Under the terms of the Merger Agreement, each of our stockholders will be entitled to receive, in exchange for each share of our common stock owned by the stockholder, the following consideration: (i) at the election of the stockholder, either one share of common stock of Holdings or $6.50 in cash, subject to a potential pro-rata reduction; (ii) a pro-rata amount of certain tax refunds received by us prior to the closing of the transaction reduced by the amount of the tax refunds contractually required to be placed in escrow at closing; and (iii) a contingent value right payable periodically during the period commencing nine months after closing and expected to end on or about October 15, 2013.
Under SFAS No. 141R, "Business Combinations," Cambium is the accounting acquirer and we are the acquiree. As such, when the planned mergers are completed we will cease to be a reporting entity and Cambium's financial statements will be the historical financial statements of Holdings. The planned merger is subject to approval by our shareholders and other closing conditions. We expect the merger to be completed no later than year end 2009. Overview
As expected at year end, the adverse developments in the education funding environment, including the reductions in Reading First funding and reductions in available state and local funds as property taxes decline, have continued to significantly decrease the funding available to schools to purchase our products and services. Some school districts have found it difficult to secure alternative funding sources in the midst of the current market conditions. These reductions have impacted our operations during the current year and may continue to have an impact on our future sales, profits, cash flows and carrying value of assets.

The following trends have had or may have an impact on our revenues and profitability:
• In February 2009, the American Reinvestment and Recovery Act (ARRA) was passed. The Act provides significant new federal funding for various education initiatives over the next two years. While the education funding is for a broad set of initiatives, a meaningful amount is anticipated to be targeted for programs often used by schools for our products. While success in winning some of these funds for our products is not certain at this time, we believe it has the potential to stabilize some of the negative funding trends which emerged in 2008.

• Sales of our online subscription based products grew significantly in 2008, and we expect growth to continue in the coming years.

• We believe our product diversification, such as growth in the online offerings and new intervention products for higher grades, will allow us to strengthen our ability to sustain share in a troubled market and capture share when the market recovers.

• We believe our focus on product usage and an overall partnership approach with the customer to implement our solutions with fidelity will result in higher success rates and such success, if achieved, will lead to customer retention and growth through reference sales.

• Efforts were taken in 2008 to reduce our cost structure for 2009, including a reduction in force, which better aligns our cost structure to current market conditions.

• We performed a goodwill impairment analysis in the second quarter of 2009, as the signing of the Merger Agreement in late June is a triggering event and in consideration of the continuing impact of adverse marketplace and economic conditions. As a result of that analysis, we recorded a goodwill impairment charge of $22.0 million.

Sales and gross profit are subject to seasonality with the first and fourth quarters being the weakest.

Results of Operations
Second Quarter of Fiscal 2009 Compared to the Second Quarter of Fiscal 2008

                                        Three Months Ended
                             June 30, 2009             June 30, 2008               Year Over Year Change
                                        % of                      % of           Favorable / (Unfavorable)
(Dollars in millions)     Amount        sales       Amount        sales             $                  %

Net sales                 $  28.3        100.0      $  33.5        100.0      $        (5.2 )           (15.5 )
Cost of sales
(exclusive of
depreciation and
amortization shown
separately below)            (9.5 )      (33.6 )      (11.3 )      (33.7 )              1.8              15.9

Gross profit                 18.8         66.4         22.2         66.3               (3.4 )           (15.3 )

Research and
development expense          (1.0 )       (3.5 )       (1.2 )       (3.6 )              0.2              16.7
Sales and marketing
expense                      (7.3 )      (25.8 )       (8.9 )      (26.6 )              1.6              18.0
General and
administrative expense       (6.0 )      (21.2 )       (8.3 )      (24.8 )              2.3              27.7
Depreciation and
amortization expense         (4.8 )      (17.0 )       (5.4 )      (16.1 )              0.6              11.1
Goodwill impairment         (22.0 )      (77.7 )          -            -              (22.0 )          (100.0 )


Loss before interest,
other income and
income taxes                (22.3 )      (78.8 )       (1.6 )       (4.8 )            (20.7 )        (1,293.8 )

Net interest income
(expense)                       -            -            -            -                  -                 -
Other income (expense)       (0.1 )       (0.4 )          -            -               (0.1 )          (100.0 )
Income tax benefit            0.1          0.4            -            -                0.1             100.0

Net loss $ (22.3 ) (78.8 ) $ (1.6 ) (4.8 ) $ (20.7 ) (1,293.8 )

Net Sales.
Total net sales decreased $5.2 million, or 15.5%, to $28.3 million in the second quarter of 2009 compared to the second quarter of 2008. The decline in net sales is attributable to a decline in order volume as a result of the economic slowdown and reductions in education funding, which was partially offset by increased revenue recognized from prior period deferred revenue.
We defer revenue associated with certain services and technology components and recognize the revenue over the period they are delivered. In fiscal 2008 we had an increase in revenue deferral rates due to more of these service and technology components in our products. These deferral rates have stabilized in 2009. During the quarter ended June 30, 2009, deferred revenue balances decreased $2.3 million, totaling $24.1 million at March 31, 2009 and $21.8 million at June 30, 2009. Comparatively, during the quarter ended June 30, 2008, deferred revenue balances increased $2.1 million, totaling $18.4 million at March 31, 2008 and $20.5 million at June 30, 2008. Gross Profit.
Cost of sales includes expenses to print, purchase, handle and warehouse product and to provide services and support to customers. Our gross profit percentage was flat between the two fiscal quarters, at 66.4% for the second quarter of 2009 compared to 66.3% for the second quarter of 2008. Research and Development.
Research and development expenditures include costs to research, evaluate and develop educational products, net of capitalization. Research and development expense for the second quarter of 2009 decreased $0.2 million to $1.0 million compared to the second quarter of 2008, due to the timing of expenditures and the ratio of capitalizable versus non-capitalizable activities performed during the respective quarters.

Sales and Marketing.
Sales and marketing expenditures include all costs related to selling efforts and marketing. Sales and marketing expense for the second quarter of 2009 decreased $1.6 million to $7.3 million, due to reduced sales volume in 2009 compared to 2008, prior year costs associated with our participation in several 2008 state adoptions, and the Company's overall initiative to lower costs as a response to the market slow down and the reduced sales volume. General and Administrative.
Overall, general and administrative expenses decreased $2.3 million, or 27.7%, to $6.0 million compared to the second quarter of fiscal 2008. General and administrative activities for the second quarter of 2009 include $2.7 million of costs directly related to the merger transaction. Excluding these merger costs, general and administrative expenses for the second quarter of 2009 were $3.3 million, a decrease of $5.0 million, or 60.2%, over the prior year quarter. This decrease is primarily attributable to a significant decline in corporate expenses and one-time costs related to activities based in Ann Arbor, Michigan that were required to finalize the restatement effort, get current in our SEC filings, and transition the corporate office to Dallas, Texas. These activities were brought to conclusion by the end of fiscal 2008. Depreciation and Amortization Expense.
Our depreciation and amortization expense decreased $0.6 million, or 11.1%, to $4.8 million in the second quarter of 2009. The decrease is primarily due to the use of an accelerated depreciation method on our acquired curriculum, which results in higher amortization expense in the previous period when compared to the current period.
Goodwill Impairment.
We review the carrying value of goodwill for impairment at least annually, and whenever certain triggering events occur, based on the requirements of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). The signing of the Merger Agreement in late June is such a triggering event and so we performed a goodwill impairment analysis in the second quarter of 2009, giving due consideration to the continuing impact of adverse marketplace and economic conditions. As a result of that analysis, we recorded a goodwill impairment charge of $22.0 million.

Net Interest Income (Expense).


                                Three Months Ended             Year Over Year Change
                            June 30,         June 30,        Favorable / (Unfavorable)
    (Dollars in millions)     2009             2008             $                    %

    Interest income         $     0.1       $      0.1     $         -                  -
    Interest expense        $    (0.1 )     $     (0.1 )             -                  -


    Total                   $       -       $        -     $         -                  -

Net interest income (expense) for the second quarter of 2009 was flat compared to the second quarter of 2008.
Income Tax Benefit.
The income tax benefit of $0.1 million for the second quarter of 2009 represents an effective rate of 0.6%, which is close to 0% as we cannot assume future taxable income.
We recorded no income tax benefit or expense for the net loss in the second quarter of 2008 as we cannot assume future taxable income. First Half of 2009 Compared to the First Half of 2008

                                         Six Months Ended
                             June 30, 2009             June 30, 2008              Year Over Year Change
                                        % of                      % of          Favorable / (Unfavorable)
(Dollars in millions)     Amount        sales       Amount        sales             $                  %

Net sales                 $  47.0        100.0      $  49.2        100.0      $        (2.2 )           (4.5 )
Cost of sales
(exclusive of
depreciation and
amortization shown
separately below)           (15.6 )      (33.2 )      (17.9 )      (36.4 )              2.3             12.8

Gross profit                 31.4         66.8         31.3         63.6                0.1              0.3

Research and
development expense          (2.2 )       (4.7 )       (2.6 )       (5.3 )              0.4             15.4
Sales and marketing
expense                     (14.0 )      (29.8 )      (17.4 )      (35.4 )              3.4             19.5
General and
administrative expense      (12.4 )      (26.4 )      (16.2 )      (32.9 )              3.8             23.5
Depreciation and
amortization expense         (9.7 )      (20.6 )      (10.8 )      (21.9 )              1.1             10.2
Goodwill impairment         (22.0 )      (46.8 )          -            -              (22.0 )         (100.0 )
Lease termination
costs                           -            -        (11.7 )      (23.8 )             11.7            100.0


Loss before interest,
other income and
income taxes                (28.9 )      (61.5 )      (27.4 )      (55.7 )             (1.5 )           (5.5 )

Net interest income
(expense)                    (0.4 )       (0.9 )        0.4          0.8               (0.8 )         (200.0 )
Other income (expense)        1.2          2.6          0.8          1.6                0.4             50.0
Income tax benefit            0.4          0.9            -            -                0.4            100.0


Net loss                  $ (27.7 )      (58.9 )    $ (26.2 )      (53.3 )    $        (1.5 )           (5.7 )

Net Sales.
Total net sales decreased $2.2 million, or 4.5%, to $47.0 million in the first half of 2009 compared to the first half of 2008. The decline in net sales is attributable to a decline in order volume as a result of the economic slowdown and reductions in education funding, which was partially offset by increased revenue recognized from prior period deferred revenue.
We defer revenue associated with certain services and technology components and recognize the revenue over the period they are delivered. In fiscal 2008 we had an increase in revenue deferral rates due to more of these service and technology components in our products. These deferral rates have stabilized in 2009. During the six months ended June 30, 2009, deferred revenue balances decreased $7.7 million, totaling $29.5 million at December 31, 2008 and $21.8 million at June 30, 2009. Comparatively, during the six months ended June 30, 2008, deferred revenue balances decreased $0.6 million, totaling $21.1 million at December 31, 2007 and $20.5 million at June 30, 2008. Gross Profit.
Cost of sales includes expenses to print, purchase, handle and warehouse product and to provide services and support to customers. Our gross profit percentage for the first half of 2009 increased 3.2 percentage points to 66.8% compared to 63.6% for the first half of 2008. We recognized more deferred revenue in the first half of 2009 as compared to the same period of fiscal 2008. The revenue recognized in the first half of 2009 from prior year deferred revenue was largely for technology, which is at a higher margin. Research and Development.
Research and development expenditures include costs to research, evaluate and develop educational products, net of capitalization. Research and development expense for the second quarter of 2009 decreased $0.4 million to $2.2 million compared to the second quarter of 2008, due to the timing of expenditures and the ratio of capitalizable versus non-capitalizable activities performed during the respective quarters.
Sales and Marketing.
Sales and marketing expenditures include all costs related to selling efforts and marketing. Sales and marketing expense for the first half of 2009 decreased $3.4 million to $14.0 million, due to reduced sales volume in 2009 compared to 2008, prior year costs associated with our participation in several 2008 state adoptions, and our overall initiative to lower costs as a response to the market slow down and the reduced sales volume.

General and Administrative.
Overall, general and administrative expenses decreased $3.8 million, or 23.5%, to $12.4 million compared to the first half of fiscal 2008. General and administrative activities for the first half of 2009 include $5.1 million of costs directly related to the merger transaction. Excluding these merger costs, general and administrative expenses for the first half of 2009 were $7.3 million, a decrease of $8.9 million, or 54.9%, over the prior year. This decrease is primarily attributable to a significant decline in corporate expenses and one-time costs related to activities based in Ann Arbor, Michigan that were required to finalize the restatement effort, get current in our SEC filings, and transition the corporate office to Dallas, Texas. These activities were brought to conclusion by the end of fiscal 2008. Depreciation and Amortization Expense.
Our depreciation and amortization expense decreased $1.1 million, or 10.2%, to $9.7 million in the first half of 2009. The decrease is primarily due to the use of an accelerated depreciation method on our acquired curriculum, which results in higher amortization expense in the previous period when compared to the current period.
Goodwill Impairment.
We review the carrying value of goodwill for impairment at least annually, and whenever certain triggering events occur, based on the requirements of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). The signing of the Merger Agreement in late June is such a triggering event and so we performed a goodwill impairment analysis in the second quarter of 2009, giving due consideration to the continuing impact of adverse marketplace and economic conditions. As a result of that analysis, we recorded a goodwill impairment charge of $22.0 million.

Lease Termination Costs.
On January 1, 2008, we entered into an agreement with one of our lessors, Relational, LLC f/k/a Relational Funding Corporation ("Relational") and ProQuest LLC (formerly known as ProQuest-CSA LLC and Cambridge Scientific Abstracts, L.P.) ("CSA") relating to certain obligations regarding the capital and operating leases for certain property and equipment used at our facilities at 777 Eisenhower Parkway (the "777 Facility") and 789 Eisenhower Parkway (the "789 Facility") in Ann Arbor, Michigan. The aforementioned leases originated as early as fiscal 2005 with up to five year terms. Effective January 1, 2008, we conveyed, assigned, transferred and delivered to CSA all of our right, title and interest and benefit of certain property and equipment. We were released from any and all obligations relating to these leases and Relational, as lessor, consented to such assignments and releases. Due to these assignments, the write off of certain assets and liabilities under capital leases, such as office furniture, phone and power supply systems, and video equipment, totaled a net charge of $0.1 million in the first quarter of 2008.
On January 25, 2008, we entered into a series of agreements with our current landlord, Transwestern Great Lakes, LP ("Transwestern") and CSA relating to certain obligations regarding the long term leases for the facilities in Ann Arbor, Michigan. On March 4, 2008, we paid CSA $11.0 million, a portion of which was distributed to Transwestern for termination of the lease relating to office space at the 777 Facility. Upon the Closing Date of March 7, 2008, we were released from any and all obligations relating to the 15 year lease we previously entered into for the 777 Facility. Through assignment, we were also released from any and all obligations relating to the 15 year lease we previously entered into for office space at the 789 Facility. We assigned all of our rights under the lease for the 789 Facility to CSA and CSA assumed the obligations of tenant under such lease, as amended. Transwestern, as landlord, consented to such assignment. In connection with the termination and assignment of these long term facility leases, certain leasehold improvements and deferred rent were written off, which totaled a net charge of $0.6 million in the first quarter of 2008. We recorded a total charge to expense in the first quarter of 2008 of $11.7 million for all lease termination costs. Net Interest Income (Expense).

                                 Six Months Ended              Year Over Year Change
                             June 30,        June 30,        Favorable / (Unfavorable)
     (Dollars in millions)     2009            2008             $                 %

     Interest income         $     0.1      $      0.6     $      (0.5 )            (83.3 )
     Interest expense             (0.5 )          (0.2 )          (0.3 )            150.0


     Total                   $    (0.4 )    $      0.4     $      (0.8 )           (200.0 )

Net interest income (expense) for the first half of 2009 decreased $0.8 million to ($0.4) million compared to the first half of 2008. Interest income declined from $0.6 million in the first half of fiscal 2008 to $0.1 million for the first half of fiscal 2009. We traditionally invest very conservatively in cash deposits and U.S. Treasuries, and the safety and liquidity of these investments in the current economic crisis has led to an interest rate yield near 0%. Interest expense for the first six months of fiscal 2009 was primarily related to tax-related liabilities resulting from the sales agreement with Snap-On Incorporated and CSA.
Other Income (Expense).
From the date of the sale of ProQuest Information and Learning ("PQIL") in February 2007, we subleased substantial space to the buyer of PQIL through March 2008 resulting in sublease income totaling $0.8 million, which was recognized in other income, during the first quarter of fiscal 2008. Because this sublease expired in the first quarter of fiscal 2008, we did not recognize any sublease income during fiscal 2009.
During the fourth quarter of 2008, we provided an opportunity for participants in our Replacement Benefit Plan ("RBP") and our U.S. defined benefit pension plan to receive a discounted lump sum distribution to settle retirement obligations. Prior to the distribution opportunity, both plans were frozen, with no participants entitled to make additional contributions or earn additional service years. Based on the number of participants who chose to receive a discounted lump sum distribution, the Company paid participants approximately $7.9 million in January 2009 for these lump sum payments. As a result of the settlements, the Company recorded a gain in January 2009 of $1.3 million, consisting of $1.1 million related to the RBP settlement and $0.2 million related to the settlement of the U.S. defined benefit pension plan. Income Tax Benefit.
We recorded income tax benefit of $0.3 million in the first quarter of 2009 in connection with the partial settlement of our U.S. defined benefit pension plan. The tax benefit recorded was to write-off a portion of the tax benefit included in accumulated other comprehensive income for our U.S. defined benefit pension plan. Other than this item, our income tax benefit for the first half of 2009 was $0.1 million, representing an effective rate of 0.5%. The effective tax rate is close to 0% as we cannot assume future taxable income.
We recorded no income tax benefit or expense for the net loss in the first half of 2008 as we cannot assume future taxable income.

Liquidity and Capital Resources
As of June 30, 2009, we did not have any debt with the exception of certain capital leases. Cash and cash equivalents increased to $71.2 million at June 30, 2009 compared to $67.3 million at December 31, 2008.
During the first half of 2009, cash used in operating activities was $2.8 million. We received income tax refunds of $13.9 million, primarily from US Federal income tax refunds for tax years 2003 and 2004, plus another $1.7 million of tax-related receivables from CSA. Use of cash beyond normal season operating use included $7.9 million related to the partial settlement of our legacy employee benefit plans and $4.0 million escrowed in connection with the settlement of the consolidated shareholder securities class actions lawsuit. . . .