<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

                For the quarterly period ended November 30, 2006

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

       For the transition period from _______________ to _______________.

                          Commission File No. 000-50916

                       Peoples Educational Holdings, Inc.
             (Exact name of registrant as specified in its charter)

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

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

                                 (201) 712-0090
              (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 [X] No [ ]

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

Large accelerated filer [ ]   Accelerated filer [ ]   Non-accelerated filer [X]

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

Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practical date: 4,424,941 shares of Common Stock
(par value $0.02 per share) outstanding on January 3, 2007.


                                        1

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                        Page
                                                                        ----
<S>                                                                     <C>
PART I. FINANCIAL INFORMATION

   Item 1:    Financial Statements:

              Consolidated Balance Sheets as of November 30, 2006
                 (Unaudited) and May 31, 2006........................     3

              Unaudited Consolidated Statements of Operations for
                 the Three and Six Months Ended November 30, 2006
                 and 2005............................................     4

              Unaudited Consolidated Statement of Changes in
                 Stockholders Equity for the Six Months Ended
                 November 30, 2006 ..................................     5

              Unaudited Consolidated Statements of Cash Flows for
                 the Six Months Ended November 30, 2006 and 2005.....     6

              Condensed Notes to Consolidated Financial
                 Statements (Unaudited)..............................     7

   Item 2:    Management's Discussion and Analysis of Financial
                 Condition and Results of Operations.................    12

   Item 3:    Quantitative and Qualitative Disclosures About
                 Market Risk.........................................    20

   Item 4:    Controls and Procedures................................    20

PART II. OTHER INFORMATION

   Item 1:    Legal Proceedings......................................    21

   Item 1A:   Risk Factors ..........................................    21

   Item 2:    Unregistered Sales of Equity Securities and Use of
                 Proceeds............................................    21

   Item 3:    Defaults Upon Senior Securities........................    21

   Item 4:    Submission of Matters to a Vote of Security Holders....    21

   Item 5:    Other Information......................................    21

   Item 6:    Exhibits...............................................    22

SIGNATURES...........................................................    23

EXHIBITS.............................................................    24
</TABLE>


                                        2

<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                      November 30,
                                                                          2006       May 31, 2006
                                                                      ------------   ------------
<S>                                                                   <C>            <C>
ASSETS
Current Assets
Cash and Cash Equivalents                                             $   755,163    $   749,792
Accounts Receivable Net of Allowances for Doubtful Accounts
   and Returns                                                          3,191,868      3,351,428
Inventory                                                               6,935,485      4,737,427
Prepaid Expenses and Other                                                480,910        315,080
Income Taxes Receivable                                                     2,000        660,713
Deferred Income Taxes                                                     655,000        746,955
                                                                      -----------    -----------
      Total Current Assets                                             12,020,426     10,561,395
Equipment - At Cost, Less Accumulated Depreciation of $1,538,000
   and $1,375,000, respectively                                           819,786        829,456
                                                                      -----------    -----------
Other Assets
Deferred Prepublication Costs, Net                                     17,517,701     16,605,686
Deferred Income Taxes                                                     689,000      1,054,965
Trademarks, Net                                                           136,161        126,006
Deposits and Other                                                         95,050        165,017
                                                                      -----------    -----------
      Total Other Assets                                               18,437,912     17,951,674
                                                                      -----------    -----------
Total Assets                                                          $31,278,124    $29,342,525
                                                                      ===========    ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long Term Obligations                           $ 1,046,832    $ 2,487,086
Accounts Payable                                                       10,365,829      7,808,965
Accrued Compensation                                                      575,867        645,705
Short Term Bank Loan                                                           --      1,000,000
Other Accrued Expenses                                                    225,690        287,448
Deferred Revenue                                                          352,164        257,439
                                                                      -----------    -----------
      Total Current Liabilities                                        12,566,382     12,486,643
Long Term Obligations, Less Current Maturities                         10,586,672      9,420,076
                                                                      -----------    -----------
Total Liabilities                                                      23,153,054     21,906,719
                                                                      -----------    -----------
Commitments and Contingencies
Stockholders' Equity
Common Stock, $0.02 par value; authorized 8,500,000 shares;
Issued, 4,441,173 shares, as to both periods                               88,823         88,823
Additional Paid In Capital                                              7,831,681      7,786,885
Retained Earnings (Accumulated Deficit)                                   268,424       (431,992)
Less Treasury stock, 16,232 shares and 1,650, respectively, at cost       (63,858)        (7,910)
                                                                      -----------    -----------
Total Stockholders' Equity                                              8,125,070      7,435,806
                                                                      -----------    -----------
Total Liabilities and Stockholders' Equity                            $31,278,124    $29,342,525
                                                                      ===========    ===========
</TABLE>


                                        3

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                          Three Months Ended          Six Months Ended
                                                             November 30                November 30
                                                       -----------------------   -------------------------
                                                          2006         2005          2006          2005
                                                       ----------   ----------   -----------   -----------
<S>                                                    <C>          <C>          <C>           <C>
Revenue, Net                                           $8,238,731    9,346,510   $23,585,803    23,324,212
Cost of Revenue
   Direct Costs                                         2,808,557    3,343,720    10,566,270    10,818,737
   Prepublication Cost Amortization                     1,448,674    1,278,543     2,892,036     2,429,650
                                                       ----------   ----------   -----------   -----------
   Total                                                4,257,231    4,622,263    13,458,306    13,248,387
Gross Profit                                            3,981,500    4,724,247    10,127,497    10,075,825
Selling, General and Administrative Expenses            4,204,151    4,125,971     8,371,119     7,986,247
                                                       ----------   ----------   -----------   -----------
Income (Loss) from Operations                            (222,651)     598,276     1,756,378     2,089,578
Other Expenses, Net                                        26,006        1,847        19,700         3,314
Interest Expense                                          311,463      121,016       569,607       244,518
                                                       ----------   ----------   -----------   -----------
Net Income (Loss) Before Income Taxes                    (560,120)     475,413     1,167,071     1,841,746
Income Tax Expense (Benefit)                             (224,345)     190,500       466,655       737,000
                                                       ----------   ----------   -----------   -----------
Net Income (Loss)                                      $ (335,775)  $  284,913   $   700,416   $ 1,104,746
                                                       ==========   ==========   ===========   ===========
Net Income (Loss) per Common Share
   Basic                                               $    (0.08)  $     0.06   $      0.16   $      0.25
   Diluted                                             $    (0.08)  $     0.06   $      0.15   $      0.23
Weighted-average Number of Common Shares Outstanding
   Basic                                                4,428,114    4,384,198     4,433,392     4,370,448
   Diluted                                              4,428,114    4,709,858     4,611,828     4,796,189
                                                       ==========   ==========   ===========   ===========
</TABLE>


                                        4

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2006

<TABLE>
<CAPTION>
                                          Additional    Retained
                                 Common     Paid-In     Earnings   Treasury
                                 Stock      Capital    (Deficit)     Stock       Total
                                -------   ----------   ---------   --------   ----------
<S>                             <C>       <C>          <C>         <C>        <C>
Balance, May 31, 2006           $88,823   $7,786,885   $(431,992)  $ (7,910)  $7,435,806
Stock-Based Compensation             --       44,796          --         --       44,796
Purchase of Treasury Stock           --           --          --    (55,948)     (55,948)
Net Income                           --           --     700,416         --      700,416
                                -------   ----------   ---------   --------   ----------
Balance, at November 30, 2006   $88,823   $7,831,681   $ 268,424   $(63,858)  $8,125,070
                                =======   ==========   =========   ========   ==========
</TABLE>


                                        5

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     Six Months Ended
                                                                       November 30,
                                                                -------------------------
                                                                    2006          2005
                                                                -----------   -----------
<S>                                                             <C>           <C>
Cash Flows From Operating Activities
Net Income                                                      $   700,416   $ 1,104,746
Adjustments to Reconcile Net Income to Net Cash
   Provided by Operating Activities
   Depreciation                                                     162,956       167,502
   Amortization of Prepublication Costs and Intangible Assets     2,905,618     2,430,828
   Deferred Income Taxes                                            457,920            --
   Stock-Based Compensation                                          44,796            --
   Market Value Adjustment of Interest Rate Swap                     76,162            --
Changes in Assets and Liabilities
   Accounts Receivable                                              159,560      (597,663)
   Inventory                                                     (2,198,058)   (1,243,929)
   Prepaid Expense and Other                                       (165,830)      258,216
   Deposits and Other                                                69,967        70,130
   Accounts Payable and Accrued Expenses                          2,418,519       971,589
   Deferred Revenue                                                  94,725       246,994
   Income Taxes Payable or Refundable                               665,462       733,026
                                                                -----------   -----------
      Net Cash Provided by Operating Activities                   5,392,213     4,141,439
                                                                -----------   -----------
Cash Flows From Investing Activities
   Purchases of Equipment                                          (153,286)     (159,733)
   Expenditures for Intangibles                                     (23,737)      (28,905)
   Expenditures for Prepublication Costs                         (3,804,051)   (5,641,968)
                                                                -----------   -----------
      Net Cash Used in Investing Activities                      (3,981,074)   (5,830,606)
                                                                -----------   -----------
Cash Flows From Financing Activities
   Net Borrowings Under Line of Credit                              206,744    (1,158,660)
   Net Proceeds from the Sale of Common Stock                            --     2,877,095
   Purchase of Treasury Stock                                       (55,948)           --
   Principal Payments on Short Term Bank Loan                    (1,000,000)           --
   Principal Payments on Long Term Debt                            (556,564)     (179,934)
                                                                -----------   -----------
      Net Cash Provided By (Used In) Financing Activities        (1,405,768)    1,538,501
                                                                -----------   -----------
      Net Increase (Decrease) in Cash and Cash Equivalents            5,371      (150,666)
Cash and Cash Equivalents
   Beginning of Period                                              749,792       963,227
                                                                -----------   -----------
   End of Period                                                $   755,163   $   812,561
                                                                ===========   ===========
Supplemental Cash Flow Information
   Cash Payments for:
      Interest                                                  $   476,100   $   244,518
                                                                ===========   ===========
</TABLE>


                                        6

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC., AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - Basis of Presentation

Nature of business: Peoples Educational Holdings, Inc. (PEH), through its wholly
owned subsidiary, Peoples Education, Inc. (PE), formerly known as The Peoples
Publishing Group, Inc. publishes and markets its own supplementary educational
textbooks and materials for the K -12 school market. The materials are
predominantly state-specific and standards-based, focused on state-required
tests. PE publishes its own proprietary, and distributes for other publishers,
college textbooks and supplements to the high school Advanced Placement market.
Marketing channels include direct and commission sales representatives,
telemarketing, direct mail, and catalogs. PE and PEH are together referred to
herein as the Company.

The accompanying condensed consolidated financial statements have been prepared
by the Company without audit and in accordance with the instructions to Form
10-Q and therefore do not include all information and disclosures necessary for
a fair presentation of the consolidated financial position, results of
operations, and cash flows in conformity with accounting principles generally
accepted in the United States of America. These condensed consolidated financial
statements contain, in the opinion of management, all adjustments (consisting of
normal accruals and other recurring adjustments) necessary for a fair
presentation of the consolidated financial position, results of operations, and
cash flows for the periods presented. The operating results for the period ended
November 30, 2006, are not necessarily indicative of the operating results to be
expected for the full fiscal year. Accordingly, these condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the related notes included in our Annual Report on Form
10-K for the year ended December 31, 2005. In connection with our change in year
end as discussed in Note 10 we filed a Transition Report 10Q for the period
ended May 31, 2006, which was previously filed.

Management is required to make certain estimates and assumptions which affect
the amounts of assets, liabilities, revenue and expenses we have reported, and
our disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ materially from these estimates and
assumptions.

NOTE 2 - Revenue Recognition and Accounts Receivable

The Company recognizes revenue upon shipment and estimates returns, if the right
of return exists. The allowances for returns as of November 30, 2006 and May 31,
2006, were $613,000 and $453,000, respectively. These allowances are recorded as
a reduction of accounts receivable and revenue and are determined based on the
Company's historical returns experience, which is monitored on a monthly and
annual basis. The Company recognizes its subscription-based revenue from the
Measuring Up e-Path pro rata over the life of the agreement.

NOTE 3 - Basic and Diluted Per Share Amounts

Basic per share amounts are computed, generally, by dividing net income by the
weighted average number of common shares outstanding. Diluted per share amounts
assume the conversion, exercise or issuance of all potential common stock
instruments, unless their effect is anti-dilutive thereby reducing the loss or
increasing the income per common share.

NOTE 4- Deferred Prepublication Costs

Deferred prepublication costs are capitalized and amortized over a three or
five-year period (the estimated lives of the related publication) using the
straight-line method beginning on the in-stock date of the publication. The
activity in deferred prepublication costs and the balances as of November 30,
2006 and 2005 are as follows:


                                       7

<PAGE>

<TABLE>
<CAPTION>
                              Three Months Ended           Six Months Ended
                                 November 30                  November 30
                          -------------------------   --------------------------
                              2006          2005          2006          2005
                          -----------   -----------   -----------   ------------
<S>                       <C>           <C>           <C>           <C>
Balances, Beginning       $16,965,940   $16,304,490   $16,605,686   $14,600,780
   Prepublication Cost
      Additions             2,000,435     2,787,151     3,804,051     5,641,968
   Amortization Expense    (1,448,674)   (1,278,543)   (2,892,036)   (2,429,650)
                          -----------   -----------   -----------   -----------
Balances, Ending          $17,517,701   $17,813,098   $17,517,701   $17,813,098
                          ===========   ===========   ===========   ===========
</TABLE>

The estimated future amortization expense over the next five years as related to
the above deferred prepublication costs is as follows:

<TABLE>
<S>                                <C>
For the remainder of fiscal 2007   $2,580,000
For the year ended May 31, 2008     5,744,000
For the year ended May 31, 2009     4,456,000
For the year ended May 31, 2010     2,555,000
For the year ended May 31, 2011     1,410,000
Thereafter                            773,000
</TABLE>

Future estimated expense amount is expected to increase as the Company continues
its investments in additional prepublication costs.

NOTE 5 - Finite Life Intangibles

Finite life intangibles include costs incurred for patents and trademarks. Costs
are capitalized and amortized over their estimated lives, generally 15 years,
using the straight-line method. The activity and balances as of November 30,
2006 and 2005 are as follows:

<TABLE>
<CAPTION>
                              Three Months Ended           Six Months Ended
                                 November 30                  November 30
                          -------------------------   --------------------------
                              2006          2005          2006          2005
                          -----------   -----------   -----------   ------------
<S>                       <C>           <C>           <C>           <C>
Balances, Beginning        $137,622      $ 78,743      $126,006       $ 75,358
   Additions                  9,307        24,897        23,737         28,905
   Amortization Expense     (10,768)         (555)      (13,582)        (1,178)
                           --------      --------      --------       --------
Balances, Ending           $136,161      $103,085      $136,161       $103,085
                           ========      ========      ========       ========
</TABLE>

The estimated future amortization expense related to these intangibles is
expected to approximate $4,000 per year over the next five years.

NOTE 6 - Financing Arrangements

The Company has a $12 million bank financing facility, which consists of a
revolving line of credit and a term loan:

     -    The revolving line of credit provides for advances up to $7.0 million
          and expires in May 2010. The interest rate on the revolving line of
          credit is in a range from LIBOR plus 1.75% to LIBOR plus 2.25%, with
          the exact interest rate based on the ratio of the Company's Total
          Funded Debt to EBITDA. At November 30, 2006, $6.6 million was
          outstanding under this facility, and $.4 million was still available
          for borrowing.

     -    The term loan is for $5.0 million and matures in May 2012. The loan is
          being amortized over 72 months beginning June 2006. In May 2006, we
          converted the variable interest rate on this loan to a fixed rate of
          7.8%, by entering into a swap agreement. The change in the fair value
          of the interest rate swap is recognized as a component of interest
          expense during each reporting period. As of November 30, 2006, we have
          a recorded $76,000 of interest expense as a result of the mark to
          market interest rate adjustment related to our swap agreement on our
          term loan.


                                       8

<PAGE>

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

The revolving line of credit, the term loan and the short-term bank loan are
secured by substantially all Company assets. The credit agreement contains
certain financial covenants, calculated on a consolidated basis for the Company
and its subsidiaries, which, among other things, impose a maximum ratio of
senior funded debt to EBITDA, require the Company to maintain a minimum debt
service coverage ratio, a minimum annual EBITDA, and a minimum annual
stockholders' equity, prohibit net losses on a fiscal year basis and impose a
limit on prepublication expenditures. The credit agreement also provides that
the Company may not declare or pay dividends if an event of default exists or
would exist under the credit agreement after giving effect to the dividend.

The Company and the bank are currently discussing an amended credit facility,
which, among other things, will provide for revised financial covenants. In
connection with these discussions, the bank did not require the Company to test
for compliance with the existing financial covenants for the quarter ended
November 30, 2006. Although, management is confident that the agreement will be
amended, there can be no assurance that such discussions will result in an
amended agreement on terms acceptable to the company.

NOTE 7 - Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment: an
amendment of FASB Statements No. 123," ("SFAS 123R") which requires companies to
recognize in the income statement the grant-date fair value of stock options and
other equity-based compensation issued to employees. SFAS 123R is effective for
financial statements issued for annual reporting periods that begin after June
15, 2005. In adopting SFAS No. 123R, the Company used the modified prospective
transition method, as of January 1, 2006, the first day of the Company's
previous fiscal year.

Under the modified prospective transition method, awards that are granted,
modified or settled after the date of adoption will be measured and accounted
for in accordance with SFAS 123R. Compensation cost for awards granted prior to,
but not vested, as of the date SFAS 123R is adopted would be based on the grant
date attributes originally used to value those awards for pro forma purposes
under SFAS 123. The Company's 2006 condensed consolidated financial statements
reflect the impact of SFAS No. 123R. In accordance with the modified prospective
transition method, the Company's consolidated financial statements for the prior
periods have not been restated to reflect, and do not include, the impact of
SFAS No. 123R. Share-based compensation expense recognized under SFAS No. 123R
for the six month period ended November 30, 2006 was approximately $45,000
before income taxes.

Prior to the adoption of SFAS 123R, the Company accounted for stock options
issued under its plans under APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Because the exercise price of the
Company's stock options granted to employees and directors equaled the fair
market value of the underlying stock at the grant date, under the intrinsic
value method, no share-based compensation expense was recognized in the
Company's 2005 condensed consolidated statement of operations. If compensation
cost had been determined based on fair values at the date of grant under SFAS
123, "Accounting for Stock-Based Compensation", 2005 pro-forma net income and
income per share would have been as follows:

<TABLE>
<CAPTION>
                                                      Six Months Ended
                                                      November 30, 2005
                                                      -----------------
<S>                                                   <C>
Net income, as reported                                  $1,104,746
Deduct: Total stock-based employee compensation
   expense determined under the fair value-based
   method for all awards                                   (143,820)
                                                         ----------
Proforma net income                                      $  960,926
                                                         ==========
Net income per common share:
   Basic Net Income per Common Share, as reported        $     0.25
   Basic Net Income per Common Share, proforma           $     0.22
   Diluted Net Income per Common Share, as reported      $     0.23
   Diluted Net Income per Common Share, proforma         $     0.20
</TABLE>


                                       9

<PAGE>

SFAS 123R requires companies to estimate the fair value of share-based awards on
the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as an expense in the
Company's condensed consolidated statement of operations over the requisite
service periods. Share-based compensation expense for share-based awards granted
prior to, but not yet vested as of, December 31, 2005, is based on the grant
date fair value estimated in accordance with the provisions of SFAS 123. For
options granted subsequent to December 31, 2005, compensation expense is based
on the grant date fair value estimated in accordance with SFAS 123R. Because
share-based compensation expense is based on awards that are ultimately expected
to vest, share-based compensation expense will be reduced to account for
estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the pro forma information required
under SFAS 123 for periods prior to fiscal 2006, the Company accounted for
forfeitures as they occurred.

To calculate the option-based compensation under SFAS No. 123R, the Company used
the Black-Scholes option-pricing model, which it had previously used for the
valuation of option-based awards for its pro forma information required under
SFAS No. 123 for periods prior to January 1, 2006. The Company's determination
of fair value of option-based awards on the date of grant using the
Black-Scholes model is affected by the Company's stock price as well as
assumptions regarding a number of subjective variables. These variables include,
but are not limited to, the Company's expected stock price volatility over the
term of the awards, the risk-free interest rate, and the expected life of the
options. The risk-free interest rate is based on a treasury instrument whose
term is consistent with the expected life of our stock options. The expected
volatility, holding period, and forfeitures of options are based on historical
experience.

The following table represents stock option activity for the six months ended
November 30, 2006:

<TABLE>
<CAPTION>
                                                             WEIGHTED
                                                  WEIGHTED    AVERAGE
                                                   AVERAGE   REMAINING
                                      NUMBER OF   EXERCISE   CONTRACT
                                       SHARES       PRICE      LIFE
                                      ---------   --------   ---------
<S>                                   <C>         <C>        <C>
Outstanding options at 5/31/06         826,036      $3.31
Granted                                 40,000      $4.18
Canceled                               (10,000)     $6.00
                                       -------
Outstanding options at 11/30/06        856,036      $3.33    4.61 Yrs.
                                       =======
Outstanding exercisable at 11/30/06    669,864      $3.32    4.36 Yrs.
                                       =======
</TABLE>

The weighted average fair value at date of grant for options granted was
estimated using the Black-Scholes option-pricing model. Assumptions used by the
Company related to the six months ended November 30, 2006 were an expected
dividend yield rate of 0%, an expected stock price volatility of 43%, a risk
free interest rate of 4.3% to 6.3%, and an expected life of the options of five
years. Shares available for future stock grants to employees and directors under
existing plans were 55,975 at November 30, 2006. At November 30, 2006, the
aggregate intrinsic value of options outstanding was $1,165,000, and the
aggregate intrinsic value of options exercisable was $985,000. No options were
exercised during the six months ended November 30, 2006.

The following table summarizes our non-vested stock option activity for the
period ended November 30, 2006:


                                       10

<PAGE>

<TABLE>
<CAPTION>
                                     NUMBER OF
                                       SHARES
                                     ---------
<S>                                  <C>
Nonvested stock options at 5/31/06    190,492
Vested                                (34,320)
Canceled                              (10,000)
Granted                                40,000
                                      -------
Nonvested stock options at 11/30/06   186,172
                                      =======
</TABLE>

At November 30, 2006, there was approximately $257,000 of unrecognized
compensation cost related to share-based payments, which are expected to be
recognized over a weighted-average period of five years.

NOTE 8 - Income Taxes

Income tax expense for the six months ended November 30, 2006 and 2005 was
computed using an estimated combined federal and state tax rate of approximately
40%.

NOTE 9 - Recently Issued Accounting Standards

In March 2005, the FASB issued FASB Interpretation No. 47, or "FIN 47," which
clarifies terminology in FASB Statement No. 143, Accounting for Asset Retirement
Obligations. FIN 47 clarifies when an entity has sufficient information to
reasonably estimate the fair value of an asset retirement obligation. FIN 47
became effective for the Company in the first quarter of fiscal 2006. The
adoption of FIN 47 did not have a material impact on the Company's consolidated
financial statements.

In July 2006, the FASB issued FASB Interpretation No.48, Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement 109 ("FIN 48"),
which clarifies the accounting for uncertainty in tax positions. This
Interpretation provides that the tax effects from an uncertain tax position can
be recognized in our financial statements, only if the position is more likely
than not of being sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective as of the beginning of fiscal
2008, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. We are currently evaluating the
impact of adopting FIN 48 on our financial statements.

NOTE 10 - Fiscal Year End Change

The Company has changed its fiscal year end from December 31 to May 31. This
more closely aligns the Company's financial year-end with its revenue cycle and
its customers' purchasing cycle. This change was effective May 31, 2006.

NOTE 11 - Related-Party Transactions

Mr. Casabonne, one of the Company's directors, is a principal in Casabonne
Associates and was a principal until October 1, 2006 in Marketing Works. The
Company paid Casabonne Associates for the six-month period ended November 30,
2006 and 2005 approximately $19,000 and $26,000, respectively. The Company paid
Casabonne Associates for the three-month period ended November 30, 2006 and 2005
approximately $16,000 and $10,000, respectively. In addition, the Company paid
Marketing Works for the six-month period ended November 30, 2006 and 2005
approximately $32,000 and $19,000, respectively. The Company paid Marketing
Works for the three-month period ended November 30, 2006 and 2005 approximately
$19,000 and $-0-, respectively.


                                       11

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements regarding the Company and its
markets as defined in section 21E of the Securities Exchange Act of 1934. These
forward-looking statements involve a number of risks and uncertainties,
including (1) changes in demand from customers, (2) changes in product or
customer mix or revenues and in the level of operating expenses, (3) rapidly
changing technologies and the Company's ability to respond thereto, (4) the
impact of competitive products and pricing, (5) federal, state and local levels
of educational spending, (6) the Company's ability to retain qualified
personnel, (7) the Company's ability to retain its distribution agreements in
the College Preparation market, (8) the sufficiency of the Company's copyright
protection, and (9) the Company's ability to continue to rely on the services of
a third-party warehouse, and other factors disclosed below and throughout this
report. The actual results that the Company achieves may differ materially from
any forward-looking statements due to such risks and uncertainties. The Company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report, including the discussion set forth below and in
the Company's other reports filed with the Securities and Exchange Commission
from time to time that attempt to advise interested parties of the risks and
factors that may affect the Company's business and results of operations.

SEASONALITY

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

<TABLE>
<CAPTION>
                                                 Jun - Aug     Sep - Nov     Dec - Feb     Mar - May
                                                1st Quarter   2nd Quarter   3rd Quarter   4th Quarter
                                                -----------   -----------   -----------   -----------
<S>                                             <C>           <C>           <C>           <C>
Test Preparation, Assessment, and Instruction       27%           28%           21%           24%
College Preparation                                 61%           16%            8%           15%
   Total Revenue                                    39%           24%           16%           21%
</TABLE>

OVERVIEW

The Company develops and sells its own proprietary products and distributes
other publishers' products. Our products are organized in two product groups,
one designated as Test Preparation, Assessment, and Instruction, and the other
as College Preparation. The Test Preparation, Assessment, and Instruction
materials are almost exclusively proprietary products, while the College
Preparation materials are mainly distributed products accompanied by a limited
number of proprietary titles.

TEST PREPARATION, ASSESSMENT, AND INSTRUCTION PRODUCT GROUP

Test Preparation, Assessment

     -    We create and sell print and web-based materials targeted to grades
          2-12 to help students prepare for state proficiency tests. The
          Measuring Up(R) Test Preparation and assessment print products are
          sold in twelve states. Measuring Up(R) is positioned as
          standards-based, state customized instruction and classroom
          assessment, designed to be an integral part of a school's
          instructional program throughout the school year.


                                       12

<PAGE>

     -    Measuring Up e-Path(TM), a web-based assessment product developed in
          conjunction with Cisco Learning Systems, provides schools and
          districts the ability to provide formative classroom level
          assessments, which, in turn, allows for informed instruction relative
          to state standards. Measuring Up e-Path(TM) delivers a detailed
          prescriptive instructional path for individual students tied into our
          rapidly expanding instructional materials or to other products in use
          within a school or district. The strategy is to help educators assess
          a child's strengths and weaknesses relative to the state standards and
          then provide a Personal Prescriptive Path(TM) for remediation. The
          assessment data can be aggregated using NCLB-compliant reporting at
          the class, school and district level and can be used to drive not only
          student learning, but teacher professional development as well.

     -    Step Up to Success, a test preparation product in language arts, is
          positioned to fill a market niche for schools looking for pretest
          refresher materials, as well as products for after school and summer
          programs.

Instruction

     -    We have two product lines within this grouping: Focused Instruction,
          which we began publishing in the fourth quarter of 2004, and remedial,
          multicultural text and professional development related materials.
          Focused Instruction materials provide standards-based, state-specific
          supplemental instruction on particular subject areas such as reading
          comprehension, mathematics problem solving, and vocabulary
          development. Essential to this strategy is the market alignment of the
          Focused Instruction and Test Preparation and Assessment products so
          that both product lines are suitable for sale to an identical customer
          base with an identical sales force. We continue to sell our backlist
          remedial, multicultural and professional development materials, but we
          are not investing in new development for these products.

COLLEGE PREPARATION PRODUCT GROUP

     -    We have the exclusive U.S. high school distribution rights for college
          textbooks and related instruction materials published by two major
          college publishers. In addition to these distributed products, we also
          publish our own proprietary products for the college preparation
          market. The college preparation products that we offer are utilized in
          a wide range of Advanced Placement, honors, electives and other
          high-level high school courses. Distribution revenue, consist of
          direct billings to customers, as well as commissions earned on sales
          generated by our marketing efforts though billed directly by the
          college publishers. Such sales, for which the commission rate varies,
          include purchases by schools through online bookstores and sales
          derived as a result of purchases made through state adoption
          contracts.


                                       13

<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED NOVEMBER 30, 2006 VS. THREE MONTHS ENDED NOVEMBER 30, 2005

<TABLE>
<CAPTION>
                                                     Three Months Ended November 30,
                                                     -------------------------------
(Amounts in Thousands)                                    2006             2005
                                                     --------------   --------------
<S>                                                  <C>      <C>     <C>      <C>
Revenue
   Test Preparation, Assessment and Instruction      $6,456    78.4%  $7,373    78.9%
   College Preparation                                1,783    21.6%   1,973    21.1%
                                                     ------   -----   ------   -----
                                                      8,239   100.0%   9,346   100.0%
Cost of Revenue
   Direct Costs                                       2,809    34.1%   3,344    35.8%
   Prepublication Cost Amortization                   1,449    17.6%   1,278    13.7%
                                                     ------   -----   ------   -----
Total Cost Of Revenue                                 4,258    51.7%   4,622    49.5%
Selling, General and Administrative Expenses
   Marketing and Selling                              3,088    37.5%   2,850    30.5%
   General and Administrative                         1,116    13.5%   1,276    13.6%
                                                     ------   -----   ------   -----
Total Selling, General and Administrative Expenses    4,204    51.0%   4,126    44.1%
Operating Income (Loss)                                (223)   -2.7%     598     6.4%
Other Expenses                                           26     0.3%       2     0.0%
Interest Expense                                        311     3.8%     121     1.3%
Income Tax Expense (Benefit)                           (224)   -2.7%     190     2.0%
                                                     ------   -----   ------   -----
Net Income (Loss)                                    $ (336)   -4.1%  $  285     3.1%
                                                     ======   =====   ======   =====
</TABLE>

REVENUE

Overview

Total revenue for the three-month period ended November 30, 2006 was $8.2
million, compared to $9.3 million during the same period in the prior year.
Although revenue was down 12% on a year over year basis, our results
outperformed the K-12 educational publishing industry during this time frame,
which recorded a 24% year over year decrease, according to the Association of
American Publishers.

Test Preparation, Assessment, and Instruction

Revenue derived from this product group was $6.5 million for the three-months
ended November 30, 2006 compared to $7.4 million for the same period in 2005.
The decrease is primarily due to a sale of a large district order in 2005 in the
amount of $517,000 which did not recur in 2006. In addition revenue from our
remedial, multicultural and professional development materials decreased by
$160,000 as we are not actively marketing these products.

College Preparation

College Preparation product line revenue for the three-months ended November 30,
2006 was $1.8 million, compared to $2.0 million during the same period in 2005.
Distribution revenue, which accounts for over 90% of the total revenue within
this line was down 13% primarily due to timing of receipt of orders from
customers as the six-month revenue on a year over year basis is up 3%.
Proprietary revenue was


                                       14

<PAGE>

$111,000, an increase of over 118% on a year-over-year basis. We are continuing
to invest in new proprietary product development and actively market our
distribution products within that line as we continue to be optimistic about the
opportunities for growth in this market niche.

COST OF REVENUE

Cost of Revenue for the three months ended November 30, 2006 was $4.3 million
(51.7% of revenue) compared to $4.6 million (49.5% of revenue) during the same
period in 2005.

Cost of Revenue consists of two components: direct costs and prepublication cost
amortization. Direct costs consist of (1) product cost, which includes paper,
printing, binding, and prepress costs for proprietary products and product
purchases for nonproprietary products, (2) royalties on proprietary products,
and (3) warehousing and shipping costs for all products.

     -    Direct costs as a percentage of revenue decreased from 35.8% in 2005
          to 34.1% in 2006. The decrease as a percent of revenue is due to a
          reduction in product costs as a result of the of the cost reduction
          initiatives implemented during the past six months.

     -    Prepublication costs include one-time expenses associated with
          developing and producing new or revised proprietary products. It
          includes all editorial expenses, writing, page design and makeup, art
          and other permissions, prepress, and any other costs incurred up to
          the print/bind stage of the books. These prepublication costs also
          include expenses incurred for other forms of product development, such
          as expert reviews. Prepublication costs are capitalized and expensed
          on a straight-line basis over a three- or five-year period, based upon
          the product. We believe our amortization policy is in line with
          industry practice. For the three-month period ending November 30, 2006
          we amortized $1.4 million of prepublication costs, compared to $1.3
          million in 2005.

MARKETING AND SELLING

Marketing and Selling expenses increased from $2.85 million for the three months
ended November 30, 2005 (30.5% of revenue) to $3.09 million in 2006 (37.5% of
revenue), an increase of 8.4%.

Marketing expense within this category increased $259,000 from 2005 to 2006
primarily due to mailing of 12 state specific catalogs for our Testing,
Assessment and Instruction products. In 2005, we did not mail state specific
catalogs but instead utilized state specific brochures. In addition, the
non-state specific catalogs that were mailed in 2005 were expensed primarily
during the period June to August 2005.

Selling expenses within this category decreased $21,000 from 2005 to 2006 but
increased a percent of revenue from 22.5% in 2005 to 25.2% in 2006. The variance
in absolute dollars is due to a $264,000 decrease in commission expense as a
result of lower revenue, offset by an increase in selling salaries and related
expenses as a result of the growth in our sales infrastructure. In addition, we
have elected to participate in a state adoption for one of our major college
publishers within our College Preparation niche. We incurred $82,000 of
incremental expenses during the three-months ended November 30, 2006. Revenue
related to this state adoption will not begin to be realized until the summer of
2007.

GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased from $1.3 million for the three
months ended November 30, 2005 to $1.1 million, a decrease of 12.5%. The
decrease in a result of the cost containment initiatives implemented during the
past twelve months. Included in the 2006 expenses was $17,000 of FAS 123R stock
option expense, compared to $0 in 2005.

INTEREST EXPENSE

Interest expense for the three-month period ended November 30, 2006 was
$311,000, compared to $121,000 for the same period in 2005. The change is due to
an increase in outstanding debt on a year over year basis and the recording of
$76,000 of expense as a result of the mark to market interest rate adjustment
related to our swap agreement on our term loan.


                                       15

<PAGE>

SIX MONTHS ENDED NOVEMBER 30, 2006 VS. SIX MONTHS ENDED NOVEMBER 30, 2005

<TABLE>
<CAPTION>
                                                       Six Months Ended November 30,
                                                     ---------------------------------
(Amounts in Thousands)                                     2006              2005
                                                     ---------------   ---------------
<S>                                                  <C>       <C>     <C>       <C>
Revenue
   Test Preparation, Assessment and Instruction      $13,681    58.0%  $13,808    59.2%
   College Preparation                                 9,905    42.0%    9,516    40.8%
                                                     -------   -----   -------   -----
Total Revenue                                         23,586   100.0%   23,324   100.0%
Cost of Revenue
   Direct Costs                                       10,566    44.8%   10,818    46.4%
   Prepublication Cost Amortization                    2,892    12.3%    2,430    10.4%
                                                     -------   -----   -------   -----
Total Cost Of Revenue                                 13,458    57.1%   13,248    56.8%
Selling, General and Administrative Expenses
   Marketing and Selling                               5,954    25.2%    5,430    23.3%
   General and Administrative                          2,417    10.2%    2,556    11.0%
                                                     -------   -----   -------   -----
Total Selling, General and Administrative Expenses     8,371    35.4%    7,986    34.3%
Operating Income                                       1,757     7.5%    2,090     8.9%
Other Expenses                                            20     0.1%        3     0.0%
Interest Expense                                         570     2.4%      245     1.1%
Income Tax Expense                                       467     2.0%      737     3.2%
                                                     -------   -----   -------   -----
Net Income                                           $   700     3.0%  $ 1,105     4.6%
                                                     =======   =====   =======   =====
</TABLE>

REVENUE

Overview

Total revenue for the six-month period ended November 30, 2006 was $23.6
million, compared to $23.3 million during the same period in the prior year.
Although revenue up a modest 1% on a year over year basis, our results
outperformed the K-12 educational publishing industry, which recorded a 6% year
over year decrease, according to the Association of American Publishers.

Test Preparation, Assessment, and Instruction

Revenue derived from this product group was $13.7 million for the six-months
ended November 30, 2006 compared to $13.8 million for the same period in 2005.
The decrease is primarily due to the billing of a large district order in 2005
in the amount of $542,000, which did not recur in 2006. In addition revenue from
our remedial, multicultural and professional development materials decreased by
$311,000 as we are not actively marketing these products. On a proforma basis,
excluding these two items from 2005, revenue increased 5.6% on a year over year
basis.

College Preparation

College Preparation product line revenue for the six-months ended November 30,
2006 was $9.9 million, compared to $9.5 million during the same period in 2005.
Distribution revenue, which accounts for over 90% of the total revenue within
this revenue group, was up 3% on a year over year basis. Proprietary revenue was
$315,000, which represents an increase of over 85% on a year-over-year basis. We
are


                                       16

<PAGE>

continuing to invest in new proprietary product development and actively market
our distribution products within that line as we continue to be optimistic about
the opportunities for growth in this market niche.

COST OF REVENUE

Cost of Revenue for the six months ended November 30, 2006 was $13.5 million
(57.1% of revenue) compared to $13.2 million (56.8% of revenue) during the same
period in 2005.

Cost of Revenue consists of two components: direct costs and prepublication cost
amortization. Direct costs consist of (1) product cost, which includes paper,
printing, binding, and prepress costs for proprietary products and product
purchases for nonproprietary products, (2) royalties on proprietary products,
and (3) warehousing and shipping costs for all products.

     -    Direct costs as a percentage of revenue decreased from 46.4% in 2005
          to 44.8% in 2006. The decrease as a percent of revenue is primarily in
          product costs as we have begun to realize the benefits of the cost
          reduction initiatives we implemented during the past six months.

     -    Prepublication costs include one-time expenses associated with
          developing and producing new or revised proprietary products. It
          includes all editorial expenses, writing, page design and makeup, art
          and other permissions, prepress, and any other costs incurred up to
          the print/bind stage of the books. These prepublication costs also
          include expenses incurred for other forms of product development, such
          as expert reviews. Prepublication costs are capitalized and expensed
          on a straight-line basis over a three or five-year period, based upon
          the product. We believe our amortization policy is in line with
          industry practice. For the six-month period ending November 30, 2006
          we amortized $2.9 million of prepublication costs, compared to $2.4
          million in 2005.

MARKETING AND SELLING

Marketing and Selling expenses increased from $5.4 million for the six-months
ended November 30, 2005 (23.3% of revenue) to $6.0 million in 2006 (25.2% of
revenue), an increase of 9.7%.

Marketing expense within this category increased $163,000 from 2005 to 2006
primarily due to a $259,000 increase in catalog expense as a result of the
mailing of 12 state specific catalogs for our Testing, Assessment and
Instruction products. In 2005, we did not mail state specific catalogs but
instead utilized state specific brochures. This was offset by a decrease in
promotion and advertising expense, as a result of those new catalogs, and a
decrease in training and product development consulting expenses.

Selling expenses within this category increased $361,000 from 2005 to 2006 and
increased as percent of revenue from 17.3% in 2005 to 18.6% in 2006. The
increase in absolute dollars is primarily due to $146,000 of incremental
expenses associated with our participation in a state adoption for one of our
major college publishers within our College Preparation niche. Revenue related
to this adoption will not begin to be realized until the summer of 2007. In
addition, salaries and related expenses increased as a result of the growth of
our sales infrastructure.

GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased from $2.6 million for the six
months ended November 30, 2005 to $2.4 million, a decrease of 5.4%. The decrease
in a result of the cost containment initiatives implemented during the past
twelve months. Included in the 2006 expenses was $45,000 of FAS 123R stock
option expense, compared to $0 in 2005.

INTEREST EXPENSE

Interest expense for the six-month period ended November 30, 2006 was $570,000,
compared to $245,000 for the same period in 2005. The change is due to an
increase in outstanding debt on a year


                                       17

<PAGE>

over year basis and the recording of $76,000 of expense as a result of the mark
to market interest rate adjustment related to our swap agreement on our term
loan.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for the six-month period ending
November 30, 2006 was $5.4 million. Cash was primarily provided by our net
income, adjusted for non-cash items and increases in accounts payable, accrued
expenses and income taxes payable, offset primarily by increases in inventory
and prepaid expenses. Inventory, accounts payable and accrued expenses increased
due to the cyclical nature of our business cycle.

Net cash used in investing activities was $4.0 million, consisting primarily of
prepublication cost expenditures of $3.8 million. Prepublication expenditures
for the six-months ended November 30, 2006 decreased $1.8 million and 32.6% for
the same period in the prior year. The decrease in expenditures is primarily due
to efficiencies realized within our production and editorial departments which
allowed us to reduce the development costs on new and revised titles.

Net cash used in financing activities was $1.4 million, consisting primarily of
net borrowings under our line of credit of $207,000, as well as by principal
payments of long-term debt of $1.6 million.

We have a $12 million bank financing facility, which consists of a revolving
line of credit and a term loan:

     -    The revolving line of credit provides for advances up to $7.0 million
          and expires in May 2010. The interest rate on the revolving line of
          credit is in a range from LIBOR plus 1.75% to LIBOR plus 2.25%, with
          the exact interest rate based on the ratio of our Total Funded Debt to
          EBITDA. At November 30, 2006, $6.6 million was outstanding under this
          facility, and $.4 million was still available for borrowing.

     -    The term loan is for $5.0 million and matures in May 2012. The loan is
          being amortized over 72 months beginning June 2006. In May 2006, we
          converted the variable interest rate on this loan to a fixed rate of
          7.8%, by entering into a swap agreement. The change in the fair value
          of the interest rate swap will be recognized as interest expense
          during each reporting period.

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

The revolving line of credit, the term loan and the short-term bank loan are
secured by substantially all of our assets. The credit agreement contains
certain financial covenants, calculated on a consolidated basis for the Company
and its subsidiaries, which, among other things, impose a maximum ratio of
senior funded debt to EBITDA, require us to maintain a minimum debt service
coverage ratio, a minimum annual EBITDA, and a minimum annual stockholders'
equity, and prohibit net losses on a fiscal year basis. The credit agreement
also provides that we may not declare or pay dividends if an event of default
exists or would exist under the credit agreement after giving effect to the
dividend.

The Company and the bank are currently discussing an amended credit facility,
which, among other things, will provide for revised financial covenants. In
connection with these discussions, the bank did not require the Company to test
for compliance with the existing financial covenants for the quarter ended
November 30, 2006. Although, management is confident that the agreement will be
amended, there can be no assurance that such discussions will result in an
amended agreement on terms acceptable to the company.

A summary of our contractual cash obligations at November 30, 2006, excluding
the outstanding line of credit balances and the short-term bank loan (as
described above), is as follows:

<TABLE>
<CAPTION>
                                                            PAYMENTS DUE BY PERIOD
                                  ---------------------------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS         TOTAL        2007         2008         2009         2010         2011
----------------------------      ----------   ----------   ----------   ----------   ----------   ----------
<S>                               <C>          <C>          <C>          <C>          <C>          <C>
Term Loan
   (including interest portion)   $4,732,000   $  598,000   $1,131,000   $1,066,000   $1,001,000    $936,000
Capital Leases
   (including interest portion)      368,000      125,000      161,000       47,000       35,000          --
Operating Leases                   1,492,000      287,000      536,000      475,000      194,000          --
                                  ----------   ----------   ----------   ----------   ----------    --------
Total                             $6,592,000   $1,010,000   $1,828,000   $1,588,000   $1,230,000    $936,000
                                  ==========   ==========   ==========   ==========   ==========    ========
</TABLE>


                                       18

<PAGE>

We use our cash and borrowing availability under our financing arrangements,
together with cash generated from operations, to meet our cash needs. We are
currently seeking additional borrowing capacity from our bank or other sources
to meet anticipated peak cash requirements. We believe that such additional
borrowing capacity together with our existing sources of cash will be sufficient
to meet our anticipated cash needs for the balance of the fiscal year, and that
we can defer or reduce our cash expenditures if we do not obtain such additional
borrowing capacity when desired. This could have an adverse long-term effect on
the Company's future operations. We intend to continue investing in
prepublication costs for our proprietary products, using cash generated from
operations, and borrowings under financing arrangements. As we develop more
products, additional investments in inventory will be required.

OFF-BALANCE SHEET ARRANGEMENTS

None.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

The Company's significant accounting policies are summarized in the footnotes to
our financial statements included in our December 31, 2005 Form 10-K. Some of
our accounting policies require management to exercise significant judgment in
selecting the appropriate assumptions for calculating financial estimates. These
judgments are subject to an inherent degree of uncertainty. These judgments are
based on our historical experience, known trends in our industry, terms of
existing contracts and other information from outside sources, as appropriate.
Actual results may differ from these estimates under different assumptions and
conditions. Certain of the most critical policies that require significant
judgment are as follows:

Revenue Recognition and Allowance for Returns

The Company recognizes revenue upon shipment and estimates returns, if the right
of return exists. The allowances for returns are recorded as a reduction of
accounts receivable and are determined based on the Company's historical returns
experience, which is monitored on a monthly and annual basis. The Company
recognizes its subscription-based revenue from its Measuring Up e-Path(TM)
pro-rata over the life of the agreement.

Deferred Prepublication Costs

Deferred prepublication costs are recorded at their original cost and amortized
on a straight-line basis over a three- or five-year period, based on the
estimated lives of the related publications. The net carrying value of the
deferred prepublication costs is periodically reviewed and compared to an
estimate of future sales. If future sales are not sufficient to realize the net
carrying value of the asset, an impairment charge is recognized.

Allowance for Excess and Slow-Moving Inventory

The Company continuously monitors its inventory on hand for salability. This
monitoring includes review of historical sales experience, projected sales
activity by title, and any planned changes to a title that are known by
management. Any slow-moving or non-salable inventory identified is reserved or
written down at that time. The reserve of $233,000 at November 30, 2006 is
believed to be adequate to cover inventory loss exposure.

STOCK-BASED COMPENSATION

We adopted the provisions of SFAS 123R, Share-Based Payment, on January 1, 2006.
SFAS 123R requires us to measure and recognize in our consolidated statements of
income the expense associated with all share-based payment awards made to
employees and directors based on estimated fair values. We utilize the
Black-Scholes option valuation model to measure the amount of compensation
expense to be recognized for each option award. There are several assumptions
that must be made when using the Black-Scholes model such as the expected term
of each option, the expected volatility of the stock price during the expected
term of the option, estimated forfeitures, expected dividends to be paid and the
risk- free interest rate expected during the option term. We have reviewed each
of these assumptions carefully and have determined our best estimate for these
variables. Of these assumptions, the expected term of


                                       19

<PAGE>

the option and expected volatility of our common stock are the most difficult to
estimate since they are based on the exercise behavior of employees and the
expected performance of our stock. An increase in the volatility of our stock
will increase the amount of compensation expense on new awards. An increase in
the holding period of options will also cause an increase in compensation
expense. Dividend yields and risk-free interest rates are less difficult to
estimate, but an increase in the dividend yield will cause a decrease in expense
and an increase in the risk-free interest rate will increase compensation
expense.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk results from fluctuations in interest rates.
The Company is exposed to future earnings and cash flow exposures from changes
in interest rates as a significant portion of the Company's debt is at variable
rates. Based on average floating rate borrowing of $7.0 million, a one percent
change in the applicable rate would have caused the Company's interest expense
for the quarter to change by approximately $18,000. The Company's management
believes that these amounts are not material to the Company's operations.

ITEM 4. CONTROLS AND PROCEDURES

The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have reviewed the Company's disclosure controls and
procedures at the end of the period covered by this report. Based upon this
review, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
ensuring that information required to be disclosed by the Company in the reports
it files or submits under the 1934 Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.

The Company is currently in the process of reviewing and formalizing the
internal controls and procedures for financial reporting in accordance with
Securities and Exchange Commission's rules implementing the internal control
reporting requirements included in Section 404 of the Sarbanes-Oxley Act of 2002
("Section 404"). Changes have been and will be made to internal controls over
financial reporting as a result of these efforts. The Company is dedicating
significant resources, including senior management time and effort, and
incurring substantial costs in connection with our ongoing Section 404
assessment. The Company is currently documenting and testing its internal
controls and considering whether any improvements are necessary for maintaining
an effective control environment at the Company. The evaluation of internal
controls is being conducted under the direction of our senior management in
consultation with an independent third party consulting firm. In addition,
senior management is regularly discussing the results of testing and any
proposed improvements to the control environment with the Audit Committee. The
Company expects to assess controls and procedures on a regular basis and will
continue to work to improve controls and procedures and educate and train
employees on the existing controls and procedures in connection with its efforts
to maintain an effective controls infrastructure at the Company.


                                       20

<PAGE>

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None.

ITEM 1A. RISK FACTORS

     There has not been a material change to the risk factors set forth in our
     Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     During the three-months ended November 30, 2006, we did not issue any
     securities without registration under the Securities Act of 1933

     The following table provides information about purchases made by us of our
     common stock for the three-months ended November 30, 2006.

<TABLE>
<CAPTION>
                                                                    (c)                  (d)
                                                               Total Number      Maximum Number (or
                                                                 of Shares       Approximate Dollar
                                   (a)            (b)          Purchased as     Value of Shares that
                              Total Number   Average Price   Part of Publicly   May Yet Be Purchased
                                of Shares         Paid        Announced Plans      Under the Plans
Period                          Purchased      per Share        or Programs          or Programs
------                        ------------   -------------   ----------------   --------------------
<S>                           <C>            <C>             <C>                <C>
September  1 - September 30      13,600          $3.80            13,600               83,768
October  1 - October 31              --            n/a                --               83,768
November 1 - November 30             --            n/a                --               83,768
                                 ------          -----            ------               ------
Total                            13,600          $3.80            13,600               83,768
                                 ======          =====            ======               ======
</TABLE>

     On October 5, 2005, we announced that our Board of Directors had approved a
     share repurchase program, permitting us to repurchase up to 100,000 shares
     of our common stock. No share repurchase plan or program expired, or was
     terminated, during the period covered by this report.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

ITEM 5. OTHER INFORMATION

     In May 2006, the Company changed the name of its wholly owned subsidiary
     The Peoples Publishing Group, Inc. to Peoples Education, Inc.


                                       21

<PAGE>

ITEM 6. EXHIBITS

Exhibit 31.1   CEO Certification pursuant to Rule 13a-14(a).

Exhibit 31.2   CFO Certification pursuant to Rule 13a-14(a).

Exhibit 32.1   CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted
               pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2   CFO Certification pursuant to 18 U.S.C. Section 1350, as
               adopted pursuant to Section 906 of the Sarbanes-Oxley Act
               of 2002.


                                       22

<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

Dated: January 16, 2007                 PEOPLES EDUCATIONAL HOLDINGS, INC.


                                        By: /s/ Brian T. Beckwith
                                            ------------------------------------
                                            Brian T. Beckwith
                                            President and
                                            Chief Executive Officer


                                       23