<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 August 31, 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 October 6, 2006.


                                        1

<PAGE>

                                TABLE OF CONTENTS

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

   Item 1:  Financial Statements:
            Consolidated Balance Sheets as of August 31, 2006 (Unaudited)
               and May 31, 2006..........................................     3
            Unaudited Consolidated Statements of Income for the Three
               Months Ended August 31, 2006 and 2005.....................     4
            Unaudited Consolidated Statement of Changes in Stockholders
               Equity for the Three Months Ended August 31, 2006 ........     5
            Unaudited Consolidated Statements of Cash Flows for the Three
               Months Ended August 31, 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...    17

   Item 4:  Controls and Procedures......................................    17

PART II.    OTHER INFORMATION

   Item 1:  Legal Proceedings............................................    18

   Item 1A: Risk Factors.................................................    18

   Item 2:  Unregistered Sales of Equity Securities and Use of Proceeds..    18

   Item 3:  Defaults Upon Senior Securities..............................    18

   Item 4:  Submission of Matters to a Vote of Security Holders..........    19

   Item 5:  Other Information............................................    19

   Item 6:  Exhibits.....................................................    19

SIGNATURES...............................................................    20

EXHIBITS.................................................................    21
</TABLE>


                                        2

<PAGE>


                                     PART I
                             FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                     August 31, 2006   May 31, 2006
                                                     ---------------   ------------
<S>                                                  <C>               <C>
ASSETS
Current Assets
Cash and Cash Equivalents                              $   396,714     $   749,792
Accounts Receivable Net of Allowances for
   Doubtful Accounts and Returns                         7,233,053       3,351,428
Inventory                                                5,085,593       4,737,427
Prepaid Expenses and Other                                 409,168         315,080
Income Taxes Receivable                                    657,406         660,713
Deferred Income Taxes                                      762,000         746,955
                                                       -----------     -----------
   Total Current Assets                                 14,543,934      10,561,395
Equipment - At Cost, Less Accumulated Depreciation
   of $1,457,000 and $1,375,000, respectively              828,909         829,456
                                                       -----------     -----------
Other Assets
Deferred Prepublication Costs, Net                      16,965,940      16,605,686
Deferred Income Taxes                                      348,271       1,054,965
Trademarks, Net                                            137,622         126,006
Deposits and Other                                         129,096         165,017
                                                       -----------     -----------
   Total Other Assets                                   17,580,929      17,951,674
                                                       -----------     -----------
Total Assets                                           $32,953,772     $29,342,525
                                                       ===========     ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long Term Obligations            $ 1,071,299     $ 2,487,086
Accounts Payable                                        11,659,222       7,808,965
Accrued Compensation                                       550,093         645,705
Short Term Bank Loan                                     1,000,000       1,000,000
Other Accrued Expenses                                     320,958         287,448
Deferred Revenue                                           262,038         257,439
                                                       -----------     -----------
   Total Current Liabilities                            14,863,610      12,486,643
Long Term Obligations, Less Current Maturities           9,594,511       9,420,076
Total Liabilities                                       24,458,121      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                               7,814,801       7,786,885
Retained Earnings (Accumulated Deficit)                    604,199        (431,992)
Less Treasury stock, 2,632 shares and 1,650,
   respectively, at cost                                   (12,172)         (7,910)
                                                       -----------     -----------
Total Stockholders' Equity                               8,495,651       7,435,806
                                                       -----------     -----------
Total Liabilities and Stockholders' Equity             $32,953,772     $29,342,525
                                                       ===========     ===========
</TABLE>


                                        3
<PAGE>

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

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                               August 31
                                                       -------------------------
                                                           2006          2005
                                                       -----------   -----------
<S>                                                    <C>           <C>
Revenue, Net                                           $15,347,072    13,977,702
Cost of Revenue
   Direct Costs                                          7,757,713     7,475,017
   Prepublication Cost Amortization                      1,443,362     1,151,107
                                                       -----------   -----------
   Total                                                 9,201,075     8,626,124
Gross Profit                                             6,145,997     5,351,578
Selling, General and Administrative Expenses             4,166,968     3,860,276
                                                       -----------   -----------
Income from Operations                                   1,979,029     1,491,302
Other Expenses (Income), Net                                (6,306)        1,467
Interest Expense                                           258,144       123,502
                                                       -----------   -----------
Net Income Before Income Taxes                           1,727,191     1,366,333
Federal and State Income Tax Expense                       691,000       546,500
                                                       -----------   -----------
Net Income                                             $ 1,036,191   $   819,833
                                                       ===========   ===========
Net Income per Common Share
   Basic                                               $      0.23   $      0.19
   Diluted                                             $      0.23   $      0.17
Weighted-average Number of Common Shares Outstanding
   Basic                                                 4,438,541     4,356,698
   Diluted                                               4,594,615     4,845,965
                                                       ===========   ===========
</TABLE>


                                        4

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED AUGUST 31, 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           --       27,916           --          --       27,916
Purchase of Treasury Stock         --           --           --      (4,262)      (4,262)
Net Income                         --           --    1,036,191          --    1,036,191
                              -------   ----------   ----------    --------   ----------
Balance, at August 31, 2006   $88,823   $7,814,801   $  604,199    $(12,172)  $8,495,651
                              =======   ==========   ==========    ========   ==========
</TABLE>


                                        5

<PAGE>

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

<TABLE>
<CAPTION>
                                                            Three Months Ended
                                                                August 31,
                                                        -------------------------
                                                            2006          2005
                                                        -----------   -----------
<S>                                                     <C>           <C>
Cash Flows From Operating Activities
Net Income                                              $ 1,036,191   $   819,833
Adjustments to Reconcile Net Income to Net Cash
   Provided by Operating Activities
      Depreciation                                           81,870        83,352
      Amortization of Prepublication Costs and
         Intangible Assets                                1,446,176     1,151,730
      Deferred Income Taxes                                 691,649            --
         Stock-based compensation                            27,916            --
Changes in Assets and Liabilities
      Accounts Receivable                                (3,881,625)   (3,702,722)
      Inventory                                            (348,166)       69,229
      Prepaid Expense and Other                             (94,088)      108,318
      Deposits and Other                                     35,921       (28,574)
      Accounts Payable and Accrued Expenses               3,788,155     1,884,198
      Deferred Revenue                                        4,599        42,749
      Income Taxes Payable or Refundable                      3,307       546,467
                                                        -----------   -----------
            Net Cash Provided by Operating Activities     2,791,905       974,580
                                                        -----------   -----------
Cash Flows From Investing Activities
      Purchases of Equipment                                (81,323)     (136,375)
      Expenditures for Intangibles                          (14,430)       (4,008)
      Expenditures for Prepublication Costs              (1,803,616)   (2,854,817)
                                                        -----------   -----------
            Net Cash Used in Investing Activities        (1,899,369)   (2,995,200)
                                                        -----------   -----------
Cash Flows From Financing Activities
      Net Borrowings Under Line of Credit                  (961,331)   (1,102,628)
      Net Proceeds from the Sale of Common Stock                 --     2,877,095
      Purchase of Treasury Stock                             (4,262)           --
      Principal Payments on Long Term Debt                 (280,021)      (90,421)
                                                        -----------   -----------
            Net Cash Provided By (Used In) Financing
               Activities                                (1,245,614)    1,684,046
                                                        -----------   -----------
            Net Decrease in Cash and Cash Equivalents      (353,078)     (336,574)
Cash and Cash Equivalents
      Beginning of Period                                   749,792       963,227
                                                        -----------   -----------
      End of Period                                     $   396,714   $   626,653
                                                        ===========   ===========
Supplemental Cash Flow Information
      Cash Payments for:
            Interest                                    $   258,144   $   123,502
                                                        ===========   ===========
</TABLE>


                                        6
<PAGE>

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

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 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 August 31, 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 August 31, 2006 and May 31,
2006, were $666,000 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 August 31, 2006
and 2005 are as follows:


                                        7

<PAGE>

<TABLE>
<CAPTION>
                                      Three Months Ended
                                           August 31
                                   -------------------------
                                       2006          2005
                                   -----------   -----------
<S>                                <C>           <C>
Balances, Beginning                $16,605,686   $14,600,780
   Prepublication Cost Additions     1,803,616     2,854,817
   Amortization Expense             (1,443,362)   (1,151,107)
                                   -----------   -----------
Balances, Ending                   $16,965,940   $16,304,490
                                   ===========   ===========
</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   $4,190,000
For the year ended May 31, 2008     5,255,000
For the year ended May 31, 2009     3,977,000
For the year ended May 31, 2010     2,101,000
For the year ended May 31, 2011     1,138,000
Thereafter                            305,000
</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 August 31, 2006
and 2005 are as follows:

<TABLE>
<CAPTION>
                          Three Months Ended
                               August 31
                          ------------------
                            2006       2005
                          --------   -------
<S>                       <C>        <C>
Balances, Beginning       $126,006   $75,358
   Additions                14,430     4,008
   Amortization Expense     (2,814)     (623)
                          --------   -------
Balances, Ending          $137,622   $78,743
                          ========   =======
</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 August 31, 2006, $5.5 million was
          outstanding under this facility, and $1.5 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.


                                        8

<PAGE>

In May 2006, the Company entered into a short-term bank loan in the amount of
$1.0 million, which matures on October 31, 2006. The interest rate on this
facility is prime. Payments are interest only with a balloon payment due at
maturity.

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. In addition, during the period from
November 15th to December 31st of each year, the revolving line of credit is
reduced from $7.0 million to $5.0 million. 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.

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 three month period ended August 31, 2006 was approximately $28,000,
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>
                                                   Three Months Ended
                                                     August 31, 2005
                                                   ------------------
<S>                                                <C>
Net income, as reported                                 $819,833
Deduct: Total stock-based employee compensation
   expense determined under the fair value-based
   method for all awards                                 (57,392)
                                                        --------
Proforma net income                                     $762,441
                                                        ========
Net income per common share:
   Basic Net Income per Common Share, as
      reported                                          $   0.19
   Basic Net Income per Common Share, proforma          $   0.18
   Diluted Net Income per Common Share, as
      reported                                          $   0.17
   Diluted Net Income per Common Share, proforma        $   0.16
</TABLE>

SFAS 123R requires companies to estimate the fair value of share-based awards on
the date of grant


                                        9

<PAGE>

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 fiscal 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 three months ended
August 31, 2006:

<TABLE>
<CAPTION>
                                                             WEIGHTED
                                                 WEIGHTED    AVERAGE
                                                  AVERAGE   REMAINING
                                       NUMBER    EXERCISE    CONTRACT
                                     OF SHARES     PRICE       LIFE
                                     ---------   --------   ---------
<S>                                  <C>         <C>        <C>
Outstanding options at 5/31/06        826,036      $3.39
Granted                                30,000      $3.98
Exercised                                  --      $  --
Canceled                              (10,000)     $6.00
                                      -------
Outstanding options at 8/31/06        846,036      $3.31    4.82 Yrs.
                                      =======
Outstanding exercisable at 8/31/06    656,306      $3.29    4.58 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 three months ended August 31, 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 49,662 at August 31, 2006. At August 31, 2006, the aggregate
intrinsic value of options outstanding was $517,000, and the aggregate intrinsic
value of options exercisable was $429,000. No options were exercised during the
three months ended August 31, 2006.

The following table summarizes our non-vested stock option activity for the
period ended August 31, 2006:


                                       10

<PAGE>

<TABLE>
<CAPTION>
                                       NUMBER
                                     OF SHARES
                                     ---------
<S>                                  <C>
Nonvested stock options at 5/31/06    190,492
Vested                                (20,762)
Canceled                              (10,000)
Granted                                30,000
                                      -------
Nonvested stock options at 8/31/06    189,730
                                      =======
</TABLE>

At August 31, 2006, there was approximately $259,000 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 three months ended August 31, 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
2007, 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 both Casabonne
Associates and Marketing Works. The Company paid Casabonne Associates for the
three-month period ended August 31, 2006 and 2005 approximately $3,000 and
$16,000, respectively. In addition, the Company paid Marketing Works for the
three-month period ended August 31, 2006 and 2005 approximately $12,000 and
$19,000, 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>

THREE MONTHS ENDED AUGUST 31, 2006 VS. THREE MONTHS ENDED AUGUST 31, 2005

Overview

Net revenue for the three-month period ended August 31, 2006 increased 9.8%
compared to the same period in 2005. This increase was comprised of a 12.3%
increase in our Test Preparation, Assessment, and Instruction revenue, and a
7.7% increase in College Preparation revenue. Net Income for the period was
$1,037,000, compared to $820,000 in 2005, an increase of 26.5%.

<TABLE>
<CAPTION>
                                                           Three Months Ended August 31,
                                                ---------------------------------------------------
                                                    2006          2005       Variance    % Variance
                                                -----------   -----------   ----------   ----------
<S>                                             <C>           <C>           <C>          <C>
Net Revenue
Test Preparation, Assessment, and Instruction   $ 7,225,000   $ 6,434,000   $  791,000      12.3%
College Preparation                               8,122,000     7,544,000      578,000       7.7%
                                                -----------   -----------   ----------      ----
   Total                                        $15,347,000   $13,978,000   $1,369,000       9.8%
                                                ===========   ===========   ==========      ====
Net Income                                      $ 1,037,000   $   820,000   $  217,000      26.5%
</TABLE>


                                       12

<PAGE>

NET REVENUE

TEST PREPARATION, ASSESSMENT, AND INSTRUCTION

     Test Preparation and 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.

     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 started publishing in the fourth quarter of 2004, and remedial and
     multicultural text and related materials. Our 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 and multicultural texts and related materials, but we
     are not investing in new development for these products.

Revenue from the Test Preparation, Assessment, and Instruction product group
increased from $6.4 million for the three months ended August 31, 2005 to $7.2
million for the same time period in 2006, an increase of 12.3%. The fluctuation
is a result of increased market penetration of existing materials and the
release of new products into existing states.

COLLEGE PREPARATION

We have the exclusive U.S. high school distribution rights for college textbooks
and related instruction materials published by two major college publishers. We
also expanded our product offerings by entering into distribution contracts with
other 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.

College Preparation product line revenue for the three months ended August 31,
2006 was $8.1 million, compared to $7.5 million during the same period in 2005,
representing an increase of 7.7%. Revenue from the two major college publishers
increased to $7.9 million from $7.3 million for the three months ended August
31, 2006 compared to the same period in 2005. Revenue from our other
distribution


                                       13

<PAGE>

agreements and from our own proprietary products was $286,000 for the
three-months ended August 31, 2006, an increase of 20.8% from the same period in
the prior year. 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.

GROSS PROFIT AND COST OF REVENUE

Gross Profit for the three months ended August 31, 2006 was $6.1 million
compared to $5.4 million during the same period in 2005. Gross Profit as a
percent of revenue for the period increased from 38.3% in 2005 to 40.0% in 2006.

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 53.5% in 2005 to 50.5% in
2006. The primary factor in the decrease is a reduction in product cost on
proprietary product and a favorable mix of total revenue between proprietary and
distributed product.

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 August 31, 2006, we amortized $1.4
million of prepublication costs, compared to $1.2 million in 2005.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                                               Three Months Ended August 31,
                                      -----------------------------------------------
                                         2006         2005      Variance   % Variance
                                      ----------   ----------   --------   ----------
<S>                                   <C>          <C>          <C>        <C>
Selling, General and Administrative   $4,167,000   $3,860,000   $307,000      8.0%
</TABLE>

Marketing expenses within this expense category decreased $96,000 for the
three-month period ended August 31, 2006 compared to the same period in 2005.
The expense also decreased as a percent of revenue from 4.6% in 2005 to 3.6% in
2006. Fluctuation is primarily due to decreased promotion and related expenses
associated with new product line launches, including Focused Instruction, which
occurred in 2005.

Selling expenses within this category increased $382,000 for the three months
ended August 31, 2006 compared to the same period in 2005. Selling expense as a
percentage of revenue increased from 13.8% in 2005 to 15.1% in 2006. The
increase is primarily related to an increase of $59,000 in third party
commission expense (due to an increase in revenue), which was offset by a
favorable revenue mix. In addition, salary and related expenses increased
$246,000 as a result of the growth in our sales infrastructure.

General and administrative expenses within this category for the three months
ended August 31, 2006 increased $21,000, in part, due to the recognition of FAS
123R Stock option expense in the amount of $28,000.




                                       14

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for the three-month period ending
August 31, 2006 was $2.8 million. Cash was primarily provided by our net income,
adjusted for non-cash items and increase in accounts payable and accrued
expenses, offset primarily by increases in accounts receivable, inventory, and
prepaid expenses. Accounts receivable, inventory, accounts payable and accrued
expenses increased due to the cyclical nature of our business cycle.

Net cash used in investing activities was $1.9 million, consisting primarily of
prepublication cost expenditures.

Net cash used in financing activities was $1.2 million, consisting primarily of
net payments under our line of credit of $961,000, as well as by principal
payments of long-term debt of $280,000.

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 August 31, 2006, $5.5 million was outstanding under this
          facility, and $1.5 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 matures on October 31, 2006. The interest rate on this facility
is prime. Payments are interest only with a balloon payment due at maturity.

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.

A summary of our contractual cash obligations at August 31, 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)   $5,028,000   $  894,000   $1,131,000   $1,066,000   $1,001,000   $936,000
Capital Leases
   (including interest portion)      443,000      201,000      160,000       47,000       35,000         --
Operating Leases                   1,636,000      432,000      536,000      474,000      194,000         --
                                  ----------   ----------   ----------   ----------   ----------   --------
Total                             $7,107,000   $1,527,000   $1,827,000   $1,587,000   $1,230,000   $936,000
                                  ==========   ==========   ==========   ==========   ==========   ========
</TABLE>

Due to the seasonality of our business, our cash availability and requirements
fluctuate. Accordingly we require working capital to support our seasonal
business cycle. Borrowing requirements are generally highest during the fourth
quarter of our fiscal year.

We believe that our cash and borrowing availability under our financing
arrangements, together with cash generated from operations, will be sufficient
to meet our normal cash needs for the balance of the fiscal year. 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


                                       15

<PAGE>

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 $243,000 at August 31, 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 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.


                                       16

<PAGE>

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.


                                       17
<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 August 31, 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 August 31, 2006.

<TABLE>
<CAPTION>
                            (a)           (b)        Purchased as     Value) of Shares that
                       Total Number     Average    Part of Publicly    May Yet Be Purchased
                         of Shares    Price Paid    Announced Plans      Under the Plans
Period                   Purchased     per Share      or Programs          or Programs
--------------------   ------------   ----------   ----------------   ---------------------
<S>                    <C>            <C>          <C>                <C>
June 1 - June 30            982          $4.05            982                 97,368
July 1 to July 31            --            n/a             --                 97,368
August 1 - August 31         --            n/a             --                 97,368
                            ---          -----            ---                 ------
Total                       982          $4.05            982                 97,368
                            ===          =====            ===                 ======
</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.


                                       18

<PAGE>

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

On August 22, 2006, the Company held its Annual Meeting of Stockholders. At the
meeting, the following persons were elected to the Company's Board of Directors:

<TABLE>
<CAPTION>
                           For      Withhold
                        ---------   --------
<S>                     <C>         <C>
G.Thomas Ahern          4,103,872       150
Brian T. Beckwith       4,103,622       400
John C. Bergstrom       4,102,595     1,427
Richard J. Casabonne    4,102,595     1,427
Anton J. Christianson   4,102,595     1,427
James P. Dolan          4,103,622       400
Diane M. Miller         4,103,872       150
James J. Peoples        4,103,872       150
</TABLE>

The appointment of the Company's auditors, McGladrey & Pullen LLP, was ratified
by the stockholders, with 4,103,847 votes for; 75 votes against; 100 votes
abstaining.

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.

ITEM 6. EXHIBITS

<TABLE>
<S>                 <C>
     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.
</TABLE>


                                       19

<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: October 9, 2006                  PEOPLES EDUCATIONAL HOLDINGS, INC.


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


                                       20