	)		—			(28	)

Accrued restructuring liability as of March 31, 2008		—			62		$	—			62
Restructuring expense		—			19			—			19
Cash paid		—			(29	)		—			(29	)

Accrued restructuring liability as of June 30, 2008		—			52		$	—			52
Restructuring expense		—			19			—			19
Cash paid		—			(29	)		—			(29	)

Accrued restructuring liability as of September 30, 2008	$	—		$	42		$	—		$	42


Options Publishing — Consolidation with Buckle Down
Amount expected to be incurred	$	1,000		$	—		$	87		$	1,087

2008
Accrued restructuring liability as of December 31, 2007		626			—			—			626

Restructuring expense		155			—			26			181
Cash paid		(696	)		—			(26	)		(722	)

Accrued restructuring liability as of March 31, 2008		85			—			—			85
Restructuring expense		66			—			—			66
Cash paid		(111	)		—			—			(111	)

Accrued restructuring liability as of June 30, 2008		40			—			—			40

Restructuring expense		—			—			—			—
Cash paid		(40	)		—			—			(40	)

Accrued restructuring liability as of September 30, 2008	$	—		$	—		$	—		$	—

In addition to the severance and related relocation and other cash expenses incurred in connection with the Options Publishing consolidation with Buckle Down Publishing, an additional $0.2 million restructuring expense was incurred during the first quarter 2008 due to the write off of accumulated product development costs associated with projects abandoned with the merger.

11. Income Taxes

Effective January 1, 2007, the Company adopted FASB Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result of the implementation of FIN 48, the Company did not recognize any adjustments in the liability for unrecognized tax benefits. The Company does not have any accrued interest or penalties associated with unrecognized tax benefits. The Company’s continuing policy is to recognize interest and penalties related to income tax matters as tax expense. There were no significant interest and penalty expense related income tax matters recorded during the three and nine months ended September 30, 2008.

The Company files income tax returns in the U.S. federal, state, local and foreign jurisdictions. Income tax returns filed for fiscal years 2003 and earlier are no longer subject to examination by state, local and foreign authorities. Income tax returns filed for fiscal year 2004 and earlier are no longer subject to examination by U.S. federal authorities. Certain income tax returns for fiscal years 2004 through 2007 remain open to examination by state, local and foreign tax authorities and certain income tax returns for fiscal year 2005 through 2007 remain open to examination by U.S. federal tax authorities. Currently none of the federal or state tax returns are under examination. The Company believes that no provisions are required for all income tax uncertainties pertaining to these open tax years.

The continuing operations (provision) benefit for income taxes consists of the following:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Current income tax expense:
Foreign	$	(158	)	$	(100	)	$	(501	)	$	(303	)
Benefit recognized as a result of the discontinued operations gain		772			—			5,627			—
Deferred income tax expense:
U.S. Federal		(829	)		(612	)		(2,487	)		(2,698	)

Total benefit (provision) for income taxes	$	(215	)	$	(712	)	$	2,639		$	(3,001	)

Foreign income tax expense is derived from taxable earnings on sales in the United Kingdom of $0.5 million and $0.3 million in the three-month periods ended September 30, 2008 and 2007, respectively and $1.6 million and $0.9 million in the nine-month periods ended September 30, 2008 and 2007.

In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon facts and circumstances known to the Company. The Company’s effective rate is based on expected pretax income or loss, statutory tax rates, changes in the deferred tax asset valuation allowance and permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The Company has recorded an income tax benefit in continuing operations of $5.6 million as a result of the gain on the disposal of the Oakstone Publishing and Sundance Newbridge businesses, included within discontinued operations. The deferred income tax expense reflects the increase in deferred tax liabilities as a result of the amortization for income tax purposes of goodwill and indefinite lived assets not reflected in book income.

Under Section 382 of the Internal Revenue Code, based on the change of control, there could be limitations on the utilization of the Company’s NOL deductions in future periods. The annual limitation on utilization of NOL’s is expected to be approximately $20 million. The Company has evaluated the impact of this change of control on the utilization of our NOL’s and believes the impact of the 382 limitation will not be significant as built-in gains relating to businesses sold within 5 years of the change in control serve to increase the annual section 382 limitation.

12. Financing Arrangements

Senior Secured Revolving Credit Facility, Term Loans, 11 3/4% Senior Notes

On August 20, 2003, Haights Cross entered into a $30.0 million Senior Secured Revolving Credit Facility (the “Facility”) and a $100.0 million Senior Secured Term Loan (the “First Term Loan”), and also issued $140.0 million aggregate principal amount of its 11 3/4% Senior Notes due 2011 (“Senior Notes”).

On August 15, 2007, we terminated the Facility, which Haights Cross had never drawn upon and was scheduled to expire by its terms in May 2008.

The First Term Loan matured on August 15, 2008, and was secured by a lien on all of the Company’s property and assets (tangible and intangible), including all capital stock of existing and future subsidiaries (except future excluded subsidiaries). The First Term Loan contained customary restrictive covenants and debt incurrence tests. The First Term Loan accrued interest at a variable rate based on the Eurodollar (subject to a 2% floor), plus an applicable margin based on a graduated rate schedule. Beginning on November 15, 2003 and continuing through maturity, the Company was required to make principal payments on the First Term Loan of $250,000 per quarter.

On December 10, 2004, Haights Cross issued an additional $30.0 million aggregate principal amount of its Senior Notes under its existing indenture. These Senior Notes are pari passu with, of the same series as and vote on any matter submitted to bondholders, the original Senior Notes. In connection with the issuance of the additional Senior Notes, Haights Cross entered into a new $30.0 million Senior Secured Term Loan (the “Second Term Loan” and, together with the First Term Loan, the “Term Loans”). Amounts borrowed

under the Second Term Loan rank equally with the amounts borrowed under the First Term Loan. The Second Term Loan also matured on August 15, 2008.

The Senior Notes mature on August 15, 2011, and were effectively subordinated to the Term Loans to the extent of the collateral securing the Term Loans. The Senior Notes contain customary restrictive covenants and debt incurrence tests. The Senior Notes bear interest at a fixed rate of 11 3/4% with payments due semi-annually on February 15 and on August 15. Interest payments commenced on February 15, 2004. On August 15, 2008, the Company entered into a new Credit Agreement, repaid its Term Loans in full, and repurchased and retired Senior Notes in the aggregate principal amount of $31.2 million from certain of the Lenders and their affiliates for a purchase price equal to the aggregate principal amount of the notes retired, plus accrued but unpaid interest, if any.

The Senior Notes are fully and unconditionally guaranteed, jointly and severally, by the Company and each of Haights Cross’ existing and future restricted subsidiaries. (See Note 17).

Term Loan Refinancing. On August 15, 2008, Haights Cross entered into a new credit agreement (“Credit Agreement”) with DDJ Capital Management LLC, as administrative agent and collateral agent, and certain other lenders (collectively, the “Lenders”). Under the Credit Agreement, Haights Cross borrowed $108.2 million under a senior secured term loan facility (“New Term Loan”). Haights Cross used a combination of the net proceeds of the New Term Loan and cash on hand, including the net proceeds from its previous sale of its Oakstone Publishing business, to repay the Term Loans due August 15, 2008 in full.

Haights Cross Communications and all of its direct and indirect subsidiaries (other than Haights Cross) have guaranteed Haights Cross’ obligations under the New Term Loan. The New Term Loan is secured by first-priority liens on, and first-priority security interests in, substantially all of the assets of the Company and all guarantors to the Credit Agreement and a first priority security interest in 100% of the equity issued by Haights Cross’ direct and indirect subsidiaries.

The final maturity date for the New Term Loan is May 15, 2011. We are required to apply 75% of our annual consolidated excess cash flow (as defined) to prepay any amounts outstanding under the New Term Loan. In addition, subject to certain exceptions and reinvestment basket, we are required to use any net proceeds from the sale or disposition of our assets, net casualty, condemnation proceeds or other extraordinary proceeds and net proceeds from the issuance or incurrence of debt or equity to prepay the New Term Loan. In general, prepayment premiums are not applicable to partial prepayments in accordance with the above. However, prepayment premiums are applicable to (a) partial prepayments on account of debt or equity issuances above agreed on baskets, (b) voluntary prepayments, and (c) upon payments of the New Term Loan (See Note 14) in full on account of any mandatory or voluntary prepayments. When applicable, the following prepayment premiums apply: prepayments on or prior to August 15, 2009 are subject to a premium of 102% of the principal, prepayments after August 15, 2009, but on or before August 15, 2010 are subject to a premium of 101% of the principal. Thereafter, the Company may make prepayments without paying a premium.

All amounts outstanding under the New Term Loan will bear interest, at the Company’s option:

(i) at the three month LIBOR rate (with a floor of 3.00%) plus 8.25% per annum, payable quarterly; or

(ii) at the prime rate (with a floor of 5.25%) plus 7.0% per annum, payable monthly.

The Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants restricting the ability of the Company, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets in excess of scheduled amounts, enter into sale-leaseback transactions, make capital expenditures in excess of scheduled amounts, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of their businesses.

The credit facilities require Haights Cross and the other loan parties to maintain a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a minimum net EBITDA (as defined) . The maximum secured leverage ratio is 3.33:1 beginning with the quarter ending September 30, 2008, and then ranges from 3.36:1 to 2.94:1 through the fiscal quarter ending March 31, 2011. The minimum fixed charge coverage ratio is 0.83:1 beginning with the Company’s fiscal quarter ending September 30, 2008 and then ranges between 0.80:1.00 and 0.67:1 through the fiscal quarter ending March 31, 2011. The minimum net EBITDA is $29.8 million beginning with the Company’s fiscal quarter ending September 30, 2008, and then ranges over time between $29.2 million to $33.4 million through the fiscal quarter ending March 31, 2011. The secured leverage ratio is defined as the ratio of Haights Cross’ senior secured debt (net of up to $10 million of balance sheet cash) to the Company’s consolidated net EBITDA for the four-fiscal quarter period ending on the measurement date. The fixed charge coverage ratio is defined as the ratio of the Company’s consolidated net EBITDA for the four-fiscal quarter period ending on the measurement date to the Company’s consolidated interest expense, plus total

taxes and total capital expenditures (subject to certain limited exceptions) for the same period. These terms, and the calculation thereof, are defined in further detail in the Credit Agreement. As of September 30, 2008 the Company was in compliance with all terms and financial covenants of the Credit Agreement.

As of September 30, 2008, the effective interest rate on all borrowings under the New Term Loan was 11.25%.

Backstop Commitment

Effective July 29, 2008, Haights Cross entered into a commitment letter with Monarch Capital on behalf of certain of its affiliated investment funds and Glenview on behalf of certain of its affiliated investment funds. Pursuant to the Commitment Letter, Monarch Capital’s and Glenview’s affiliated investment funds made commitments to provide $75 million of senior secured term loans to Haights Cross to refinance its then existing senior secured term loan indebtedness that matured on August 15, 2008. See Note 19 to our consolidated financial statements. These commitments expired upon the execution of the Credit Agreement and consummation of the loan transaction described above.

12 1/2% Senior Discount Notes

On February 2, 2004, Haights Cross Communications issued $135.0 million aggregate principal amount at maturity of its 12 1/2% Senior Discount Notes due 2011 (the “Senior Discount Notes”), for which it received net proceeds of $73.7 million. The Senior Discount Notes mature on August 15, 2011, with each Senior Discount Note having an accreted value of $1,000 at maturity. The Senior Discount Notes will not begin to accrue cash interest until February 1, 2009, after which the Company will be required to make cash interest payments every six months in arrears on February 1 and August 1, commencing August 1, 2009. The Senior Discount Notes are general unsecured obligations of Haights Cross Communications and rank equally with all of Haights Cross Communications’ existing and future unsecured senior indebtedness and are senior to all of its future subordinated indebtedness. The Senior Discount Notes are effectively subordinated to all of Haights Cross Communications’ existing and future secured indebtedness, to the extent of the collateral securing such indebtedness. The Senior Discount Notes rank pari passu in right of payment to Haights Cross Communications’ guarantee of the Term Loans and the Senior Notes. The Company can redeem the Senior Discount Notes on or after February 15, 2008. The Senior Discount Notes contain customary restrictive covenants and debt incurrence tests.

The following table is a summary of the Company’s current outstanding debt as of September 30, 2008 (in thousands):


							Premium			Interest Rate			Book Value
							(Discount)			As of			As of
	Issuance		Due		Face		At			September 30,			September 30,
Instrument	Date		Date		Amount		Issuance			2008			2008
Haights Cross:
New Term Loan		08/15/08		05/15/11	$	108,200		––			11.25	%	$	108,200

113/4% Senior notes		08/20/03		08/15/11	$	108,800		––			11.75	%		108,800
113/4% Senior notes		12/10/04		08/15/11	$	30,000	$	3,150			11.75	%		31,318

														140,118
Haights Cross Communications:
121/2% Senior discount notes		02/02/04		08/15/11	$	135,000	$	(61,347	)		12.5	%		129,649

Total debt													$	377,967

The following table shows the required future repayments under the Company’s current financing arrangements as of September 30, 2008 (in thousands):


2011		382,000
Less: Unamortized discounts and other		(4,033	)

Total	$	377,967

13. Equity and Redeemable Preferred Stock

On December 10, 1999, the Company issued 22,476 shares of voting Series A preferred stock (the “Preferred A”). The Preferred A had a liquidation value of $1,000 per share, plus any accrued but unpaid dividends, accrued quarterly cumulative dividends at an annual rate of 8%, and was redeemable at the option of the holders thereof beginning on December 31, 2019 at a redemption price equal to $1,000 per share, plus any accrued but unpaid dividends. Upon the closing of the Recapitalization Agreement, all outstanding shares of Preferred A were converted to common stock at an agreed upon rate, and no shares of Preferred A remain outstanding.

On December 10, 1999, the Company issued 2,400,000 shares of nonvoting Series B senior preferred stock (the “Preferred B”). The Preferred B had a liquidation value of $25 per share, plus any accrued but unpaid dividends accrued quarterly cumulative dividends at an annual rate of 16%, and was mandatorily redeemable by the Company on December 10, 2011 at a redemption price equal to its liquidation value, plus any accrued but unpaid dividends. Upon the closing of the Recapitalization Agreement, all outstanding shares of Preferred B were converted to common stock at an agreed upon rate, and no shares of Preferred B remain outstanding.

In connection with the issuance of the Preferred B on December 10, 1999, the Company also issued warrants to acquire common stock (the “Common Warrants”), and warrants to acquire Preferred A (the “Preferred Warrants”). Upon the closing of the Recapitalization Agreement, all outstanding Common Warrants were canceled and all outstanding Preferred Warrants were converted into warrants to acquire common stock at an agreed upon rate.

On April 15, 2004, in connection with the acquisition of Buckle Down Publishing, the Company issued 3,500 shares of Series C preferred stock (the “Preferred C”). The Preferred C had a liquidation value of $1,000 per share, plus any accrued but unpaid dividends, accrued quarterly cumulative dividends at an annual rate of 5%, was automatically convertible into common stock upon the consummation of the Company’s initial public offering, was redeemable at the option of the holder thereof beginning on April 15, 2012 at a redemption price equal to $1,000 per share plus any accrued but unpaid dividends, and was redeemable at the option of the Company at a redemption price equal to 101% of the per share liquidation value plus any accrued but unpaid dividends. Upon the closing of the Recapitalization Agreement, all outstanding shares of Preferred C were converted to common stock at an agreed upon rate, and no shares of Preferred C remain outstanding.

See Note 3 above for a description of the Recapitalization Agreement referred to above.

14. Commitments

From time to time, the Company is involved in litigation that it considers to be ordinary routine litigation incidental to our business. The Company is not presently involved in any such legal proceedings that it expects, individually or in the aggregate, to have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

Application of Net Proceeds from Oakstone Publishing Sale. On June 30, 2008, the Company sold its Oakstone Publishing business for gross proceeds of $47.5 million, consisting of consideration received from the buyer of $42.8 million and $4.8 million placed in an escrow account to satisfy working capital adjustments and indemnification obligations, if any. The cash consideration from the sale was received on July 1, 2008. Under the indentures for the Senior Notes and the Senior Discount Notes, within 365 days after the receipt of the net proceeds from an asset sale, such as the Oakstone Publishing sale, the Company may apply such net proceeds, at its option to (i) repay obligations under any credit facilities (as defined), (ii) to acquire all or substantially all of the assets of, or any capital stock or, another permitted business (as defined), (iii) to make capital expenditures, or to acquire any other assets that are not classified as current assets under generally accepted accounting principles and that are used or useful in a permitted business. Any net proceeds that are not applied or invested within 365 days as provided above will constitute excess proceeds. If the aggregate excess proceeds were to exceed $10 million, the indentures for our Senior Notes and Senior Discount Notes would require the Company to offer to apply such proceeds to the repayment of the Company’s term loans and/or such notes. The Credit Agreement for its New Term Loan (see Note 12) further requires Haights Cross to apply such excess proceeds to the repayment of the New Term Loan no later than the date that is 30 days prior to the date on which Haights Cross would have to apply such proceeds as dictated by the indentures for the Senior Notes and Senior Discount Notes. On August 15, 2008 the Company applied a portion of the net proceeds from the Oakstone Publishing sale to the repayment of its senior secured term debt and anticipates that it will apply additional amounts for other permitted uses, such as capital expenditures or additional repayments of the New Term Loans, such that excess proceeds, if any, at the end of the 365 day period will be less than $10 million.

15. Comprehensive Loss

The following table sets forth the calculation of comprehensive loss for the periods indicated:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
	(Unaudited)					(Unaudited)
Net income (loss)	$	(591	)	$	107,013	$	5,854		$	79,964
Foreign currency translation adjustment		(437	)		79		(440	)		184

Comprehensive Loss	$	(1,028	)	$	107,092	$	5,414		$	80,148

16. Segment Reporting

The Company’s operating segments are regularly reviewed by the chief operating decision maker for purposes of allocating resources and assessing performance.

The Company’s financial reporting is organized into two business segments: Test-prep and Intervention and Library.

Our Test-Prep and Intervention segment is comprised of our Triumph Learning and Buckle Down Publishing/ Options Publishing businesses, which have been aggregated due to the similarity of their economic and business characteristics. Our Library segment is comprised of our Recorded Books business. Our Medical Education segment was comprised of our Oakstone Publishing business which was sold on June 30, 2008 and our K-12 Supplemental Education segment was comprised of our Sundance Newbridge business, which was sold on August 27, 2008. As a result of these dispositions, the results of Oakstone Publishing and Sundance Newbridge have been reclassified as discontinued operations for all periods presented in the consolidated financial statements and Medical Education and K-12 Supplemental Education segments are not included in the information below. (See Note 7 “Dispositions”)

The information presented below includes certain expense allocations between the corporate office and the operating business segments. The information is presented after all intercompany and intersegment eliminations and is therefore not necessarily indicative of the results that would be achieved had the business segments been stand-alone businesses. Corporate general and administrative expenses consist of general corporate administration expenses not allocated to the operating business segments.

The results of operations and other data for the two reporting segments and corporate for the three and nine-month periods ending September 30, 2008 and 2007 are as follows:


	Test-prep &
	Intervention		Library		Corporate			Consolidated
Three Months Ended September 30, 2008 (unaudited)
Revenue	$	25,603	$	23,474	$	––		$	49,077
Cost of goods sold		4,712		8,263		––			12,975
Marketing and sales		6,501		3,415		––			9,916
Fulfillment and distribution		1,685		1,515		––			3,200
General and administrative		1,939		2,052		3,320			7,311
Restructuring charges		19		––		––			19
Amortization of pre-publication costs		2,704		1,477		––			4,181
Depreciation expense and amortization of intangibles		838		176		10			1,024

Income (loss) from operations	$	7,205	$	6,576	$	(3,330	)	$	10,451

Interest expense	$	4,409	$	754	$	6,049		$	11,212
Capital expenditures –– property and equipment		123		149		15			287
Capital expenditures –– pre-publication costs		2,848		1,844		––			4,692
Goodwill		50,488		64,513		––			115,001
Total assets		122,026		111,794		50,005			283,825


	Test-prep &
	Intervention		Library		Corporate			Consolidated
Three Months Ended September 30, 2007 (unaudited)
Revenue	$	26,234	$	21,349	$	––		$	47,583
Cost of good sold		5,375		7,570		––			12,945
Marketing and sales		6,333		3,633		––			9,966
Fulfillment and distribution		1,653		1,459		––			3,112
General and administrative		2,171		2,023		6,652			10,846
Restructuring charges		19		––		––			19
Amortization of pre-publication costs		2,255		1,416		––			3,671
Depreciation expense and amortization of intangibles		719		205		15			939

Income (loss) from operations	$	7,709	$	5,043	$	(6,667	)	$	6,085

Interest expense	$	4,387	$	1,161	$	8,972		$	14,520
Capital expenditures –– property and equipment		201		128		6			335
Capital expenditures –– pre-publication costs		3,101		1,637		––			4,738
Goodwill		50,488		64,513		––			115,001
Total assets		124,028		107,479		118,370			349,877


	Test-prep &
	Intervention		Library		Corporate			Consolidated
Nine Months Ended September 30, 2008 (unaudited)
Revenue	$	66,768	$	68,319	$	––		$	135,087
Cost of good sold		12,608		24,033		––			36,641
Marketing and sales		20,091		10,819		––			30,910
Fulfillment and distribution		5,392		4,546		––			9,938
General and administrative		6,102		5,803		8,190			20,095
Restructuring charges		303		––		––			303
Amortization of pre-publication costs		7,695		4,370		––			12,065
Depreciation expense and amortization of intangibles		2,592		548		37			3,177

Income (loss) from operations	$	11,985	$	18,200	$	(8,227	)	$	21,958

Interest expense	$	12,456	$	2,481	$	18,416		$	33,353
Capital expenditures –– property and equipment		376		445		18			839
Capital expenditures –– pre-publication costs		10,553		4,994		––			15,547
Goodwill		50,488		64,513		––			115,001
Total assets		122,026		111,794		50,005			283,825


	Test-prep &
	Intervention		Library		Corporate			Consolidated
Nine Months Ended September 30, 2007 (unaudited)
Revenue	$	64,316	$	64,300	$	––		$	128,616
Cost of good sold		12,647		22,968		––			35,615
Marketing and sales		17,536		11,103		––			28,639
Fulfillment and distribution		4,654		4,433		––			9,087
General and administrative		6,252		5,570		10,414			22,236
Restructuring charges		57		––		––			57
Amortization of pre-publication costs		6,217		3,998		––			10,215
Depreciation expense and amortization of intangibles		2,133		600		40			2,773

Income (loss) from operations	$	14,820	$	15,628	$	(10,454	)	$	19,994

Interest expense	$	12,996	$	3,788	$	33,377		$	50,161
Capital expenditures –– property and equipment		543		519		67			1,129
Capital expenditures –– pre-publication costs		10,049		4,474		––			14,523
Goodwill		50,488		64,513		––			115,001
Total assets		124,028		107,479		118,370			349,877

17. Condensed Consolidating Financial Statements

On August 20, 2003 and December 10, 2004, Haights Cross issued $140.0 million and $30.0 million, respectively, of its Senior Notes, and on August 15, 2008 the Company issued $108.2 million of New Term Loans . Both the Senior Notes and the New Term Loans have been fully and unconditionally guaranteed, jointly and severally, by the Company and each of Haights Cross’ existing and future restricted subsidiaries. Haights Cross and its guarantor subsidiaries are 100% owned, directly or indirectly, by the Company. Subject to certain exceptions, Haights Cross is restricted in its ability to make funds available to the Company. The following unaudited interim condensed consolidating financial information of the Company is being provided pursuant to Rule 3-10(d) of Regulation S-X.

Unaudited Interim Condensed Consolidating Statements of Operations:


	Three Months Ended September 30, 2008
	Parent						Guarantor
	Guarantor			HCOC			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Revenue	$	––		$	––		$	49,077		$	––		$	49,077
Costs and expenses		127			3,202			35,297			––			38,626

Income (loss) from operations		(127	)		(3,202	)		13,780			––			10,451
Equity in the income (loss) of subsidiaries		3,582			8,287			––			(11,869	)		––
(Income) loss from discontinued operations		––			657			(1,847	)		––			(1,190	)
Other expenses (income)		4,046			846			7,340			––			12,232

Net (loss) income	$	(591	)	$	3,582		$	8,287		$	(11,869	)	$	(591	)


	Three Months Ended September 30, 2007
	Parent						Guarantor
	Guarantor			HCOC			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Revenue	$	––		$	––		$	47,583		$	––		$	47,583
Costs and expenses		45			6,620			34,833			––			41,498

(Loss) income from operations		(45	)		(6,620	)		12,750			––			6,085
Equity in the income (loss) of subsidiaries		(1,520	)		3,988						(2,468	)		––
(Income) loss from discontinued operations		––			9			(938	)		––			(929	)
Other expenses (income)		(108,578	)		(1,121	)		9,700			––			(99,999	)

Net (loss) income	$	107,013		$	(1,520	)	$	3,988		$	(2,468	)	$	107,013


	Nine Months Ended September 30, 2008
	Parent						Guarantor
	Guarantor			HCOC			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Revenue	$	––		$	––		$	135,087		$	––		$	135,087
Costs and expenses		381			7,846			104,902			––			113,129

Income (loss) from operations		(381	)		(7,846	)		30,185			––			21,958
Equity in the income (loss) of subsidiaries		14,651			7,408			––			(22,059	)		––
(Income) loss from discontinued operations		––			(14,212	)		(1,721	)		––			(15,933	)
Other expenses (income)		8,416			(877	)		24,498			––			32,037

Net (loss) income	$	5,854		$	14,651		$	7,408		$	(22,059	)	$	5,854


	Nine Months Ended September 30, 2007
	Parent						Guarantor
	Guarantor			HCOC			Subsidiaries		Eliminations		Consolidated
							(in thousands)
Revenue	$	––		$	––		$	128,616	$	––	$	128,616
Costs and expenses		45			10,408			98,169		––		108,622

Income (loss) from operations		(45	)		(10,408	)		30,447		––		19,994
Equity in the income (loss) of subsidiaries		(6,884	)		370			––		6,514		––
(Income) loss from discontinued operations		––			397			1,555		––		1,952
Other expenses (income)		(86,893	)		(3,551	)		28,522		––		(61,922	)

Net (loss) income	$	79,964		$	(6,884	)	$	370	$	6,514	$	79,964

Unaudited Interim Condensed Consolidating Balance Sheets:


	As of September 30, 2008
	Parent					Guarantor
	Guarantor			HCOC		Subsidiaries		Eliminations			Consolidated
	*(in thousands)*
Assets
Current assets	$	3,934		$	38,753	$	56,679	$	—		$	99,366
Investment in subsidiaries		87			209,294		—		(209,381	)		—
Long term assets		1,149			5,708		177,602		—			184,459

Total assets	$	5,170		$	253,755	$	234,281	$	(209,381	)	$	283,825

Liabilities and Stockholders’ Deficit
Current liabilities	$	202		$	5,350	$	24,864	$	—		$	30,416
Long term liabilities		146,255			248,318		123		—			394,696
Stockholders’ deficit:
Common stock		3			—		—		—			3
Accumulated deficit and other		(141,290	)		87		209,294		(209,381	)		(141,290	)

Total stockholders’ deficit		(141,287	)		87		209,294		(209,381	)		(141,287	)

Total liabilities and stockholders’ deficit	$	5,170		$	253,755	$	234,281	$	(209,381	)	$	283,825


	As of December 31, 2007
	Parent						Guarantor
	Guarantor			HCOC			Subsidiaries		Eliminations			Consolidated
							*(in thousands)*
Assets
Current assets	$	3,872		$	56,759		$	101,025	$	—		$	161,656
Investment in subsidiaries		(15,314	)		231,094			—		(215,780	)		—
Long term assets		1,449			6,275			175,392		—			183,116

Total assets	$	(9,993	)	$	294,128		$	276,417	$	(215,780	)	$	344,772

Liabilities and Stockholders’ Deficit
Current liabilities	$	—		$	137,554		$	45,126	$	—		$	182,680
Long term liabilities		136,836			171,888			197		—			308,921
Stockholders’ deficit:
Common stock		3			—			—		—			3
Accumulated deficit		(146,832	)		(15,314	)		231,094		(215,780	)		(146,832	)

Total stockholders’ deficit		(146,829	)		(15,314	)		231,094		(215,780	)		(146,829	)

Total liabilities and stockholders’ deficit	$	(9,993	)	$	294,128		$	276,417	$	(215,780	)	$	344,772

Unaudited Interim Condensed Consolidating Statements of Cash Flows:


	Nine Months Ended September 30, 2008
	Parent						Guarantor
	Guarantor			HCOC			Subsidiaries			Eliminations		Consolidated
	*(in thousands)*
Cash provided by (used in):
Operating activities from continuing operations:	$	(963	)	$	(10,876	)	$	10,242		$	––	$	(1,597	)
Investing activities from continuing operations:
Additions to pre––publication costs		––						(15,547	)		––		(15,547	)
Additions to property and equipment		––			(19	)		(820	)		––		(839	)
Additions to intangible assets		––			––			(24	)		––		(24	)
Proceeds from sale of business		––			48,716			––			––		48,716
Proceeds from sale of assets		––			1,181			2			––		1,183
Intercompany activity		1,026			(3,673	)		2,647			––		––

Net cash provided by (used in) investing activities		1,026			46,205			(13,742	)		––		33,489
Financing activities:													––
Proceeds from issuance of New Term Loans		––			108,200			––			––		108,200
Repayment of Senior Notes		––			(31,200	)		––			––		(31,200	)
Repayment of Senior Secured Term Loan		––			(124,850	)		––			––		(124,850	)
Additions to deferred financing costs		––			(2,951	)		––			––		(2,951	)

Net cash provided used in financing activities		––			(50,801	)		––			––		(50,801	)
Effect of exchange rates on cash		––			––			(296	)		––		(296	)
Net cash used in discontinued operations		––			(7,148	)		5,403			––		(1,745	)

Net change in cash and cash equivalents		63			(22,620	)		1,607			––		(20,950	)

Cash and cash equivalents at beginning of period		3,872			56,237			1,675			––		61,784

Cash and cash equivalents at end of period	$	3,935		$	33,617		$	3,282		$	––	$	40,834


	Nine Months Ended September 30, 2007
	Parent						Guarantor
	Guarantor			HCOC			Subsidiaries			Eliminations		Consolidated
	*(in thousands)*
Cash provided by (used in):
Operating activities from continuing operations:	$	72		$	(7,320	)	$	8,959		$	––	$	1,711
Investing activities from continuing operations:
Additions to pre-publication costs		––			––			(14,523	)		––		(14,523	)
Additions to property and equipment		––			(67	)		(1,062	)		––		(1,129	)
Additions to intangible assets		––			––			(24	)		––		(24	)
Intercompany activity		1,977			(8,393	)		6,416			––		––
Proceeds from sale of assets		––			––			6			––		6

Net cash provided by (used in) investing activities		1,977			(8,460	)		(9,187	)		––		(15,670	)
Financing activities:											––
Transaction cost – troubled debt restructuring and Recapitalization		(1,932	)		––			––			––		(1,932	)
Proceeds from exercise of stock options		––			––			––			––		––
Repayment of senior secured term loan		––			(975	)		––			––		(975	)
Additions to deferred financing costs		––			(88	)		––			––		(88	)

Net cash provided used in financing activities		(1,932	)		(1,063	)		––			––		(2,995	)
Effect of exchange rates on cash		––			––			132			––		132
Net cash used in discontinued operations		––			(106	)		(4,584	)		––		(4,690	)

Net change in cash and cash equivalents		117			(16,949	)		(4,680	)		––		(21,512	)

Cash and cash equivalents at beginning of period		3,718			63,989			2,140			––		69,847

Cash and cash equivalents at end of period	$	3,835		$	47,040		$	(2,540	)	$	––	$	48,335

18. Subsequent Events

Effective October 8, 2008, the Company amended and restated its Second Amended and Restated Certificate of Incorporation of the Company, as amended (the “Existing Charter”) by filing the Third Amended and Restated Certificate of Incorporation of the Company (the “Third Amended and Restated Charter”). Certain provisions of the Existing Charter were amended or restated to provide for the following:

	•		Addition of Section C “Reclassification” to Article IV, which ratifies and confirms the Company’s reclassification of its common stock and preferred stock that occurred on August 10, 2008 (the “Recapitalization”) by further reclassifying all shares of each and every class and series of capital stock of the Company outstanding immediately prior to the filing of the Third Amended and Restated Charter into shares of new Common Stock as reflected on the Company’s stock ledger, which ledger reflects the ownership of the Company based upon the effectiveness of the Recapitalization; and

	•		Addition of a new Article VIII, which makes explicit the Company’s ability to provide certain indemnification rights and advancement of expenses to its directors, officers and agents in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law.

19. Related Party Transaction

Pursuant to Management Stock Purchase Agreements dated August 10, 2007, Messrs. Crecca and Quandt purchased for $0.001 a share, 75,000 and 225,000 shares of restricted stock, respectively. Mr. Quandt’s 225,000 shares of common stock were deemed to be fully vested at the time of his resignation. Mr. Crecca’s restricted shares are subject to a three year vesting period. Each non-employee member of the Board of Directors received a restricted stock award of 8,117 shares of our common stock with the Chairman receiving 12,175 shares. The restricted stock granted pursuant to all of these awards was to vest in February 2008. During the year ended December 31, 2007, for $0.001 per share director Eugene I. Davis purchased 12,175 shares of restricted stock, and directors John A. McKenna, Jr., Curry E. Ford and T.J. Vigliotta have purchased 8,117 shares of restricted stock each. In January 2008, prior to the vesting of his restricted stock, Mr. Vigliotta elected to forfeit all of his restricted stock. In January 2008, prior to the vesting of his restricted stock, Mr. Ford elected to forfeit all of his restricted stock in exchange for an issuance by the Company to Glenview Capital Management, LLC, of an equivalent amount under the same terms and conditions. Subsequently, we issued to Glenview Capital Management, LLC, which has designated Mr. Ford to serve as our director, a restricted stock award of 8,117 shares. All outstanding restricted stock awards fully vested on February 10, 2008 for issuances to Mr. Davis and Glenview Capital Management, LLC and February 21, 2008 for the issuance to Mr. McKenna. Total stock-based compensation expense is recognized as a “general and

administrative expense” in the consolidated statements of operations on a ratable basis over the vesting period. Total stock-based compensation expense is recognized as a “general and administrative expense” in the consolidated statements of operations on a ratable basis over the vesting period. The compensation expense recorded for these restricted shares was $0 and $0.1 million for the three and nine months ended September 30, 2008, respectively.

Monarch Alternative Capital LP (“Monarch Capital”), Deephaven Distressed Opportunities Trading Ltd. and New York Life Investment Management LLC each may be deemed to beneficially own more than 5% of our outstanding stock. Each of these entities or their affiliates also own positions in one or more of our Term Loans, Senior Notes or Senior Discount Notes. Mr. Vigliotta, a director, is a Principal at Monarch Capital and has served as a member of our Board of Directors since August 2007. Monarch Capital acquired its debt positions prior to Mr. Vigliotta’s appointment to our Board. Effective July 29, 2008, Haights Cross entered into a commitment letter (the “Commitment Letter”) with Monarch Capital on behalf of certain of its affiliated investment funds and Glenview Capital Management, LLC on behalf of certain of its affiliated investment funds (“Glenview” and together with Monarch Capital, the “Proposed Lenders”). Pursuant to the Commitment Letter, the Proposed Lenders made commitments to provide $75 million of senior secured term loans (the “Facility”) to Haights Cross to refinance its then existing senior secured term loan indebtedness that matured on August 15, 2008 (the “Refinancing”).

This commitment was obtained as a backstop to ensure the Company had the ability to effect the Refinancing. Accordingly, Haights Cross was free to obtain financing in lieu of the Facility (the “Alternative Term Loan Facility”) and suffer no financial penalty. Upon Haights Cross’ election to proceed with an Alternative Term Loan Facility described above under “New Term Loans”, the commitments of Monarch and Glenview terminated.

Pursuant to the Commitment Letter, Monarch and Glenview each made a commitment to provide 50% of the amount of the Facility. In consideration for this commitment, Haights Cross agreed (i) to pay or reimburse Monarch and Glenview for certain reasonable and documented out-of-pocket costs and expenses and (ii) to pay a non-refundable commitment fee of $750,000 to each of Monarch and Glenview.

Certain of Monarch’s affiliates or investment funds for which it acts as investment advisor currently beneficially own more than 21% of the common stock of the Company. T.J. Vigliotta, a Principal at Monarch, has served as a member of our Board of Directors since August 2007.

Certain of Glenview’s affiliates or investment funds for which it acts as investment advisor currently beneficially own more than 14% of the common stock of the Company. Curry E. Ford, a Managing Director of Glenview, has served as a member of our Board of Directors since August 2007.

Neither of Messrs. Vigliotta or Ford participated in the Company’s decision to accept the Commitment Letter.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Safe Harbor” Statement under Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements include, without limitation any statements regarding the anticipated sales process or the anticipated results of that process. The forward-looking statements included in this Quarterly Report on Form 10-Q include statements concerning our plans, objectives, goals, strategies, future events, future liquidity, sales or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this Quarterly Report on Form 10-Q, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of business trends, are based upon our current expectations, beliefs, projections and assumptions. Among other things, there can be no assurance that any of the operating units will be sold on a timely basis or on favorable terms, if at all. Our expectations, beliefs, projections and assumptions are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that our financial condition or results of operations will meet the expectations set forth in our forward-looking statements.

The forward-looking statements that we make in this Quarterly Report on Form 10-Q are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from such forward-looking statements. We refer you to documents filed by us with the Securities and Exchange Commission, specifically Item 1A of this Quarterly Report on Form 10-Q, as may be

amended from time to time, which identify important risks that could cause our actual results to differ materially from those contained in our forward-looking statements. Other factors could also materially affect our actual results.

Without limitation of the foregoing, among the important factors or risks that could cause our actual results to differ from those contained in our forward-looking statements are: (i) our substantial leverage and indebtedness, which may adversely affect our ability to operate our business and place us at a competitive disadvantage in our industry; (ii) our obligation to meet financial covenants and inability to take certain actions because of restrictions contained in our debt instruments, which may adversely affect our operations; (iii) our history of losses, which we expect to continue; (iv) changes in funding of school systems and libraries by federal, state and local governments, including the risk that weaknesses in the United States economy will result in the curtailment, delay or reduction in federal, state and local government funding available to schools and libraries for the purchase of our products, which could reduce our sales and profits, if any, (v) our inability to compete in the highly competitive industries in which we operate, (vi) the effect that misuse, misappropriation or other loss of our proprietary rights could have on our results of operations; (vii) our need to defend against intellectual property infringement and other claims, which may cause us to incur significant costs and divert management attention; (viii) the inability of our investors to evaluate the application of our cash and cash equivalents, over which management is given broad discretion; (ix) our dependence on key personnel; (x) a growth in multimedia products that may compete with and reduce our publishing activities; (xi) technological changes that may reduce the sales of our products; (xii) the effect of an increase in paper or postage costs, which could adversely affect our business; (xiii) the ability of our principal stockholders, who own a large percentage of our common stock, to influence or control the Company; (xiv) our ability to update and expand the content of existing products and develop new products in a cost effective manner and on a timely basis; (xv) the effect that a material change to or repeal of the federal government’s No Child Left Behind Act of 2001 (“NCLB Act) would have on our revenue and profitability; (xvi) the effect that a substantial reduction in the emphasis placed by federal and state governments on assessment and remediation in K-12 education would have on our operations; (xvii) our dependence on a limited number of suppliers and service providers, the interruption of supply or service with which could have a material adverse effect on our operations; (xviii) a disruption in our distribution centers could significantly lower our revenues and profitability; (xix) our dependence on a central computer system, which if damaged, or if service is interrupted or a failure occurs, could adversely affect our customer relationships and harm our ability to attract new customers; (xx) the effect of changes in accounting, regulatory and/or tax policies and practices, including the additional professional and internal costs necessary for compliance with recent and proposed future changes in SEC rules (including the Sarbanes-Oxley Act of 2002), listing standards and accounting rules; (xxi) our ability to utilize our net operating loss carryforwards; (xxi) the seasonal and cyclical nature of sales of our products; (xxii) changes in the competitive environment, including those which could adversely affect our cost of sales; (xxiii) changes in the relative profitability of products sold; (xxiv) regulatory changes that could affect the purchase of our products; (xxv) delays and unanticipated expenses in developing new programs and other products or in developing new technology products, and market acceptance and use of online instruction and assessment materials; (xxvi) the potential effect of a continued weak economy on sales of our products; and (xxvii) the risk that our well-known authors will depart and write for our competitors.

Information included in this Quarterly Report on Form 10-Q is made as of the date hereof. We undertake no obligation, and disclaim any duty, to update our forward-looking statements, including any financial projections we make. We do not endorse any projections regarding future performance that may be made by third parties.

Recent Developments

Refinancing and Repurchase of Senior Notes

On August 15, 2008, we entered into a new credit agreement with DDJ Capital Management LLC, as administrative agent, and collateral agent, and certain other lenders. Under the Credit Agreement, we borrowed $108.2 million under a senior secured term loan facility with a maturity of May 15, 2011. We used a combination of the net proceeds of the New Term Loan and cash on hand, including the net proceeds from its previous sale of our Oakstone Publishing business, to repay the full amount of our Term Loans due August 15, 2008 in full. In addition, on August 15, 2008, we repurchased and retired Senior Notes in the aggregate principal amount of $31.2 million from certain of the Lenders and their affiliates for a purchase price equal to the aggregate principal amount of the notes retired, plus accrued but unpaid interest, if any. See Note 12 to our consolidated financial statements and “Liquidity and Capital Resources”.

Dispositions

On June 30, 2008, we sold all the assets that comprised our Oakstone Publishing business, which previously constituted our Medical Education segment and on August 27, 2008, we sold all the assets that comprised our Sundance Newbridge business which previously constituted our K-12 Supplemental Education segment. As a result of these dispositions, the results of Oakstone Publishing and Sundance Newbridge have been reclassified as discontinued operations for all periods presented in the consolidated financial statements. We also entered into a post acquisition service agreement with the purchaser of Sundance Newbridge under which

Triumph Learning provides warehouse, distribution and customer service to the purchaser under an arms length agreement. This agreement provides for a 60 day cancellation by either party with notice.

Restructuring

On September 28, 2007, the Board of Directors authorized a restructuring of Options Publishing and Triumph Learning, whereby the management of Options Publishing was merged into Triumph Learning and the warehouse functions of Options Publishing were consolidated into the shared services division; the accounting functions were taken over by the Triumph Learning general accounting group located in New York City; customer services, warehousing and fulfillment were incorporated into the shared services facility in Northborough, MA; and the manufacturing and product purchasing functions were consolidated into a new shared manufacturing group that is being formed in our Iowa City location. The purpose of this restructuring is to save operational costs and to improve the product development process. Furthermore, certain functions of Triumph Learning were moved to other locations to improve processes, leverage shared resources and take advantage of lower cost facilities. The accounts receivable and cash applications functions were relocated to Northborough, MA; and the manufacturing functions located in NY were moved into the previously discussed shared manufacturing function in Iowa City. Additionally, as of January 1, 2008, the Triumph Learning accounting group took over certain accounting functions from Sundance Newbridge related to the shared services facility in Northborough, MA. The Company completed the restructuring process during the first quarter of 2008 and incurred a total restructuring charge of approximately $1.1 million in connection with this effort.

As of November 14, 2008 Management and the Board of Directors are evaluating cost reduction measures for implementation during the fourth quarter of 2008. The final approval and implementation of these measures could result in charges for restructuring during the fourth quarter of 2008.

Recapitalization

On August 10, 2007, we consummated the recapitalization pursuant to the Recapitalization Agreement. Under the terms of the Recapitalization Agreement, holders of our previously outstanding Preferred B converted their shares of Preferred B into approximately 82% of our outstanding shares of common stock, holders of our previously outstanding Preferred A, Preferred C and Preferred Warrants converted their shares and warrants into shares of common stock and common stock warrants representing approximately 15% of our outstanding shares of common stock, and certain members of management acquired new shares of common stock under the terms of management stock purchase agreements representing approximately 3% of our outstanding common stock. In connection with the foregoing, all previously outstanding shares of common stock were effectively eliminated through the reclassification into one share of common stock in a reverse split and all outstanding Common Warrants and options to purchase common stock were similarly effectively eliminated by the reverse split of the common stock. As a result of the closing of the transactions contemplated by the Recapitalization Agreement, the Company has only outstanding common stock and common stock warrants and no shares of Preferred A, Preferred B or Preferred C, or stock options remain outstanding.

The closing of the Recapitalization Agreement was subject to the satisfaction of certain stated conditions, including the waiver by the requisite holders of our Term Loans, Senior Notes and Senior Discount Notes of applicable “change of control” covenants that, absent such waiver, might have applied in connection with the conversion of the Preferred C, Preferred B, and Preferred A into common stock. All required waivers were obtained.

Recent U.S. Economic Developments

We anticipate that weaknesses in the United States economy may result in the curtailment, delay or reduction in federal, state and local government funding available to schools and libraries and may impact retail purchases.

Overview

We are a leading developer and publisher of products for the K-12 education and library markets. Our products include state-specific test preparation materials, skills assessment and intervention books and unabridged audiobooks. Our high quality products are sold primarily to schools and libraries and we believe we have leading positions in the two markets we serve.

•

Test-prep and Intervention: We publish state-specific test preparation materials for K-12 competency tests under our well-recognized imprints and brands such as Triumph Learning, Coach and Buckle Down. We also offer skills assessment products and intervention materials for struggling math and reading students under the widely known Options Publishing imprint.

•

Library: We publish unabridged audiobooks and other products for adults and children under the Recorded Books brand, and market these titles, as well as selected non-proprietary audiobooks and other products, primarily to public libraries and schools.

Business Segments

Our financial reporting is organized into two business segments: Test-prep and Intervention and Library.

Test-prep and Intervention. Our Test-prep and Intervention segment publishes state-specific test preparation materials for K-12 state-specific competency tests and proprietary instructional materials with the focus on students in kindergarten through 8th grade, who need more help after using textbooks. This segment is comprised of our Triumph Learning, Coach, Buckle Down Publishing and Options Publishing imprints.

Library. Our Library segment publishes unabridged audiobooks and other products for adults and children and markets these titles, as well as non-proprietary audiobooks and other products, to public libraries and schools. This segment is comprised of our Recorded Books business.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Changes in facts, circumstances and market conditions may result in revised estimates.

The critical accounting policies described herein are those that are, in management’s opinion, most important to the presentation of our consolidated financial condition and results of operations.

Revenue and Expense Recognition

We recognize revenue from books when the product is shipped to the customer. Product shipment terms are FOB shipping point and collectability is reasonably assured at the time of shipment.

Short term rental revenue for audio books is recognized at the time of the rental and audio book lease revenue is deferred and recognized ratably over the term of the lease. Revenue is recognized net of provisions for estimated returns. These estimated return provisions are based upon historical experience and other industry factors including management’s expectations. Actual return experience is monitored and any significant change from management’s expectations results in an adjustment in the reserve rates utilized to estimate returns.

Cost of goods sold is recognized when the related revenue is recognized and primarily consists of paper, media, printing, binding and duplication and author royalty expenses.

Pre-Publication Costs

We capitalize the costs associated with the development of our new products. These costs primarily include author fees under work-for-hire agreements (excluding royalties), the costs associated with artwork, photography and master tapes, other external creative costs, internal editorial staff costs and pre-press costs that are directly attributable to the products. These costs are tracked at the product title or product series level and are amortized beginning in the month the product is introduced to market. These costs are amortized over the estimated life cycle of the book or product, based upon the sales performance of similarly existing products that are sold in the same business segment, for periods ranging from eighteen months to five years. The amortization rate is determined by the expected annual performance during the life cycle and, accordingly, in many cases an accelerated amortization method is utilized. Costs determined to be unrecoverable are written off. A write-off occurs most often when sales of a product are lower than anticipated or when a later version of the product is released. In addition, life cycles are periodically monitored for changes in length or rate of sales during the life cycle. When changes are significant, the amortization rate and period are adjusted.

Goodwill and Other Intangible Assets

Goodwill represents the excess of net acquisition cost over the estimated fair value of net assets acquired of purchased companies. On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Under SFAS No. 142, intangible assets considered to have indefinite lives, such as goodwill, are no longer amortized to expense but are periodically evaluated for impairment at the reporting unit level. Intangible assets with finite lives continue to be amortized to expense over their useful lives.

Under SFAS No. 142, goodwill and other indefinite lived intangible assets are subject to an annual impairment test as well as an interim test if an event occurs or circumstances change between annual tests indicating that the asset might be impaired. The goodwill impairment test is a two-step process. First, the fair value of the reporting unit is compared to its carrying value. If the fair value is less than the carrying value, a second step is performed. In the second step, an implied goodwill value is determined by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. If the implied fair value of the goodwill, as calculated, is less than the carrying amount of the goodwill, an impairment charge is taken for the difference. The Company tests the goodwill of each of its reporting units annually, and more frequently if impairment indicators exist.

Direct Response Advertising Costs

Direct response advertising costs are incurred to solicit sales from potential new customers who can be shown to have responded specifically to an advertising campaign that results in probable future economic benefits. We have two types of direct response advertising costs: direct mail and catalogs. We are able to track the revenue, costs and profitability from these advertising efforts at the campaign level. Both the direct mail and catalog campaign costs are capitalized and the net recoverability is evaluated on a product-by-product basis at the campaign level. The life and amortization rate are determined by historical experience with similar products at the same business. Generally, greater than 80% of direct mail costs are amortized in the first year, with all costs being amortized over lives ranging from 12-18 months.

Catalog costs are amortized over the estimated life of the catalog, generally between one and eighteen months with greater than 90% of catalog costs being amortized in the first year. The estimated life and amortization rate are based on the sales experience of similar catalogs at the same business segment. Amortization of direct response advertising costs is included in marketing and sales expense in the accompanying consolidated statements of operations. If a direct mail solicitation or catalog is determined to be unprofitable, all remaining capitalized costs are written-off at that time.

Inventory and Related Obsolescence

Inventory consists primarily of books, CDs and audiocassettes, which are valued at the lower of cost or market, as determined by the first-in, first-out method. Obsolescence reserves on slow-moving or excess merchandise are recorded, where applicable, based upon regular reviews of inventories on-hand and estimated future demand. If a book is taken out of print, superseded by a later version or ceases to sell, it is considered obsolete and all related inventory amounts are written-off. If quantities of a book exceed expected future demand based on historical sales of that title, the excess inventory is also written off.

Income Taxes

We account for income taxes pursuant to the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under SFAS No. 109, deferred tax assets and liabilities are recorded to reflect the future tax consequences attributable to the effects of differences between carrying amounts of existing assets and liabilities for financial reporting and for income tax purposes. A history of generating taxable income is required in order to substantiate the recording of a net deferred tax asset.

Redeemable Capital Stock

We previously accounted for our outstanding Preferred B, which was mandatorily redeemable, in accordance with Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). Our Preferred A and Preferred C, on the other hand, which were redeemable at the option of the holders thereof and were not mandatorily redeemable, were not subject to SFAS No. 150 and were instead classified as mezzanine equity. The Preferred Warrants were also required to be classified as a liability and recorded at fair value, because under FSP No. 150-5, “Issuer’s Accounting Under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable,” (“FSP No. 150-5”), the Preferred Warrants were deemed to embody obligations of the Company to issue securities that had a redemption right.

Upon the closing of the Recapitalization Agreement, all outstanding shares of Preferred A, Preferred B and Preferred C were converted to common stock at agreed upon rates, and the Preferred Warrants were converted into warrants to acquire common stock at an agreed upon rate. As a result, we no longer have outstanding any redeemable capital stock, or any securities convertible into or exercisable or exchangeable for redeemable capital stock.

Results of Operations

The operations of Oakstone Publishing, and Sundance Newbridge Publishing which were discontinued in the second and third quarters of 2008 respectively, have been removed from the continuing operations for all periods presented.

Three Months Ended September 30, 2008 Compared To Three Months Ended September 30, 2007

The following table summarizes the results of operations and the percentage of total revenue represented by each category for the three—month period ended September 30, 2008 and 2007:


				Three Months Ended September 30,
	2008						2007
				(In thousands)
Revenue
Test Prep and Intervention		25,603			52.2	%		26,234		55.1	%
Library		23,474			47.8	%		21,349		44.9	%

Total Revenue		49,077			100.0	%		47,583		100.0	%
Cost of goods sold		12,975			26.4	%		12,945		27.2	%
Selling, general and administrative expenses:
Marketing and sales		9,916			20.3	%		9,966		21.0	%
Fulfillment and distribution		3,200			6.5	%		3,112		6.5	%
General and administrative expense		7,311			14.9	%		10,846		22.8	%
Restructuring charges		19			0.0	%		19		0.0	%

Total selling, general and administrative expenses		20,446			41.7	%		23,943		50.3	%
Amortization of pre-publication costs		4,181			8.5	%		3,671		7.7	%
Depreciation expense/amortization of intangibles		1,024			2.1	%		939		2.0	%

Income from operations		10,451			21.3	%		6,085		12.8	%
Interest expense		11,212			22.8	%		14,520		30.5	%
Other income (expenses), net of interest income		(805	)		(1.7	)%		115,231		242	%

Income (loss) before taxes and discontinued operations		(1,566	)		(3.2	)%		106,796		224	%
Benefit (provision) for income taxes		(215	)		(0.4	)%		(712	)	(1.5	)%

Income (loss) before discontinued operations		(1,781	)		(3.6	)%		106,084		223	%
Income (loss) on disposal of discontinued operations		1,190			2.4	%		929		2.0	%

Net income (loss)	$	(591	)		(1.2	)%	$	107,013		225	%

Revenue

Our total revenue increased $1.5 million, or 3.1%, to $49.1 million for the three-month period ended September 30, 2008, from $47.6 million for the three-month period ended September 30, 2007. The increase is due to growth in the Library segment on strong performances from the schools and library channels. The increase was offset by a decline in our Test-Prep and Intervention segment on weak performance from Coach products.

Test-prep and Intervention. Revenue for the Test-prep and Intervention segment decreased $0.6 million, or 2.4%, to $25.6 million for the three-month period ended September 30, 2008, from $26.2 million for the three-month period ended September 30, 2007. This decrease is attributable to a large one time sale in prior year. A key provision of the NCLB Act required each state to implement, beginning with the 2005-2006 school year, increased standardized testing across many grade levels. The state standardized tests in reading, math, and science and social studies are the subject of Triumph Learning’s test-prep study materials. Triumph Learning proactively sought to benefit from the demand created by the NCLB Act by publishing new state, subject and grade specific test-prep study materials (for example a State of New York, Grade 5, Math test-preparation workbook) corresponding to these new tests for many but not all states. However, with the weakened economy we expect to see the schools react to budgetary pressures, which could have an adverse impact on revenue.

Library. The Library segment, which consists of our Recorded Books business, publishes unabridged audiobooks and other audio-based products in both CD and audiocassette formats. Recorded Books markets to public libraries, schools, retail vendors and directly to consumers, with sales to public libraries generally accounting for approximately two-thirds of revenue. Revenue for the Library segment increased $2.1 million, or 10.0%, to $23.5 million for the three-month period ended September 30, 2008, from $21.3 million for the three-month period ended September 30, 2007. The majority of the segment revenue growth is attributable to increases from the school channel on the strong performances of PITR product lines, growth in our Core Library Channel which includes WF Howes, a UK subsidiary of Recorded Books, and increases in retail revenue from downloadable products.

Cost of Goods Sold

Cost of goods sold increased $0.03 million, or 0.2%, to $13.0 million for the three-month period ended September 30, 2008, from $12.9 million for the three-month period ended September 30, 2007. Cost of goods sold as a percentage of revenue decreased to 26.4% from 27.2% period over period.

Test-prep and Intervention. Cost of goods sold for the Test-prep and Intervention segment decreased $0.7 million, or 12.3%, to $4.7 million for the three-month period ended September 30, 2008, from $5.4million for the three-month period ended September 30, 2007. Cost of goods sold as a percentage of revenue for the Test-prep and Intervention segment decreased to 18.4% from 20.5% period over period primarily due to lower inventory obsolescence charges.

Library. Cost of goods sold for the Library segment increased $0.7 million, or 9.2%, to $8.3 million for the three-month period ended September 30, 2008 from $7.6 million for the three-month period ended September 30, 2007. Cost of goods sold as a percentage of revenue remained substantially the same, decreasing to 35.2% from 35.5% period over period.

Selling, General & Administrative Expense

Selling, general and administrative expense is comprised of marketing and sales, fulfillment and distribution, general and administrative, and restructuring charges in the accompanying consolidated statements of operations. Selling, general and administrative expense decreased $3.5 million, or 14.6%, to $20.5 million for the three-month period ended September 30, 2008, from $24.0 million for the three-month period ended September 30, 2007. The decrease is primarily due to payment of executive severance of $3.6 million and compensation expense of $1.4 million related to restricted stock issuances in the prior year that have no comparable costs in 2008, offset by a $2.1 million increase in financing fees related to legal costs and commitment fees paid to the lenders that provided the backstop financing option for our August 15, 2008 refinancing. Selling, general and administrative expense as a percentage of revenue decreased to 41.7% from 50.3% period over period due primarily to the decrease in executive and compensation expense discussed above.

Test-prep and Intervention. Selling, general and administrative expense for the Test-prep and Intervention segment was $10.2 million for each of the three-month periods ended September 30, 2008 and 2007. Selling, general and administrative expenses as a percentage of revenue for the Test-prep and Intervention segment increased to 39.6% from 38.8% period over period due to the increased catalog and direct mail related expenses offset by reduction in overhead costs.

Library. Selling, general and administrative expense for the Library segment decreased $0.1 million, or 2.0%, to $7.0 million for the three-month period ended September 30, 2008, from $7.1 million for the three-month period ended September 30, 2007 primarily due to increased severance costs, offset by decreased catalog and direct mail related marketing expenses. Selling, general and administrative expense as a percentage of revenue decreased to 29.7% from 33.3% period over period.

Corporate. Our corporate general and administrative expense decreased $3.3 million, or 50.1%, to $3.3 million for the three-month period ended September 30, 2008 from $6.6 million for the three-month period ended September 30, 2007 primarily due to reduction in staff, executive severance of $3.6 million and compensation expense of $1.4 million related to restricted stock issuance incurred in the prior year that has no comparable costs in 2008 offset by an increase in financing fees.

Amortization of Pre-Publication Costs

Amortization of pre-publication costs increased $0.5 million to $4.2 million for the three-month period ended September 30, 2008, from $3.7 million for the three-month period ended September 30, 2007. The increase over the prior period is a direct result of increased investments in new product spending within both segments.

Depreciation Expense and Amortization of Intangibles

Depreciation expense and amortization of intangibles was $1.0 million for the three-month periods ended September 30, 2008 and 2007.

Interest Expense

Interest expense decreased $3.3 million, or 23.0%, to $11.2 million for the three-month period ended September 30, 2008, from $14.5 million for the three-month period ended September 30, 2007. This decrease was due to the conversion of our Preferred B, which was converted into common stock on August 10, 2007 in connection with the Recapitalization Agreement. Our total outstanding debt decreased from $411.8 million as of September 30, 2007 to $378.0 million as of September 30, 2008.

Cash interest expense decreased $0.9 million to $7.3 million for the three-month period ended September 30, 2008 from $8.2 million for the three-month period ended September 30, 2007. The average interest rate decreased to 8.49% for the three-month period ended September 30, 2008, from 9.73% for the three-month period ended September 30, 2007. Our cash interest bearing outstanding debt was $248.3 million as of September 30, 2008, compared to $297.0 million as of September 30, 2007.

Interest expense consists of the following:


	Three Months Ended
	September 30,
	2008			2007
	(In thousands)
Interest expense:
Term Loans	$	1,245		$	3,168
New Term Loan		1,555			—
11 3/4% senior notes		4,536			4,994
12 1/2% senior discount notes — non—cash		3,904			3,464
Series B senior preferred stock — non—cash		—			2,874
Other		7			47

Total interest expense		11,247			14,547
Less: capitalized interest		(35	)		(27	)

Net Interest expense	$	11,212		$	14,520

We repaid the Term Loans on August 15, 2008, but expect to incur additional interest expense in connection with our New Term Loan facility pursuant to which we borrowed $108.2 million to repay the previously outstanding Term Loans. In addition, on August 15, 2008, we repurchased and retired $31.2 million in aggregate principal amount of the Senior Notes from certain of the Lenders and their affiliates for a purchase price equal to the aggregate principal amount of the notes retired, plus accrued but unpaid interest, if any. (See Liquidity and Capital Resources for further discussion on the Credit Agreement, including interest rates).

As of September 30, 2008, the Company had $108.2 million in aggregate principal amount outstanding under the New Term Loan, with such amount bearing interest at 11.25%. The average interest rate on the Term Loans was 7.9% for the nine-month period ended September 30, 2008.

Discontinued Operations

On June 30, 2008, the assets and liabilities of Oakstone Publishing were sold for gross proceeds for $47.5 million, consisting of consideration received from the buyer of $42.8 million and $4.8 million placed in an escrow account. A gain of $15.1 million presented as a gain on disposal of discontinued operations, was recorded on the sale.

On August 27, 2008, the assets of Sundance Newbridge Publishing were sold for gross proceeds of $5.9 million. A gain of $0.8 million presented as a gain on disposal of discontinued operations, was recorded on the sale.

Provision for Income Taxes

The provision for income taxes in continuing operations includes an income tax benefit of $0.7 million as a result of the gain on the disposal of the Oakstone Publishing and Sundance Newbridge Publishing businesses, included within discontinued operations. The provision also includes $0.8 million of deferred income tax expense reflecting the increase in deferred tax liabilities as a result of the amortization for income tax purposes of goodwill and indefinite lived assets not reflected in book income.

Net Income (Loss)

Net loss for the three-month period ended September 30, 2008, was $0.6 million and net income was $107.0 million for the three-month period ended September 30, 2007. Net income for the three-month period ended September 30, 2008 included a gain on discontinued operations of $1.2 million. Operating income increased $4.4 million to $10.5 million for the three month period ended September 30, 2008, from $6.1 million for the three month period ended September 30, 2007 primarily due to the increase in revenue combined with decreased general and administrative costs. Other income/expenses decreased by $113.0 million period over period, primarily due to the inclusion of gain on troubled debt restructuring in the prior year, for which there is no comparable transaction in the current period. Excluding the effect of $116.0 million gain on troubled debt restructuring, other expenses decreased by $2.9 million

Nine Months Ended September 30, 2008 Compared To Nine Months Ended September 30, 2007

The following table summarizes the results of operations and the percentage of total revenue represented by each category for the nine-month period ended September 30, 2008 and 2007:


	Nine Months Ended September 30,
	2008					2007
	(In thousands)
Revenue
Test Prep and Intervention		66,768		49.4	%		64,316		50.0	%
Library		68,319		50.6	%		64,300		50.0	%

Total Revenue		135,087		100.0	%		128,616		100.0	%
Cost of goods sold		36,641		27.1	%		35,615		27.7	%
Selling, general and administrative expenses:
Marketing and sales		30,910		22.8	%		28,639		22.3	%
Fulfillment and distribution		9,938		7.4	%		9,087		7.1	%
General and administrative expense		20,095		14.9	%		22,236		17.3	%
Restructuring charges		303		0.2	%		57		0.0	%

Total selling, general and administrative expenses		61,246		45.3	%		60,019		46.7	%
Amortization of pre-publication costs		12,065		8.9	%		10,215		7.9	%
Depreciation expense/amortization of intangibles		3,177		2.4	%		2,773		2.2	%

Income from operations		21,958		16.3	%		19,994		15.5	%
Interest expense		33,353		24.7	%		50,161		38.9	%
Other (income) expenses, net of interest income		1,323		1.0	%		(115,084	)	(89.4	)

Income/(loss) before taxes		(12,718	)	(9.4	)%		84,917		66.0	%
Tax benefit (provision)		2,639		2.0	%		(3,001	)	(2.3	)%

Income/(loss) before discontinued operations		(10,079	)	(7.4	)%		81,916		63.7	%
Income (loss) from discontinued operations		15,933		11.8			(1,952	)	1.5	%

Net income (loss)	$	5,854		4.4	%	$	79,964		62.2	%

Revenue

Our total revenue increased $6.5 million, or 5.0%, to $135.1 million for the nine-month period ended September 30, 2008, from $128.6 million for the nine-month period ended September 30, 2007. The increase is due to growth in both the Library and Test-prep and Intervention segments.

Test-prep and Intervention. Revenue for the Test-prep and Intervention segment increased $2.5 million, or 3.8%, to $66.8 million for the nine-month period ended September 30, 2008, from $64.3 million for the nine-month period ended September 30, 2007. This increase is attributable to growth in our Coach product lines offset by declines in the Buckle Down/Options product lines. A key provision of the NCLB Act required each state to implement beginning with the 2005-2006 school year, increased standardized testing across many grade levels. The state standardized tests in reading, math, and science and social studies are the subject of Triumph Learning’s test-prep study materials. Triumph Learning proactively sought to benefit from the demand created by the NCLB Act by publishing new state, subject and grade specific test-prep study materials (for example a State of New York, Grade 5, Math test-preparation workbook) corresponding to these new tests for many but not all states. However, with the weakened economy we expect to see the schools react to budgetary pressures, which could have an adverse impact on revenue.

Library. Revenue for the Library segment increased $4.0 million, or 6.25%, to $68.3 million for the nine-month period ended September 30, 2008, from $64.3 million for the nine-month period ended September 30, 2007. The majority of the segment revenue growth is attributable to the strong performances of our School and Library channels. The growth in the School channel revenue is due primarily to the success of the PITR product line, while the growth in the Core Library channel revenue is due to the solid performance by My Library Download Video and Playaway, our new preloaded digital audio player product.

Cost of Goods Sold

Cost of goods sold increased $1.0 million, or 2.9%, to $36.6 million for the nine-month period ended September 30, 2008, from $35.6 million for the nine-month period ended September 30, 2007. Cost of goods sold as a percentage of revenue decreased to 27.1% from 27.7% period over period.

Test-prep and Intervention. Cost of goods sold for the Test-prep and Intervention segment was $12.6 million for the nine-month periods ended September 30, 2008 and 2007. Cost of goods sold as a percentage of revenue for the Test-prep and Intervention segment decreased to 18.9% from 19.7% period over period, primarily due to better collections, lower royalty expenses and lower expensed product development costs, which have been partially offset by an increase in promotions and discounts at Buckle Down and Options.

Library. Cost of goods sold for the Library segment increased $1.1 million, or 4.6% to $24.1 million for the nine-month period ended September 30, 2008, from $23.0 million for the nine-month period ended September 30, 2007, due to the corresponding growth in revenue. Cost of goods sold as a percentage of revenue decreased to 35.2% from 35.7% period over period, due to improved sales mix and lower inventory obsolescence charges in 2008.

Selling, General & Administrative Expense

Test-prep and Intervention. Selling, general and administrative expense for the Test-prep and Intervention segment increased $3.4 million, or 11.9%, to $31.9 million for the nine-month period ended September 30, 2008, from $28.5 million for the nine-month period ended September 30, 2007. The increase was primarily due to increased catalog and direct mail related marketing expenses and increased overhead cost from the Northborough warehouse facility. Selling, general and administrative expenses as a percentage of revenue for the Test-prep and Intervention segment increased to 47.8% from 44.3% period over period due to the increased catalog and direct mail related expenses as well as the increased facility costs from the fulfillment and distribution function.

Library. Selling, general and administrative expense for the Library segment increased $0.1 million, or 0.3%, to $21.2 million for the nine-month period ended September 30, 2008, from $21.1 million for the nine-month period ended September 30, 2007, primarily due to increased severance costs offset by decreased catalog and direct mail related expenses. Selling, general and administrative expense as a percentage of revenue decreased to 31.0% from 32.8% period over period.

Corporate. Our corporate general and administrative expenses decreased $2.2 million, or 21.4% to $8.2 million for the nine-month period ended September 30, 2008, from $10.4 million for the nine-month period ended September 30, 2007, primarily due to reduction in staff, executive severance and compensation expense related to restricted stock issuance incurred in the prior year that has no comparable costs in 2008, offset by an increase in financing cost.

Amortization of Pre-Publication Costs

Amortization of pre-publication costs increased $1.8 million to $12.1 million for the nine-month period ended September 30, 2008, from $10.2 million for the nine-month period ended September 30, 2007. The increase over the prior period is a direct result of increased investments in new product spending within both the Test-prep and Intervention and Library segments.

Depreciation Expense and Amortization of Intangibles

Depreciation expense and amortization of intangibles increased $0.4 million, or 14.6%, to $3.2 million for the nine-month period ended September 30, 2008, from $2.8 million for the nine-month period ended September 30, 2007 due to increased depreciation on our fixed assets.

Interest Expense

Interest expense decreased $16.8 million, or 33.5%, to $33.4 million for the nine-month period ended September 30, 2008, from $50.2 million for the nine-month period ended September 30, 2007. This decrease was due to the conversion of our Preferred B, which was converted into common stock on August 10, 2007, in connection with the Recapitalization Agreement. Our total outstanding debt decreased from $411.8 million as of September 30, 2007, to $378.0 million as of September 30, 2008.

Cash interest expense decreased $2.6 million to $22.2 million for the nine-month period ended September 30, 2008, from $24.8 million for the nine-month period ended September 30, 2007. The average interest rate decreased to 7.96% for the nine-month period ended September 30, 2008 from 9.86% for the nine-month period ended September 30, 2007. Our cash interest bearing outstanding debt was $248.3 million as of September 30, 2008, compared to $297.0 million as of September 30, 2007.

Interest expense consists of the following:


	Nine Months Ended
	September 30,
	2008			2007
	(In thousands)
Interest expense:
Term Loans	$	6,066		$	9,561
New Term Loan		1,555			—
11 3/4% senior notes		14,524			14,981
12 1/2% senior discount notes — non-cash		11,287			9,998
Series B senior preferred stock — non-cash		—			15,061
Other		18			638

Total interest expense		33,450			50,239
Less: capitalized interest		(97	)		(77	)

Net Interest expense	$	33,353		$	50,162

We repaid the Term Loans on August 15, 2008, but expect to incur additional interest expense in connection with our New Loan facility pursuant to which we borrowed $108.2 million to repay the previously outstanding Term Loans. In addition, on August 15, 2008, we repurchased $31.2 million in aggregate principal amount of the Senior Notes from certain of the Lenders and their affiliates for a purchase price equal to the aggregate principal amount of the notes retired, plus accrued but unpaid interest, if any. (See Liquidity and Capital Resources for further discussion on the Credit Agreement, including interest rates).

As of September 30, 2008, the Company had $108.2 million in aggregate principal amount outstanding under the New Term Loan, with such amount bearing interest at 11.25%.

Discontinued Operations

On June 30, 2008, the assets and liabilities of Oakstone Publishing was sold for gross proceeds for $47.5 million, consisting of consideration received from the buyer of $42.8 million and $4.5 million placed in an escrow account. A gain of $15.1 million presented as a gain on disposal of discontinued operations, was recorded on the sale.

Provision for Income Taxes

The provision for income taxes in continuing operations includes an income tax benefit of $5.6 million as a result of the gain on the disposal of the Oakstone Publishing and Sundance Newbridge Publishing businesses, included within discontinued operations.

The provisions also includes $2.5 million of deferred income tax expense reflecting the increase in deferred tax liabilities as a result of the amortization for income tax purposes of goodwill and indefinite lived assets not reflected in book income.

Net Income (Loss)

Net income for the nine-month period ended September 30, 2008, was $5.8 million and $80.0 million for the nine-month period ended September 30, 2007. Net income for the nine-month period ended September 30, 2008 included a gain on discontinued operations of $15.9 million. Operating income increased $1.9 million to $21.9 million for the nine month period ended September 30, 2008 from $20.0 million for the nine month period ended September 30, 2007. Other income/expenses decreased by $99.6 million period over period, primarily due to the inclusion of gain on troubled debt restructuring in the prior year, for which there is no comparable transaction in the current period. Excluding the effect of $116.0 million gain on troubled debt restructuring, other expenses decreased by $16 million, primarily due to the decrease in interest expense.

Liquidity and Capital Resources

We have relied primarily on our available cash balance to fund our working capital, capital expenditures, business acquisition and debt service requirements. As of September 30, 2008, we had an available cash balance of $40.8 million. During the nine month period ended September 30, 2008, we funded $15.5 million in pre-publication costs for new product development, $0.8 million of capital expenditures for property and equipment, and $22.2 million of cash interest payments.

As of September 30, 2008, we had total indebtedness outstanding of $377.9 million, including our New Term Loan in the principal amount of $108.2 million, Senior Notes in the aggregate principal amount of $140.1 million and Senior Discount Notes in the aggregate accreted amount of $129.6 million. See Note 11 to our Consolidated Financial Statements. On August 15, 2008 we repaid the Term Loans with a combination of the net proceeds of a new term loan in the principal amount of $108.2 million and cash on hand, including net proceeds from our sale of our Oakstone Publishing business. In addition, on August 15, 2008 we repurchased from certain of the Lenders and their affiliates and retired at par, $31.2 million in principal amount of our Senior Notes. The Senior Notes which remain outstanding are general unsecured obligations of our subsidiary, Haights Cross, and also are guaranteed by our other subsidiaries and Haights Cross Communications. The Senior Notes are effectively subordinated to the New Term Loan to the extent of the collateral securing the New Term Loan. The Senior Discount Notes are general unsecured obligations of Haights Cross Communications, ranking equally with all of Haights Cross Communications’ senior debt. However, the Senior Discount Notes are structurally subordinated to all existing and future liabilities of our subsidiaries, including the New Term Loans and the Senior Notes, and are effectively subordinated to the New Term Loan to the extent of the value of the collateral securing the New Term Loan.

Credit Agreement

On August 15, 2008, Haights Cross entered into a new Credit Agreement with DDJ Capital Management LLC, as administrative agent and collateral agent and certain other lenders (collectively, the “Lenders”). Under the Credit Agreement, we borrowed $108.2 million under a senior secured term loan facility (“New Term Loan”). We used a combination of the net proceeds of the New Term Loan and cash on hand, including the net proceeds from our previous sale of our Oakstone Publishing business, to repay the Term Loans due August 15, 2008 in full.

Haights Cross Communications and all of its direct and indirect subsidiaries (other than Haights Cross) have guaranteed Haights Cross’ obligations under the New Term Loan. The New Term Loan is secured by first-priority liens on, and first-priority security interests in, substantially all of our assets and those of our subsidiaries and a first priority security interest in 100% of the equity issued by Haights Cross’ direct and indirect subsidiaries.

The final maturity date for the New Term Loan is May 15, 2011. We are required to apply 75% of our annual consolidated excess cash flow (as defined) to prepay any amounts outstanding under the New Term Loan. In addition, subject to certain exceptions and reinvestment baskets, we are required to use any net proceeds from the sale or disposition of our assets, net casualty, condemnation proceeds or other extraordinary proceeds and net proceeds from the issuance or incurrence of debt or equity to prepay the New Term Loan. In general, prepayment premiums are not applicable to partial prepayments in accordance with the above. However, prepayment premiums are applicable to (a) partial prepayment on account of debt or equity issuances above agreed on baskets, (b) voluntary prepayments, and (c) upon payments of the New Term Loan in full on account of any mandatory or voluntary prepayment. When applicable the following prepayment premiums apply: prepayments on or prior to August 15, 2009 are subject to a

premium of 102% of the principal, prepayments after August 15, 2009, but on or before August 15, 2010 are subject to a premium of 101% of the principal. Thereafter, we may make prepayments without paying a premium.

All amounts outstanding under the New Term Loan will bear interest, at our option:

(i) at the three month LIBOR rate (with a floor of 3.00%) plus 8.25% per annum, payable quarterly; or

(ii) at the prime rate (with a floor of 5.25%) plus 7.0% per annum, payable monthly.

The Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants restricting our ability, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, enter into sale-leaseback transactions, make capital expenditures in excess of scheduled amounts, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of their businesses.

The credit facilities require us to maintain a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a minimum net EBITDA (as defined) . The maximum secured leverage ratio is 3.33:1 beginning with the quarter ending September 30, 2008, and then ranges from 3.36:1 to 2.94:1 through the fiscal quarter ending March 31, 2011. The minimum fixed charge coverage ratio is 0.83:1 beginning with our fiscal quarter ending September 30, 2008 and then ranges over time between 0.80:1.00 and 0.67:1 through the fiscal quarter ending March 31, 2011. The minimum net EBITDA is $29.8 million beginning with our fiscal quarter ending September 30, 2008, and then ranges between $29.2 million to $33.4 million through the fiscal quarter ending March 31, 2011. The secured leverage ratio is defined as the ratio of our senior secured debt (net of up to $10 million of balance sheet cash) to our consolidated net EBITDA for the four-fiscal quarter period ending on the measurement date. The fixed charge coverage ratio is defined as the ratio of our consolidated net EBITDA for the four-fiscal quarter period ending on the measurement date to the our consolidated interest expense, plus total taxes and total capital expenditures (subject to certain limited exceptions) for the same period. EBITDA, is defined as our earnings before taxes, interest, taxes, depreciation and amortization, subject to certain adjustments. These terms, and the calculation thereof, are defined in further detail in the Credit Agreement. As of September 30, 2008 we were in compliance with all provisions and covenants of the Credit Agreement.

Backstop Commitment

Application of Net Proceeds from Oakstone Publishing Sale.

On June 30, 2008, we sold our Oakstone Publishing business for gross proceeds of $47.5 million, consisting of $42.8 million payable at closing and $4.8 million placed in an escrow account to satisfy working capital adjustments and indemnification obligations, if any. The cash consideration from the sale was received by us on July 1, 2008 and is included as sales proceeds receivable on our June 30, 2008 balance sheet. Under the indentures for the Senior Notes and the Senior Discount Notes, within 365 days after the receipt of the net proceeds from an asset sale, such as the Oakstone Publishing sale, we may apply the net proceeds, at our option to (i) repay obligations under our senior secured credit facilities, (ii) to acquire all or substantially all of the assets of, or any capital stock or, another permitted business, (iii) to make capital expenditures, or to acquire any other assets that are not classified as current assets under generally accepted accounting principles and that are used or useful in a permitted business. Any net proceeds that are not applied or invested within 365 days as provided above will constitute excess proceeds. If the aggregate excess proceeds were to exceed $10 million, the indentures for our Senior Notes and Senior Discount Notes would require us to offer to apply the excess proceeds to the repayment of our term loans and/or such notes. Our Credit Agreement for our New Term Loan further requires us to apply such excess proceeds to the repayment of the New Term Loan no later than the date that is 30 days prior to the date on which we would have to apply such proceeds as dictated by the indentures for the Senior Notes and Senior Discount Notes. As described above, we have applied a portion of the net proceeds from the Oakstone Publishing sale to the repayment of our term loans. We anticipate that we will apply additional amounts of the net proceeds for other permitted uses, such as capital expenditures or additional repayments of our New Term Loans, such that excess proceeds, if any, at the end of the 365 day period will be less than $10 million.

We are highly leveraged and have significant debt service obligations. Our primary sources of liquidity are our available cash balance and cash flow from operations. We expect that ongoing requirements for debt service, working capital, capital expenditures and permitted business acquisitions will be funded from these sources.

Our ability to make scheduled payments of principal of, or to pay interest on, or to refinance, our indebtedness, or to fund planned capital expenditures will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

While we cannot assure that our business will generate sufficient cash flow from operations, that any revenue growth or operating improvements will be realized or that future borrowings will be available in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs, based on our current level of operations, we believe that cash flow from operations and available cash will be adequate to meet our future liquidity needs until the maturity of our New Term Loan in May of 2011.

Cash Flows

Net cash used in operating activities increased to $1.6 million for the nine-month period ended September 30, 2008 from net cash provided by operating activities of $1.7 million for the nine-month period ended September 30, 2007, primarily due to higher working capital needs compared to the prior period.

Cash provided by investing activities increased to $33.5 million for the nine-month period ended September 30, 2008, from the cash used in investing activities of $15.8 million for the nine-month period ended September 30, 2007, primarily due to proceeds from the sale of Oakstone Publishing and Sundance Newbridge sales. Cash used in investing activities consists primarily of expenditures on pre—publication costs and property, plant and equipment.

Cash used in financing activities increased to $50.8 million for the nine month periods ended September 30, 2008 from $3.0 million for the nine-month period ended 2007, primarily reflecting principal payments on our Term Loans, Senior Notes and proceeds from the New Term Loans.

Capital Expenditures

Capital expenditures — pre-publication costs relate to the costs incurred in the development of new products. For the nine-month period ended September 30, 2008, we had $15.5 million of pre-publication expenditures compared to $14.5 million during the nine-month period ended September 30, 2007. We plan expenditures of $22.2 million for pre—publication costs in 2008. This level of spending is intended to support our successful core products and allow for the development of new products.

Capital expenditures — property and equipment relate to the purchase of tangible fixed assets such as computers, software and leasehold improvements. For the nine-month period ended September 30, 2008 we had $0.8 million of property, building and equipment expenditures compared to $1.1 million for the nine-month period ended September 30, 2007. We plan expenditures of $2.7 million for property and equipment in 2008.

Contingencies

Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations (including interest) as of September 30, 2008:


	Payments Due By Period
	Less Than						After
Contractual Obligations	1 Year		1-2 Years		3-5 Years		5 Years		Total
	(In thousands)
Operating leases	$	2,198	$	1,135	$	536	$	—	$	3,869
New Term Loan(1)		13,176		13,176		116,393		—		142,745
11³/4% Senior notes		16,309		16,309		155,109		—		187,727
12¹/2% Senior discount notes		8,438		16,875		152,531		—		177,844

Total	$	40,121	$	47,495	$	424,569	$	—	$	512,185


(1)		New Term Loan is a floating rate instruments. The interest for this schedule was calculated using the effective interest for the fourth quarter 2008.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements.

Seasonality and Quarterly Results of Operations

Our business is subject to moderate seasonal fluctuations. Our revenue and income from operations have historically been higher during the second and third calendar quarters. In addition, our quarterly results of operations have fluctuated in the past and can be expected to continue to fluctuate in the future, as a result of many factors, including, without limitation, general economic trends; the traditional cyclical nature of educational material sales; school, library and consumer purchasing decisions; the unpredictable funding of schools and libraries by federal, state and local governments; consumer preferences and spending trends; and the timing of introductions of new products.

The unaudited quarterly information includes all normal recurring adjustments that management considers necessary for a fair presentation of the information shown. Because of the seasonality of our business and other factors, results for any interim period are not necessarily indicative of the results that may be achieved for the full fiscal year.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, our financial position and results of operations are routinely subject to a variety of risks. These risks include market risk associated with interest rate movements on borrowings and investments that we make on variable interest rates.

We regularly assess these market risks and have established policies and business practices to protect against the adverse effect of these and other potential exposures. We utilize cash from operations and short-term borrowings to fund our working capital and investment needs. Cash balances are normally invested in high-grade securities with terms shorter than three-month periods. Because of the short-term nature of these investments, changes in interest rates would not materially affect the fair value of these financial instruments.

As of September 30, 2008, a hypothetical 10% change in interest costs of our variable rate debt would change interest expense on an annual basis by $1.0 million. As of September 30, 2008, a hypothetical 10% change in the interest rate applicable to our investments would change interest income on an annual basis by $0.1 million. These amounts are determined by calculating the effect of a hypothetical interest rate change on our variable rate debt and our investments, and without regard to the effects of other possible occurrences, such as actions to mitigate these risks or changes in our financial structure.

As of September 30, 2008, we had $108.2 million in aggregate principal amount outstanding under the New Term Loans. The applicable interest rates on the Term Loans, which are based on LIBOR plus an applicable spread, was 11.25% .

We have minimal exposure to foreign currency rate fluctuations on our foreign sales, as currently we have minimal transaction gain or loss recognized in our statement of operations due to currency fluctuations, mainly fluctuations in UK pounds. As a result, we do not hedge the exposure to these changes. As of September 30, 2008, a hypothetical 10% change in the foreign currency exchange rates applicable to such transactions would not have a material impact on our results of operations.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures

Pursuant to Rule 15d-15 under the Exchange Act, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of and design and operation of our disclosure controls and procedures, as defined by Exchange Act Rule 15d-15(e), as of September 30, 2008. Based on that evaluation, our disclosure controls and procedures were ineffective, as of the end of the period covered by this report, due to the material weakness in our internal control over financial reporting as previously reported in our Annual Report on Form 10K for the year ended December 31, 2007.

In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in designing and evaluating the controls and procedures. We regularly

review and document our disclosure controls and procedures, and our internal controls over financial reporting, and may from time to time make appropriate changes aimed at enhancing their effectiveness and ensure that our systems evolve with our business.

(b) Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Regarding the material weakness as previously reported in our Annual Report on Form 10K for the year ended December 31, 2007,

we have identified the following changes necessary to improve our internal control over financial reporting:

	•		Improving our documentation and training related to policies and procedures for the controls related to our significant accounts and processes;

	•		Educating and training our management and staff to improve technical expertise with respect to these technical areas;

	•		Engaging expert resources to assist with tax and goodwill valuation accounting; and

	•		Re-allocating and/or relocating duties of finance personnel to enhance review and monitoring procedures.

While we believe that the remedial actions described above would result in the correction of the material weakness in our internal control over financial reporting, the exact timing of when the conditions will be corrected is dependent upon future events, which may or may not occur.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in legal proceedings that we consider to be in the normal course of business. We are not presently involved in any legal proceedings that we expect individually or in the aggregate to have a material adverse effect on our financial condition, results of operations or liquidity.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

There are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K for our fiscal year ended December 31, 2007 other than the replacement in its entirety of the risks related to restrictive covenants in our debt instruments with the risk factor below and the addition of the risk factor below related to the U.S. economy.

Risks Related to our Indebtedness

Restrictive covenants in our debt instruments may adversely affect our operations.

The senior secured term loans and the indentures governing the senior notes and senior discount notes contain various provisions that limit our management’s discretion by restricting our ability to, among other things:

	•		incur additional debt;

	•		pay dividends and make other distributions;

	•		make investments and other restricted payments;

	•		enter into sale and leaseback transactions;

	•		incur liens;

	•		engage in mergers, acquisitions and asset sales;

	•		enter into transactions with affiliates;

	•		make capital expenditures;

	•		amend or otherwise alter debt and other material agreements; and

	•		alter the business we conduct.

Our new credit facilities also require us to satisfy certain financial covenants.

Our ability to comply with these provisions may be affected by general economic conditions, political decisions, industry conditions and other events beyond our control. Our failure to comply with the covenants contained in the new credit facility, including financial covenants, could result in an event of default, which could materially and adversely affect our results of operation and financial condition.

If we do not comply with the restrictions in the senior secured term loans, the indentures governing the senior notes and the senior discount notes or any of our other financing agreements, a default may occur. Under certain circumstances, this default may allow our creditors to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies. If we were unable to repay those amounts, the lenders under the senior secured term loans could proceed against the collateral granted to them to secure that indebtedness. We have pledged all of our assets as collateral to secure our obligations under senior secured term loans. If the lenders under the senior secured term loans accelerate the repayment of borrowings, we cannot assure you that a sale of the assets pledged as collateral would provide sufficient proceeds to repay the amounts outstanding under the senior secured term loans, the senior notes and the senior discount notes. See Note 12 to our Consolidated Financial Statements.

Risks Related to our Business

The recent U.S. financial turmoil and associated economic downturn is likely to harm our Test-prep and Intervention business and prospects.

We anticipate that the recent worldwide financial turmoil and associated economic downturn is likely to result in the curtailment, delay or reduction in federal, state and local government funding available to schools and libraries and the general retail markets. Lack of adequate funding would likely result in decreased revenue on the sale of such products. In order to mitigate any resulting decrease in revenue, we are working to design and implement a cost-savings plan. We cannot assure that these cost savings initiatives will offset any decrease in revenue effected by the downturn in funding. If our revenue grows more slowly than we anticipate, or if our cost savings initiatives are not successful, our business and prospects will be harmed.

Item 4. Submission of Matters to a Vote of Security Holders.

On or about September 15, 2008, stockholders beneficially owning an aggregate of 7,197,144 shares of our Common Stock, representing approximately 72% of the total shares of our common stock then outstanding, approved by written consent in lieu of a special meeting an amended and restated Certificate of Incorporation. Effective October 8, 2008, the Company amended and restated its Second Amended and Restated Certificate of Incorporation of the Company, as amended (the “Existing Charter”) by filing the Third Amended and Restated Certificate of Incorporation of the Company (the “Third Amended and Restated Charter”). Certain provisions of the Existing Charter were amended or restated to provide for the following:

•

Addition of Section C “Reclassification” to Article IV, which ratifies and confirms the Company’s reclassification of its common stock and preferred stock that occurred on August 10, 2008 (the “Recapitalization”) by further reclassifying all shares of each and every class and series of capital stock of the Company outstanding immediately prior to the filing of the Third Amended and Restated Charter into shares of new Common Stock as reflected on the Company’s stock ledger, which ledger reflects the ownership of the Company based upon the effectiveness of the Recapitalization; and

•

Addition of a new Article VIII, which makes explicit the Company’s ability to provide certain indemnification rights and advancement of expenses to its directors, officers and agents in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law.

The above discussion of the Third Amended and Restated Charter is qualified in its entirety by reference to the text thereof, a copy of which is attached to the Company’s Form 8-K filed October 10, 2008. Under Delaware law, the action by written consent was sufficient to approve the matters without a vote of all stockholders; consequently, there were no votes cast against or withheld with respect to such matters.

Item 6. Exhibits


Exhibit
Number	Description	Page or Method of Filing
2.1	Asset Purchase Agreement by and among The Rowman & Littlefield Publishing Group, Inc., Sundance/Newbridge, LLC, Haights Cross Operating Company and Sundance/Newbridge Educational Publishing, LLC, dated as of August 27, 2008.	Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed September 4, 2008.

3.1	Third Amended and Restated Certificate of Incorporation dated October 8, 2008, of Haights Cross Communications, Inc.	Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed October 10, 2008.

3.2	Bylaws of Haights Cross Communications, Inc.	Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-4 (Reg. No. 333-109381) filed October 2, 2003.

3.2(a)	Amendment to Bylaws dated August 10, 2007, of Haights Cross Communications, Inc.	Incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed August 16, 2007.

3.2(b)	Amendment to Bylaws dated September 21, 2007, of Haights Cross Communications, Inc.	Incorporated by referenced to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed September 27, 2007

10.26	Amendment No. 2 dated October 8, 2008 to Shareholders Agreement dated August 10, 2007, as amended on January 29, 2008.	Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed October 10, 2008.

10.27	Separation and Release Agreement by and between Kevin McAliley and Haights Cross Communications, Inc., dated November 10, 2008.	Filed herewith

31.1	Rule 13a-14(a)/15d-14(a) Certification of Paul J. Crecca	Filed herewith

31.2	Rule 13a-14(a)/15d-14(a) Certification of Mark Kurtz	Filed herewith

32*


*		The Company is not an “issuer,” as the term is defined by Section 2(a)(7) of the Sarbanes-Oxley Act of 2002 (the “Act”), because it does not have a class of securities registered under Section 12 of the Securities Act and it is not required to file reports under Section 15(d) of the Exchange Act. Accordingly, the Company is not required to file the certifications that are otherwise required by 18 U.S.C. Section 1350, which were adopted as Section 906 of the Act.

EXHIBIT INDEX


Exhibit
Number	Description	Page or Method of Filing
2.1	Asset Purchase Agreement by and among The Rowman & Littlefield Publishing Group, Inc., Sundance/Newbridge, LLC, Haights Cross Operating Company and Sundance/Newbridge Educational Publishing, LLC, dated as of August 27, 2008.	Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed September 4, 2008.

3.1	Third Amended and Restated Certificate of Incorporation dated October 8, 2008, of Haights Cross Communications, Inc.	Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed October 10, 2008.

3.2	Bylaws of Haights Cross Communications, Inc.	Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-4 (Reg. No. 333-109381) filed October 2, 2003.

3.2(a)	Amendment to Bylaws dated August 10, 2007, of Haights Cross Communications, Inc.	Incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed August 16, 2007.

3.2(b)	Amendment to Bylaws dated September 21, 2007, of Haights Cross Communications, Inc.	Incorporated by referenced to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed September 27, 2007

10.26	Amendment No. 2 dated October 8, 2008 to Shareholders Agreement dated August 10, 2007, as amended on January 29, 2008.	Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed October 10, 2008.

10.27	Separation and Release Agreement by and between Kevin McAliley and Haights Cross Communications, Inc., dated November 10, 2008.	Filed herewith

31.1	Rule 13a-14(a)/15d-14(a) Certification of Paul J. Crecca	Filed herewith

31.2	Rule 13a-14(a)/15d-14(a) Certification of Mark Kurtz	Filed herewith

32*


*		The Company is not an “issuer,” as the term is defined by Section 2(a)(7) of the Sarbanes-Oxley Act of 2002 (the “Act”), because it does not have a class of securities registered under Section 12 of the Securities Act and it is not required to file reports under Section 15(d) of the Exchange Act. Accordingly, the Company is not required to file the certifications that are otherwise required by 18 U.S.C. Section 1350, which were adopted as Section 906 of the Act.


	HAIGHTS CROSS COMMUNICATIONS, INC.
Dated: November 14, 2008	By:	/s/ PAUL J. CRECCA
		Paul J. Crecca
		Director, Chief Executive Officer and President (Principal Executive Officer)

Dated: November 14, 2008	By:	/s/ MARK KURTZ
		Mark Kurtz
		Senior Vice President and Chief Financial Officer (Principal Accounting Officer)


		Page
Part I — Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)		3
Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007		4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited)		5
Notes to Unaudited Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3. Quantitative and Qualitative Disclosures about Market Risk		38
Item 4. Controls and Procedures		38
Part II — Other Information		39
Item 1. Legal Proceedings		39
Item 1A. Risk Factors		39
Item 4. Submission of Matters to a Vote of Security Holders		40
Item 6. Exhibits		41
Signatures		42
Exhibit Index		43
EX-10.27: SEPARATION AND RELEASE AGREEMENT
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION