<PAGE>

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

                                    FORM 10-Q

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

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

        For the transition period from January 1, 2006 to May 31, 2006.

                          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: 4,441,173 shares of Common Stock
(par value $0.02 per share) outstanding on July 13, 2006.


                                        1

<PAGE>

                                TABLE OF CONTENTS

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

   Item 1: Financial Statements:
            Condensed Consolidated Balance Sheets as of May 31, 2006 and
               December 31, 2005.........................................     3
            Condensed Consolidated Statements of Operations for the Two
               Months and Five Months Ended May 31, 2006 and 2005........     4
            Condensed Consolidated Statement of Changes in Stockholders
               Equity for the Five Months Ended May 31, 2006 ............     5
            Condensed Consolidated Statements of Cash Flows for the Five
               Months Ended May 31, 2006 and 2005........................     6
            Notes to Condensed Consolidated Financial Statements ........     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...    19

   Item 4:  Controls and Procedures......................................    19

PART II. OTHER INFORMATION

   Item 1:  Legal Proceedings............................................    20

   Item 1A: Risk Factors.................................................    20

   Item 2:  Unregistered Sales of Equity Securities and Use of Proceeds..    20

   Item 3:  Defaults Upon Senior Securities..............................    20

   Item 4:  Submission of Matters to a Vote of Security Holders..........    20

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

   Item 6:  Exhibits.....................................................    21

SIGNATURES...............................................................    22

EXHIBITS.................................................................    23
</TABLE>


                                        2
<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                        May 31, 2006   December 31, 2005
                                                                        ------------   -----------------
<S>                                                                     <C>            <C>
ASSETS
Current Assets
Cash and Cash Equivalents                                               $   749,792       $   228,665
Accounts Receivable Net of Allowances for
   Doubtful Accounts and Returns                                          3,351,428         2,799,224
Inventory                                                                 4,737,427         3,525,315
Prepaid Expenses and Other                                                  315,080           390,601
Income Taxes Receivable                                                     660,713           693,442
Deferred Income Taxes                                                       746,955           684,500
                                                                        -----------       -----------
   Total Current Assets                                                  10,561,395         8,321,747

Equipment - At Cost, Less Accumulated Depreciation
   of $1,375,000 in 2006 and $1,244,000 in 2005                             829,456           915,983
                                                                        -----------       -----------
Other Assets
Deferred Prepublication Costs, Net                                       16,605,686        14,316,531
Deferred Income Taxes                                                     1,054,965           561,500
Trademarks, Net                                                             126,006           102,780
Deposits and Other                                                          165,017           153,616
                                                                        -----------       -----------
   Total Other Assets                                                    17,951,674        15,134,427
                                                                        -----------       -----------
Total Assets                                                            $29,342,525       $24,372,157
                                                                        ===========       ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long Term Obligations                             $ 2,487,086       $   834,565
Accounts Payable                                                          7,808,965         7,741,132
Accrued Compensation                                                        645,705           328,235
Short Term Bank Loan                                                      1,000,000                --
Other Accrued Expenses                                                      287,448           271,733
Deferred Revenue                                                            257,439           343,192
                                                                        -----------       -----------
   Total Current Liabilities                                             12,486,643         9,518,857
Long Term Obligations, Less Current Maturities                            9,420,076         6,587,432
Total Liabilities                                                        21,906,719        16,106,289
                                                                        -----------       -----------
Commitments and Contingencies
Stockholders' Equity
Common Stock, $0.02 par value; authorized 8,500,000 shares;
   issued and outstanding in 4,441,173 in 2006 and 4,384,198 in 2005         88,823            87,684
Additional Paid In Capital                                                7,786,885         7,662,424
Retained Earnings (Accumulated Deficit)                                    (431,992)          521,744
Less cost of 1,650 shares in 2006 and 1,174 in 2005 of Treasury Stock        (7,910)           (5,984)
                                                                        -----------       -----------
Total Stockholders' Equity                                                7,435,806         8,265,868
                                                                        -----------       -----------
Total Liabilities and Stockholders' Equity                              $29,342,525       $24,372,157
                                                                        ===========       ===========
</TABLE>


                                       3

<PAGE>

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

<TABLE>
<CAPTION>
                                                           Two Months Ended          Five Months Ended
                                                               May 31,                    May 31,
                                                       -----------------------   -------------------------
                                                          2006         2005          2006          2005
                                                       ----------   ----------   -----------   -----------
<S>                                                    <C>          <C>          <C>           <C>
Revenue, Net                                           $5,922,139   $5,279,671   $11,736,340   $10,203,264

Cost of Revenue
   Direct Costs                                         2,069,840    2,330,640     4,090,032     4,086,629
   Prepublication Cost Amortization                     1,000,059      707,227     2,174,333     1,702,921
                                                       ----------   ----------   -----------   -----------
   Total                                                3,069,899    3,037,867     6,264,365     5,789,550

Gross Profit                                            2,852,240    2,241,804     5,471,975     4,413,714

Selling, General and Administrative Expenses            2,943,692    2,484,752     6,619,988     6,061,081
                                                       ----------   ----------   -----------   -----------
Loss from Operations                                      (91,452)    (242,948)   (1,148,013)   (1,647,367)

Other Expenses, Net                                        13,437         (418)       30,295         4,671
Interest Expense                                          142,140       57,662       319,837       122,537
                                                       ----------   ----------   -----------   -----------
Net Loss Before Income Taxes                             (247,029)    (300,192)   (1,498,145)   (1,774,575)

Federal and State Income Tax Benefit                      (68,909)    (120,000)     (544,409)     (710,000)
                                                       ----------   ----------   -----------   -----------
Net Loss                                               $ (178,120)  $ (180,192)  $  (953,736)  $(1,064,575)
                                                       ==========   ==========   ===========   ===========
Net Loss per Common Share
   Basic and Diluted                                   $    (0.04)  $    (0.05)  $     (0.21)  $     (0.28)

Weighted-average Number of Common Shares Outstanding
   Basic and Diluted                                    4,440,003    3,809,198     4,438,163     3,809,198
                                                       ==========   ==========   ===========   ===========
</TABLE>


                                       4
<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FIVE MONTHS ENDED MAY 31, 2006

<TABLE>
<CAPTION>
                                                            Retained
                                            Additional      Earnings
                                              Paid-In    (Accumulated-   Treasury
                             Common Stock     Capital       Deficit)       Stock       Total
                             ------------   ----------   -------------   --------   ----------
<S>                          <C>            <C>          <C>             <C>        <C>
Balance, December 31, 2005        $87,684   $7,662,424      $ 521,744     $(5,984)  $8,265,868

Stock Options Exercised             1,139       71,911             --          --       73,050

Stock-Based Compensation               --       52,550             --          --       52,550

Purchase of Treasury Stock             --           --             --      (1,926)      (1,926)

Net Loss                               --           --       (953,736)         --     (953,736)
                             ------------   ----------    -----------    --------   ----------
Balance, at May 31, 2006          $88,823   $7,786,885      $(431,992)    $(7,910)  $7,435,806
                             ============   ==========    ===========    ========   ==========
</TABLE>


                                       5

<PAGE>

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

<TABLE>
<CAPTION>
                                                                     Five Months Ended
                                                                ---------------------------
                                                                May 31, 2006   May 31, 2005
                                                                ------------   ------------
<S>                                                             <C>            <C>
Cash Flows From Operating Activities
Net Loss                                                        $  (953,736)   $(1,064,575)
Adjustments to Reconcile Net Loss to Net Cash
   Provided by (Used in) Operating Activities
   Depreciation                                                     131,911        128,492
   Amortization of Prepublication Costs and Intangible Assets     2,176,021      1,703,862
   Deferred Income Taxes                                           (555,920)            --
   Stock-Based Compensation                                          52,550             --
Changes in Assets and Liabilities
   Accounts Receivable                                             (552,204)      (937,623)
   Inventory                                                     (1,212,112)      (828,419)
   Prepaid Expense and Other                                         75,521       (181,512)
   Deposits and Other                                               (11,401)      (107,694)
   Accounts Payable and Accrued Expenses                            401,018      2,703,350
   Deferred Revenue                                                 (85,753)       (61,886)
   Income Taxes Payable or Refundable                                32,729       (710,000)
                                                                -----------    -----------
      Net Cash Provided by (Used in) Operating Activities          (501,376)       643,995
                                                                -----------    -----------
Cash Flows From Investing Activities
   Purchases of Equipment                                           (45,384)      (263,217)
   Expenditures for Intangibles                                     (24,914)       (18,813)
   Expenditures for Prepublication Costs                         (4,463,488)    (4,637,119)
                                                                -----------    -----------
      Net Cash Used in Investing Activities                      (4,533,786)    (4,919,149)
                                                                -----------    -----------
Cash Flows From Financing Activities
   Net Borrowings Under Line of Credit                            4,471,437        (67,057)
   Proceeds from Short Term Bank Loan                             1,000,000      5,000,000
   Proceeds from the Exercise of Stock Options                       73,050             --
   Purchase of Treasury Stock                                        (1,926)            --
   Proceeds from Long Term Debt                                     159,703        307,063
   Principal Payments on Long Term Debt                            (145,975)      (135,942)
                                                                -----------    -----------
      Net Cash Provided By Financing Activities                   5,556,289      5,104,064
                                                                -----------    -----------
      Net Increase in Cash and Cash Equivalents                     521,127        828,910

Cash and Cash Equivalents
   Beginning of Period                                              228,665        134,317
                                                                -----------    -----------
   End of Period                                                $   749,792    $   963,227
                                                                ===========    ===========
Supplemental Cash Flow Information
   Cash Payments for:
      Interest                                                  $   319,837    $   122,537
      Income Taxes                                              $    98,889    $        --
                                                                ===========    ===========
</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 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.

Effective May 31, 2006, the Company changed its fiscal year end from December 31
to May 31, see Note 10. As a requirement of this year end change, the Company is
reporting results for the ("stub") period January 1, 2006 to May 31, 2006 as a
transition period with the results for the corresponding period of 2005
presented for comparative purposes. Additionally, we have also presented the
operating results for the two month periods ended May 31, 2006 and 2005, which
represent the stub period interim operating results since the quarter ended
March 31, 2006 which was our quarterly interim reporting period under our
previous fiscal year.

The accompanying condensed consolidated financial statements have been prepared
by the Company 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 condensed consolidated
financial position, results of operations, and cash flows for the periods
presented. The operating results for the transition and interim periods
presented 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.

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 May 31, 2006, and December
31, 2005, were $453,000 and $519,000, 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 or loss
by the weighted average number of common shares outstanding. Diluted per share
amounts assume the conversion, exercise or issuance of all potential common
stock instruments, unless their effect is anti-dilutive thereby reducing the
loss or increasing the income per common share. Due to the net loss in all
periods presented, diluted shares were the same as basic shares since the effect
of options and warrants would have been anti-dilutive.


                                       7

<PAGE>

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 May 31, 2006
and 2005, are as follows:

<TABLE>
<CAPTION>
                                        Two Months Ended           Five Months Ended
                                             May 31                      May 31
                                   -------------------------   -------------------------
                                       2006          2005          2006          2005
                                   -----------   -----------   -----------   -----------
<S>                                <C>           <C>           <C>           <C>
Balances, Beginning                $15,736,614   $13,072,895   $14,316,531   $11,666,604
   Prepublication Cost Additions     1,869,131     2,235,134     4,463,488     4,637,119
   Amortization Expense             (1,000,059)     (707,227)   (2,174,333)   (1,702,921)
                                   -----------   -----------   -----------   -----------
Balances, Ending                   $16,605,686   $14,600,802   $16,605,686   $14,600,802
                                   ===========   ===========   ===========   ===========
</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 year ended May 31, 2007        $5,734,000
For the year ended May 31, 2008         4,776,000
For the year ended May 31, 2009         3,496,000
For the year ended May 31, 2010         1,624,000
For the year ended May 31, 2011           958,000
Thereafter                                 18,000
</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 May 31, 2006 and
2005 are as follows:

<TABLE>
<CAPTION>
                           Two Months Ended     Five Months Ended
                                May 31               May 31
                          ------------------   ------------------
                            2006       2005      2006       2005
                          --------   -------   --------   -------
<S>                       <C>        <C>       <C>        <C>
Balances, Beginning       $119,609   $56,946   $102,780   $57,486
   Additions                 7,105    18,813     24,914    18,813
   Amortization Expense       (708)     (401)    (1,688)     (941)
                          --------   -------   --------   -------
Balances, Ending          $126,006   $75,358   $126,006   $75,358
                          ========   =======   ========   =======
</TABLE>


                                       8

<PAGE>

The estimated future amortization expense related to these intangibles over the
next five years is as follows:

<TABLE>
<S>                                     <C>
For the year ended May 31, 2007         $  4,000
For the year ended May 31, 2008            4,000
For the year ended May 31, 2009            4,000
For the year ended May 31, 2010            4,000
For the year ended May 31, 2011            4,000
Thereafter                               106,000
</TABLE>

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 May 31, 2006, $6.4 million was outstanding
          under this facility, and $600,000 was still available for borrowing.

     -    The term loan is for $5.0 million and matures in May 2012. The term
          loan provides for payments of interest only for the first twelve
          months and for 72 equal monthly payments of principal and interest
          thereafter until maturity. The term loan bears interest at the same
          rate as the revolving line of credit. In May 2006, we exercised our
          option to convert the term 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, 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, a minimum annual stockholders'
equity of $7,431,000 at May 31, 2006, prohibit net losses on a fiscal year basis
and provides a limit on prepublication expenditures. In addition, during the
period 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


                                       9

<PAGE>

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 five and two month periods ended May 31,
2006 were approximately $53,000 and $13,000, respectively, 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 loss and loss
per share would have been as follows:

<TABLE>
<CAPTION>
                                        Two Months Ended   Five Months Ended
                                          May 31, 2005        May 31, 2005
                                        ----------------   -----------------
<S>                                     <C>                <C>
Net Loss, as reported                   $       (180,192)  $      (1,064,575)
Deduct: Total stock-based employee
   compensation expense determined
   under the fair value-based method
   for all awards, net of the related
   tax effects                                   (38,261)            (95,653)
                                        ----------------   -----------------
Proforma net loss                       $       (218,453)  $      (1,160,228)
                                        ================   =================
Net loss per common share:
   Basic and diluted - as reported      $          (0.05)  $           (0.28)
   Basic and diluted - proforma         $          (0.06)  $           (0.30)
</TABLE>

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 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,
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.


                                       10

<PAGE>

The following table represents stock option activity for the five months ended
May 31, 2006:

<TABLE>
<CAPTION>
                                                                    WEIGHTED AVERAGE
                                       NUMBER    WEIGHTED AVERAGE       REMAINING
                                     OF SHARES    EXERCISE PRICE      CONTRACT LIFE
                                     ---------   ----------------   ----------------
<S>                                  <C>         <C>                <C>
Outstanding options at 1/1/06         880,175          $3.29
Granted                                 3,336          $4.77
Exercised                             (56,975)         $1.28
Canceled                                 (500)         $3.00
                                      -------
Outstanding options at 5/31/06        826,036          $3.39            5.09 Yrs.
                                      =======
Outstanding exercisable at 5/31/06    640,579          $3.28            4.88 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 five months ended May 31, 2006 were an expected dividend
yield rate of 0%, an expected stock price volatility of 43%, a risk free
interest rate of 4.9%, and an expected life of the options of five years. Shares
available for future stock grants to employees and directors under existing
plans were 59,162 at May 31, 2006. At May 31, 2006, the aggregate intrinsic
value of options outstanding was $605,000, and the aggregate intrinsic value of
options exercisable was $508,000. Total intrinsic value of options exercised was
$215,000 for the five months ended May 31, 2006.

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

<TABLE>
<CAPTION>
                                       NUMBER
                                     OF SHARES
                                     ---------
<S>                                  <C>
Nonvested stock options at 1/1/06      91,444
Vested                                (28,165)
Canceled                                   --
Granted                                 3,336
                                      -------
Nonvested stock options at 5/31/06     66,615
                                      =======
</TABLE>

At May 31, 2006, there was approximately $289,000 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 five months ended May 31, 2006 and 2005 was computed
using an estimated combined federal and state tax rate of approximately 36% and
40%, respectively.

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.


                                       11

<PAGE>

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an amendment
of ARB No. 43, Chapter 4," ("SFAS 151"). SFAS 151 amends the guidance in
Accounting Research Bulletin No. 43 to require idle facility expense, freight,
handling costs, and wasted material (spoilage) to be recognized as
current-period charges. In addition, SFAS 151 requires the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of production facilities. SFAS 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company adopted SFAS 151
on January 1, 2006 with no material impact to the consolidated financial
statements.

NOTE 10 - Fiscal Year End Change
The Company has changed its fiscal year end from December 31 to May 31. This
will more closely align the Company's financial year-end with its revenue cycle
and its customers' purchasing cycle. This change is 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
five month period ended May 31, 2006 and 2005 approximately $16,000 and $6,000,
respectively. The Company paid Casabonne Associates for the two month period
ended May 31, 2006 and 2005 approximately $6,000 and $-0-, respectively. In
addition, the Company paid Marketing Works for the five month period ended May
31, 2006 and 2005 approximately $18,000 and $6,000, respectively. The Company
paid Marketing Works for the two month period ended May 31, 2006 and 2005
approximately $16,000 and $-0-, respectively.

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.


                                       12

<PAGE>

<TABLE>
<CAPTION>
                                     Jan - Mar     Apr - Jun     Jul - Sep     Oct - Dec
                                    1st Quarter   2nd Quarter   3rd Quarter   4th Quarter
                                    -----------   -----------   -----------   -----------
<S>                                 <C>           <C>           <C>           <C>
Test Preparation, Assessment, and
   Instruction                              20%           26%           29%           25%
College Preparation                          6%           28%           57%            9%
             Total Revenue                  15%           27%           39%           19%
</TABLE>

TWO MONTHS ENDED MAY 31, 2006 VS. TWO MONTHS ENDED MAY 31, 2005
---------------------------------------------------------------

Overview
--------

Net revenue for the two-month period ended May 31, 2006 increased 12.2% compared
to the same period in 2005. This increase was led by a 23.5% increase in our
Test Preparation, Assessment, and Instruction revenue, offset by a 15.5%
decrease in College Preparation revenue. Net Loss for the period was $178,000 in
2006, compared to $180,000 in 2005, a decrease of 1.1%.

<TABLE>
<CAPTION>
                                                    Two Months Ended
                                                         May 31,
                                    ------------------------------------------------
                                       2006         2005       Variance   % Variance
                                    ----------   ----------   ---------   ----------
<S>                                 <C>          <C>          <C>         <C>
Net Revenue
-----------
Test Preparation, Assessment, and
   Instruction                      $4,626,000   $3,746,000   $ 880,000        23.5%
College Preparation                  1,296,000    1,534,000    (238,000)      -15.5%
                                    ----------   ----------   ---------   ---------
           Total                    $5,922,000   $5,280,000   $ 642,000        12.2%
                                    ==========   ==========   =========   =========
Net Loss                            $  178,000   $  180,000   $  (2,000)       -1.1%
</TABLE>

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.


                                       13
<PAGE>

     Instruction
     -----------

     During the fourth quarter of 2004 we launched our Focused Instruction
     product offering. These 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 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 $3.7 million in 2005 to $4.6 million in 2006, an increase of
23.5%. Test Preparation and Assessment revenue increased 13.2% from 2005 to
2006. Instruction revenue increased 124.7% from 2005 to 2006. The increase in
both product groups is a result of increased market penetration and the
continued growth in states in which we recently entered with additional
products.

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 semi-exclusive (exclusive
for certain market segments and geographical areas) distribution contracts with
four additional 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 two months ended May 31, 2006
was $1.3 million, compared to $1.5 million during the same period in 2005,
representing a decrease of 15.5%. Revenue from the two major college publishers
was down $235,000 for the 2 months ended May 31, 2006 compared to the same
period in 2005. Revenue from proprietary products and the new distribution
agreements combined was consistent with the prior year. Revenue from our
proprietary product for 2006 was 43.1% higher than the prior year, while other
distributed product revenue was down 44.0% from the prior year. Increase in
proprietary revenue is due to increased market penetration. Other distributed
revenue is down for the two-month period due to timing, as the revenue for the
five-month period is up compared to the prior year. We are continuing to invest
in new proprietary product development 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 two months ended May 31, 2006 was $2.9 million compared to
$2.2 million during the same period in 2005. Gross Profit as a percent of
revenue for the period increased from 42.5% in 2005 to 48.2% 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 44.1% in 2005 to 35.0% in
2006. The decrease is due primarily to revenue mix, and the attainment of
overall reduction in expenses.

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


                                       14

<PAGE>

practice. For the two-month period ending May 31, 2006, we amortized $1.0
million of prepublication costs, compared to $707,000 in 2005.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                                                  Two Months Ended May 31,
                                      -----------------------------------------------
                                         2006         2005      Variance   % Variance
                                      ----------   ----------   --------   ----------
<S>                                   <C>          <C>          <C>        <C>
Selling, General and Administrative   $2,944,000   $2,485,000   $459,000      18.5%
</TABLE>

Marketing expenses within this expense category decreased $11,000 for the
two-month period ended May 31, 2006 compared to the same period in 2005. It also
decreased as a percent of revenue from 12.9% in 2005 to 11.4% in 2006.

Selling expenses within this category increased $366,000. 3rd Party Commission
expense increased $194,000 due to an increase in revenue. Salary and related
expenses increased $142,000 as a result of our investment in our sales
infrastructure. As a percent of revenue, selling expenses increased from 20.2%
in 2005 to 24.2% in 2006. This increase is primarily due to an increase in 3rd
party commission expense as a percent of revenue due to revenue mix.

General and administrative expenses within this category increased $103,000 for
the two-month period from 2005 to 2006. The fluctuation is due to an increase in
general corporate overhead and FAS 123R Stock option expense.

FIVE MONTHS ENDED MAY 31, 2006 VS. FIVE MONTHS ENDED MAY 31, 2005
-----------------------------------------------------------------

Overview
--------

Net revenue for the five-month period ended May 31, 2006 increased 15.0%
compared to the same period in 2005. This increase was led by a 19.9% increase
in our Test Preparation, Assessment, and Instruction revenue, offset by a 2.8%
decrease in College Preparation revenue. Net Loss for the period was $954,000 in
2006, compared to $1,065,000 in 2005, a decrease of 10.4%.

<TABLE>
<CAPTION>
                                                             Five Months Ended May 31,
                                                ---------------------------------------------------
                                                    2006          2005       Variance    % Variance
                                                -----------   -----------   ----------   ----------
<S>                                             <C>           <C>           <C>          <C>
Net Revenue
-----------
Test Preparation, Assessment, and Instruction   $ 9,615,000   $ 8,020,000   $1,595,000      19.9%
College Preparation                               2,121,000     2,183,000      (62,000)     -2.8%
                                                -----------   -----------   ----------     -----
            Total                               $11,736,000   $10,203,000   $1,533,000      15.0%
                                                ===========   ===========   ==========     =====
Net Loss                                        $  (954,000)  $(1,065,000)  $  111,000     -10.4%
</TABLE>

NET REVENUE
-----------

TEST PREPARATION, ASSESSMENT, AND INSTRUCTION

Revenue from the Test Preparation, Assessment, and Instruction product group
increased from $8.0 million for the five-month period ending May 31, 2005 to
$9.6 million for the same period in 2006, an increase of 19.9%. Test Preparation
revenue increased 12.3% for the five-month period in 2006 compared to 2005. This
increase is primarily due to increased market penetration and growth in states
which we recently entered with additional products. Instruction revenue
increased 108.6% from 2005 to 2006. Instruction revenue increased as a result of
the continuing rollout of product into existing markets.


                                       15

<PAGE>

COLLEGE PREPARATION

Revenue for the College Preparation product line for the five-month period in
2006 was $2.1 million compared to $2.2 for the same period in 2005, representing
a decrease of 2.8%. Revenue from the two major college publishers was 4.6% below
the prior year. However, the largest revenue months for these products is June
to September. Revenue from our proprietary products, increased 28.9% from 2005
to 2006 and the revenue from our new distribution agreements increased 20.8%
from 2005 to 2006. 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 five-month period ending May 31, 2006 was $5.5 million
compared to $4.4 million during the same period in 2005. Gross Profit as a
percent of revenue increased from 43.3% in 2005 to 46.6% 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 40.1% in 2005 to 34.8%
in 2006. The decrease is due primarily to revenue mix and overall reduction in
expenses.

For the five-month period in 2006, we amortized $2.2 million of prepublication
costs, compared to $1.7 million in 2005. Our prepublication expenditures for the
period decreased 3.7% from $4.6 million in 2005 to $4.5 million in 2006.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                                                 Five Months Ended May 31,
                                      -----------------------------------------------
                                         2006         2005      Variance   % Variance
                                      ----------   ----------   --------   ----------
<S>                                   <C>          <C>          <C>        <C>
Selling, General and Administrative   $6,620,000   $6,061,000   $559,000      9.2%
</TABLE>

Marketing expenses within this expense category decreased $268,000 for the
five-month period ending May 31, 2006 compared to the same period in 2005. It
also decreased as a percent of revenue from 16.5% in 2005 to 12.0% in 2006.
During the five-month period in 2005, we incurred significant expenses related
to new product line launches, which did not recur in 2006.

Selling expenses within this category increased $552,000 from 2005 to 2006 and
increased as a percent of revenue from 25.4% to 26.8%. Salary and related
expenses increased $292,000 and increased as a percent of revenue from 10.3% of
revenue to 11.4% as a result of our continued investment in our sales
infrastructure. 3rd Party commission expense increased $190,000 from 2005 to
2006 due to increased revenue. Travel expense increased $84,000 primarily due to
the continued rollout of our new instruction product into additional markets.

General and administrative expenses within this category increased by $275,000,
due to an increase in general corporate overhead and FAS 123R Stock option
expense in the amount of $53,000.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities for the five-month period ending May 31,
2006 was $501,000. Cash was primarily provided by our net loss, adjusted for
non-cash items and increase in accounts payable and


                                       16

<PAGE>

accrued expenses, offset primarily by increases in accounts receivable,
inventory, and a decrease in deferred revenue.

Accounts receivable and inventory increased, and accounts payable and accrued
expenses increased due to the cyclical nature of the Company's revenue cycle.
Net cash used in investing activities was $4.5 million, consisting primarily of
prepublication cost expenditures.

Net cash provided by financing activities was $5.6 million, consisting primarily
of net borrowings under our line of credit of $4.5 million, proceeds from a
short-term bank debt of $1.0 million, proceeds from long-term debt of $160,000,
and proceeds from the exercise of stock options of $73,000, offset by principal
payments of long-term debt of $146,000.

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 the Company's Total
          Funded Debt to EBITDA. At May 31, 2006, $6.4 million was outstanding
          under this facility, and $600,000 was still available for borrowing.

     -    The term loan is for $5.0 million and matures in May 2012. The term
          loan provides for payments of interest only for the first twelve
          months and for 72 equal monthly payments of principal and interest
          thereafter until maturity. The term loan bears interest at the same
          rate as the revolving line of credit. In May 2006, we exercised our
          option to convert the term loan to a fixed rate of 7.8%, by entering
          into a swap agreement.

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, a minimum annual stockholders'
equity of $7,431,000 at May 31, 2006, and prohibit net losses on a fiscal year
basis. 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.

A summary of our contractual cash obligations at May 31, 2006, excluding the
outstanding line of credit balances (as described above), is as follows:

                             PAYMENTS DUE BY PERIOD

<TABLE>
<CAPTION>
CONTRACTUAL CASH OBLIGATIONS         TOTAL        2007         2008         2009         2010        2011
----------------------------      ----------   ----------   ----------   ----------   ----------   --------
<S>                               <C>          <C>          <C>          <C>          <C>          <C>
Term Loan
   (including interest portion)   $6,327,000   $2,193,000   $1,131,000   $1,066,000   $1,001,000   $936,000
Capital Leases
   (including interest portion)      524,000      282,000      160,000       47,000       35,000         --
Operating Leases                   1,783,000      578,000      537,000      474,000      194,000         --
                                  ----------   ----------   ----------   ----------   ----------   --------
Total                             $8,634,000   $3,053,000   $1,828,000   $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 month of
May.

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 next year. We intend to continue investing


                                       17

<PAGE>

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 $219,000 at May 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
operations 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 we 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.


                                       18

<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk results from fluctuations in interest rates.
Based on average floating rate borrowing of $9.3 million, a one percent change
in the applicable rate would have caused the Company's interest expense for the
stub period to change by approximately $39,000. 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.


                                       19

<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 two months ended May 31, 2006, the Company did not issue any
     securities without registration under the Securities Act of 1933, except as
     follows: On April 29, 2006, the Company issued 2,600 shares of common stock
     to its employees upon the exercise of stock options. The aggregate exercise
     price of $7,800 was paid in cash. This issuance of shares was made in
     reliance on the exemptions from registration contained in Sections 4(2) and
     4(6) of the Securities Act.

     The following table provides information about purchases made by us of our
     common stock in the two months ended May 31, 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    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>
April 1 - April 30, 2006             --      N/A                     -                  98,826
May 1 - May 31, 2006                476        $4.05                476                 98,350
                           ------------   ----------   ----------------   --------------------
Total                               476        $4.05                476                 98,350
                           ============   ==========   ================   ====================
</TABLE>

(1)  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.


                                       20

<PAGE>

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

     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.


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<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: July 17, 2006                   PEOPLES EDUCATIONAL HOLDINGS, INC.


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


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