<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 February 28, 2007

[ ]  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 Identification No.)
 incorporation or organization)
</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 April 2, 2007.

<PAGE>

                                TABLE OF CONTENTS

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

   Item 1:  Financial Statements:

            Consolidated Balance Sheets as of February 28, 2007
               (Unaudited) and May 31, 2006..............................     3
            Unaudited Consolidated Statements of Operations for the Three
               and Nine Months Ended February 28, 2007 and 2006..........     4
            Unaudited Consolidated Statement of Changes in Stockholders
               Equity for the Nine Months Ended February 28, 2007........     5
            Unaudited Consolidated Statements of Cash Flows for the Nine
               Months Ended February 28, 2007 and 2006...................     6
            Condensed Notes to Consolidated Financial Statements
               (Unaudited)...............................................     7

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

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

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

PART II. OTHER INFORMATION

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

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

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

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

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

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

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

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

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


                                        2
<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                                        (UNAUDITED)        (AUDITED)
                                                     February 28, 2007   May 31, 2006
                                                     -----------------   ------------
<S>                                                  <C>                 <C>
ASSETS

Current Assets
Cash and Cash Equivalents                               $   186,910       $   749,792
Accounts Receivable Net of Allowances for
   Doubtful Accounts and Returns                          2,138,773         3,351,428
Inventory                                                 6,881,228         4,737,427
Prepaid Expenses and Other                                  551,676           315,080
Income Taxes Receivable                                          --           660,713
Deferred Income Taxes                                       655,000           746,955
                                                        -----------       -----------
      Total Current Assets                               10,413,587        10,561,395
Equipment - At Cost, Less Accumulated Depreciation
of $1,620,000 and $1,375,000, respectively                  744,645           829,456
                                                        -----------       -----------
Other Assets
Deferred Prepublication Costs, Net                       17,540,145        16,605,686
Deferred Income Taxes                                     1,307,000         1,054,965
Trademarks, Net                                             135,465           126,006
Deposits and Other                                          376,554           165,017
                                                        -----------       -----------
      Total Other Assets                                 19,359,164        17,951,674
                                                        -----------       -----------
Total Assets                                            $30,517,396       $29,342,525
                                                        ===========       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Current Maturities of Long Term Obligations             $   186,622       $ 2,487,086
Accounts Payable                                          7,830,800         7,808,965
Accrued Compensation                                        313,537           645,705
Short Term Bank Loan                                             --         1,000,000
Other Accrued Expenses                                      305,944           287,448
Deferred Revenue                                            372,324           257,439
                                                        -----------       -----------
      Total Current Liabilities                           9,009,227        12,486,643
Long Term Obligations, Less Current Maturities           14,357,541         9,420,076
                                                        -----------       -----------
Total Liabilities                                        23,366,768        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                                7,864,217         7,786,885
Retained Earnings (Accumulated Deficit)                    (738,554)         (431,992)
Less Treasury stock, 16,232 shares and 1,650,
   respectively, at cost                                    (63,858)           (7,910)
                                                        -----------       -----------
Total Stockholders' Equity                                7,150,628         7,435,806
                                                        -----------       -----------
Total Liabilities and Stockholders' Equity              $30,517,396       $29,342,525
                                                        ===========       ===========
</TABLE>


                                        3

<PAGE>

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

<TABLE>
<CAPTION>
                                                   Three Months Ended          Nine Months Ended
                                                       February 28                February 28
                                               -------------------------   -------------------------
                                                   2007          2006          2007          2006
                                               -----------   -----------   -----------   -----------
<S>                                            <C>           <C>           <C>           <C>
Revenue, Net                                   $ 5,934,072   $ 6,012,886   $29,519,879   $29,337,093

Cost of Revenue
      Direct Costs                               1,994,499     2,228,046    12,560,769    13,046,793
      Prepublication Cost Amortization           1,497,652     1,842,162     4,389,688     4,271,812
      Product Line Restructuring Cost                   --     3,930,980            --     3,930,980
                                               -----------   -----------   -----------   -----------
      Total                                      3,492,151     8,001,188    16,950,457    21,249,585

Gross Profit (Loss)                              2,441,921    (1,988,302)   12,569,422     8,087,508

Selling, General and Administrative Expenses     3,852,712     3,602,881    12,223,834    11,589,123
                                               -----------   -----------   -----------   -----------
Income (Loss) from Operations                   (1,410,791)   (5,591,183)      345,588    (3,501,615)

Other Expenses, Net                                  2,536        55,200        22,236        58,513
Interest Expense                                   211,652       158,245       781,259       402,764
                                               -----------   -----------   -----------   -----------
Net Loss Before Income Taxes                    (1,624,979)   (5,804,628)     (457,907)   (3,962,892)

Income Tax Benefit                                (618,000)   (2,153,415)     (151,345)   (1,416,415)
                                               -----------   -----------   -----------   -----------
Net Loss                                       $(1,006,979)  $(3,651,213)  $  (306,562)  $(2,546,477)
                                               ===========   ===========   ===========   ===========

Net Loss per Common Share
   Basic                                       $     (0.23)  $     (0.83)  $     (0.07)  $     (0.58)
   Diluted                                     $     (0.23)  $     (0.83)  $     (0.07)  $     (0.58)

Weighted-average Number of Common Shares
   Outstanding
   Basic                                         4,424,941     4,418,031     4,430,575     4,386,309
   Diluted                                       4,424,941     4,418,031     4,430,575     4,386,309
                                               ===========   ===========   ===========   ===========
</TABLE>


                                        4

<PAGE>

PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2007

<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             --       77,332          --          --       77,332
Purchase of Treasury Stock           --           --          --     (55,948)     (55,948)
Net Loss                             --           --    (306,562)         --     (306,562)
                                -------   ----------   ---------    --------   ----------
Balance, at February 28, 2007   $88,823   $7,864,217   $(738,554)   $(63,858)  $7,150,628
                                =======   ==========   =========    ========   ==========
</TABLE>


                                        5
<PAGE>

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

<TABLE>
<CAPTION>
                                               Nine Months Ended
                                                  February 28,
                                           -------------------------
                                               2007          2006
                                           -----------   -----------
<S>                                        <C>           <C>
Cash Flows From Operating Activities
Net Loss                                   $  (306,562)  $(2,546,477)
Adjustments to Reconcile Net Loss to Net
   Cash Provided by Operating Activities
   Depreciation                                244,310       248,066
   Amortization of Prepublication
      Costs and Intangible Assets            4,406,576     4,273,947
   Product Line Restructuring Costs                 --     3,930,980
   Deferred Income Taxes                      (160,080)   (1,308,000)
   Stock-Based Compensation                     77,332        26,336
Changes in Assets and Liabilities
   Accounts Receivable                       1,212,655     1,473,212
   Inventory                                (2,143,801)   (1,937,593)
   Prepaid Expense and Other                  (236,596)     (412,439)
   Deposits and Other                         (211,537)       (8,693)
   Accounts Payable and Accrued
      Expenses                                (298,586)   (1,794,598)
   Deferred Revenue                            114,885       210,107
   Income Taxes Payable or Refundable          667,462       539,380
                                           -----------   -----------
      Net Cash Provided by Operating
         Activities                          3,366,058     2,694,228
                                           -----------   -----------

Cash Flows From Investing Activities
   Purchases of Equipment                     (159,499)     (172,007)
   Expenditures for Intangibles                (26,347)      (35,702)
   Expenditures for Prepublication
      Costs                                 (5,324,147)   (8,377,178)
                                           -----------   -----------
      Net Cash Used in Investing
         Activities                         (5,509,993)   (8,584,887)
                                           -----------   -----------

Cash Flows From Financing Activities
   Net Borrowings Under Line of
      Credit                                (2,164,089)    3,245,643
   Net Proceeds from the Sale of
      Common Stock                                  --     2,877,095
   Purchase of Treasury Stock                  (55,948)       (5,984)
   Proceeds from the Exercise of
      Stock Options                                 --        65,250
   Principal Payments on Short Term
      Bank Loan                             (1,000,000)           --
   Net Borrowings on Long Term Debt          4,801,090      (272,802)
                                           -----------   -----------
      Net Cash Provided by Financing
         Activities                          1,581,053     5,909,202
                                           -----------   -----------

      Net Increase (Decrease) in Cash
         and Cash Equivalents                 (562,882)       18,543

Cash and Cash Equivalents
   Beginning of Period                         749,792       963,227
                                           -----------   -----------
   End of Period                           $   186,910   $   981,770
                                           ===========   ===========

Supplemental Cash Flow Information
   Cash Payments for:
      Interest                             $   736,823   $   402,764
                                           ===========   ===========
</TABLE>


                                        6

<PAGE>

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

NOTE 1 - Basis of Presentation

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

The accompanying condensed consolidated financial statements have been prepared
by the Company without audit and in accordance with the instructions to Form
10-Q and therefore do not include all information and disclosures necessary for
a fair presentation of the consolidated financial position, results of
operations, and cash flows in conformity with accounting principles generally
accepted in the United States of America. These condensed consolidated financial
statements contain, in the opinion of management, all adjustments (consisting of
normal accruals and other recurring adjustments) necessary for a fair
presentation of the consolidated financial position, results of operations, and
cash flows for the periods presented. The operating results for the period ended
February 28, 2007, 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 on form 10-Q for the
period ended May 31, 2006.

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 February 28, 2007 and May 31,
2006, were $460,000 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 February 28,
2007 and 2006 are as follows:


                                        7

<PAGE>

<TABLE>
<CAPTION>
                                       Three Months Ended          Nine Months Ended
                                           February 28                February 28
                                   -------------------------   -------------------------
                                       2007          2006          2007          2006
                                   -----------   -----------   -----------   -----------
<S>                                <C>           <C>           <C>           <C>
Balances, Beginning                $17,517,701   $17,813,098   $16,605,686   $14,600,780
   Prepublication Cost Additions     1,520,096     2,735,210     5,324,147     8,377,178
   Amortization Expense             (1,497,652)   (1,842,162)   (4,389,688)   (4,271,812)
   Product Line Restructuring               --    (3,594,511)           --    (3,594,511)
                                   -----------   -----------   -----------   -----------
Balances, Ending                   $17,540,145   $15,111,635   $17,540,145   $15,111,635
                                   ===========   ===========   ===========   ===========
</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   $ 1,323,000
For the year ended May 31, 2008      6,010,000
For the year ended May 31, 2009      4,721,000
For the year ended May 31, 2010      2,709,000
For the year ended May 31, 2011      1,706,000
Thereafter                           1,071,000
</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 February 28,
2007 and 2006 are as follows:

<TABLE>
<CAPTION>
                          Three Months Ended    Nine Months Ended
                              February 28          February 28
                         -------------------   -------------------
                           2007       2006       2007       2006
                         --------   --------   --------   --------
<S>                      <C>        <C>        <C>        <C>
Balances, Beginning      $136,161   $103,085   $126,006   $ 75,358
  Additions                 2,610      6,797     26,347     35,702
  Amortization Expense     (3,306)      (957)   (16,888)    (2,135)
                         --------   --------   --------   --------
Balances, Ending         $135,465   $108,925   $135,465   $108,925
                         ========   ========   ========   ========
</TABLE>

The estimated future amortization expense related to these intangibles is
expected to range from approximately $4,000 to $8,000 in each of the next five
years.

NOTE 6 - Financing Arrangements

On February 15, 2007, the Company entered into a new $20 million credit
agreement with Sovereign Bank to refinance its previous bank credit agreement
with Manufacturers and Traders Bank. Amounts borrowed under the agreement are
secured by substantially all of the assets of the Company. The agreement
provides for a $10 million revolving line of credit and a $10 million term loan.

     -    The revolving line of credit provides for advances up to $10.0 million
          and expires in March 2012. The interest rate on the revolving line of
          credit is in a range from LIBOR plus 2.0% to LIBOR plus 2.25%, or
          prime to prime plus 0.5%, with the exact interest rate based on the
          ratio of the Company's Total Funded Debt to EBITDA. At February 28,
          2007, $4.3 million was outstanding under this facility, and $5.7
          million was still available for borrowing.

     -    The term loan is for $10.0 million and matures in December 2012. The
          term loan provides for payments of interest only for the first twelve
          months and for 20 equal quarterly payments of principal and interest
          thereafter until maturity. The term loan bears interest at the same
          rate as the revolving line of credit.


                                        8

<PAGE>

The credit agreement contains certain financial covenants, calculated on a
consolidated basis for the Company and its subsidiary, which, among other
things, impose a maximum ratio of total funded debt to EBITDA, and a minimum
fixed charge coverage ratio. These financial covenants restrict the payment of
dividends on the Company's common stock.

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

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 nine month period ended February 28, 2007 was approximately $77,000
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 condensed consolidated statement of operations, prior to the period
ended December 31, 2005.

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

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


                                        9

<PAGE>

The following table represents stock option activity for the nine months ended
February 28, 2007:

<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                    WEIGHTED         AVERAGE
                                     NUMBER OF       AVERAGE        REMAINING
                                       SHARES    EXERCISE PRICE   CONTRACT LIFE
                                     ---------   --------------   --------------
<S>                                  <C>         <C>              <C>
Outstanding options at 5/31/06        826,036         $3.31
Granted                                40,000         $4.18
Canceled                              (10,000)        $6.00
                                      -------
Outstanding options at 2/28/07        856,036         $3.44          4.39 Yrs.
                                      =======
Outstanding exercisable at 2/28/07    801,236         $3.37          4.29 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 nine months ended February 28, 2007 were an expected
dividend yield rate of 0%, an expected stock price volatility of 43%, a risk
free interest rate of 4.3% to 6.3%, and an expected life of the options of five
years. Shares available for future stock grants to employees and directors under
existing plans were 55,975 at February 28, 2007. At February 28, 2007, the
aggregate intrinsic value of options outstanding was $201,000, and the aggregate
intrinsic value of options exercisable was $200,000. No options were exercised
during the nine months ended February 28, 2007.

The following table summarizes our non-vested stock option activity for the
period ended February 28, 2007:

<TABLE>
<CAPTION>
                                     NUMBER OF SHARES
                                     ----------------
<S>                                  <C>
Nonvested stock options at 5/31/06        190,492
Vested                                   (165,692)
Canceled                                  (10,000)
Granted                                    40,000
                                         --------
Nonvested stock options at 2/28/07         54,800
                                         ========
</TABLE>

At February 28, 2007, there was approximately $72,000 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 nine months ended February 28, 2007 and 2006 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--


                                       10

<PAGE>

an Interpretation of FASB Statement 109 ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. This Interpretation provides that
the tax effects from an uncertain tax position can be recognized in our
financial statements, only if the position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of the beginning of fiscal 2008, with the
cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently evaluating the impact
of adopting FIN 48 on our financial statements.

NOTE 10 - Fiscal Year End Change

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

NOTE 11 - Related-Party Transactions

Mr. Casabonne, one of the Company's directors, is a principal in Casabonne
Associates and was a principal until October 1, 2006 in Marketing Works. The
table below summarizes payments made to Casabonne Associates and Marketing Works
for the three and nine-month periods ended February 28, 2007 and 2006.

<TABLE>
<CAPTION>
                         Three Months        Nine Months
                             Ended              Ended
                           February 28       February 28
                       ----------------   -----------------
                        2007      2006      2007      2006
                       ------   -------   -------   -------
<S>                    <C>      <C>       <C>       <C>
Casabonne Associates   $   --   $ 9,700   $19,000   $36,000
Marketing Works         4,000    12,000    36,000    31,000
                       ------   -------   -------   -------
Total Payments         $4,000   $21,700   $55,000   $67,000
                       ======   =======   =======   =======
</TABLE>


                                       11
<PAGE>

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

FORWARD-LOOKING STATEMENTS

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

SEASONALITY

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

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

OVERVIEW

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

TEST PREPARATION, ASSESSMENT, AND INSTRUCTION PRODUCT GROUP

Test Preparation, Assessment

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

     -    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
          instructional materials or to other products in use within a school or
          district. The strategy is to help


                                       12

<PAGE>

          educators assess a child's strengths and weaknesses relative to the
          state standards and then provide a Personal Prescriptive Path(TM) for
          remediation. The assessment data can be aggregated using
          NCLB-compliant reporting at the class, school and district level and
          can be used to drive not only student learning, but teacher
          professional development as well.

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

     Instruction

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

COLLEGE PREPARATION PRODUCT GROUP

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




                                       13

<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED FEBRUARY 28, 2007 VS. THREE MONTHS ENDED FEBRUARY 28, 2006
<TABLE>
<CAPTION>
                                                      Three Months Ended February 28,
                                                     ---------------------------------
(Amounts in Thousands)                                     2007              2006
                                                     ---------------   ---------------
<S>                                                  <C>       <C>     <C>       <C>
Revenue
   Test Preparation, Assessment and Instruction      $ 5,149    86.8%  $ 5,188    86.3%
   College Preparation                                   785    13.2%      825    13.7%
                                                     -------   -----   -------   -----
Total Revenue                                          5,934   100.0%    6,013   100.0%

Cost of Revenue
   Direct Costs                                        1,994    33.6%    2,228    37.1%
   Prepublication Cost Amortization                    1,498    25.2%    1,842    30.6%
   Product Line Restructuring                             --     0.0%    3,931    65.4%
                                                     -------   -----   -------   -----
Total Cost Of Revenue                                  3,492    58.8%    8,001   133.1%

Gross Profit (Loss)                                    2,442    41.2%   (1,988)  -33.1%

Selling, General and Administrative Expenses
   Marketing and Selling                               2,697    45.4%    2,402    39.9%
   General and Administrative                          1,156    19.5%    1,201    19.9%
                                                     -------   -----   -------   -----
Total Selling, General and Administrative Expenses     3,853    64.9%    3,603    59.8%

Operating Loss                                        (1,411)  -23.7%   (5,591)  -92.9%

Other Expenses                                             2     0.0%       55     0.9%
Interest Expense                                         212     3.6%      158     2.6%
                                                     -------   -----   -------   -----
Net Loss Before Taxes                                 (1,625)  -27.3%   (5,804)  -96.4%

Income Tax Benefit                                      (618)  -10.4%   (2,153)  -35.8%
                                                     -------   -----   -------   -----
Net Loss                                             $(1,007)  -16.9%  $(3,651)  -60.6%
                                                     =======   =====   =======   =====
</TABLE>

REVENUE

Overview

Total revenue for the three month period ended February 28, 2007 was $5.9
million, compared to $6.0 million during the same period in the prior year.
Although revenue was down 1% on a year over year basis, our results outperformed
the K-12 educational publishing industry during this time frame, which recorded
a 9% year over year decrease, according to the Association of American
Publishers.

Test Preparation, Assessment, and Instruction

Revenue derived from this product group was $5.1 million for the three months
ended February 28, 2007 compared to $5.2 million for the same period in the
prior year. Test Preparation and Assessment revenue within this group decreased
4% on a year-over-year basis. Focused Instruction revenue grew 59% on a year
over year basis as we continue to actively market and develop new titles for
this product line. Our remedial, multicultural and professional development
materials decreased $56,000 or 45%, as we are not actively marketing these
products any longer.

College Preparation

College Preparation product line revenue for the three-months ended February 28,
2007 was 5% below the prior year. Distribution revenue, which accounts for over
90% of the total revenue within this line,


                                       14

<PAGE>

was down 7% primarily due to timing of receipt of orders from customers as year
to date nine-month revenue is up 2%. Proprietary revenue for the quarter was
$43,000, an increase of over 59% on a year over year basis. We are continuing to
invest in new proprietary product development and actively market our
distribution products within that line as we continue to be optimistic about the
opportunities for growth in this market niche.

COST OF REVENUE

Cost of Revenue for the three months ended February 28, 2007 was $3.5 million
(58.8% of revenue) compared to $8.0 million (133.1% of revenue) during the same
period in the prior year. In fiscal 2006, we made a strategic decision to
eliminate certain product offerings, which performed below management's
expectation. This decision led to restructuring charges of $3.9 million,
including a $3.6 million write down of deferred prepublication costs and a $0.3
million write-down of inventory related to the product offerings which were
discontinued or adjusted to the lower of cost or market. On a proforma basis
excluding the product line restructuring cost, Cost of Revenue for the three
months ended February 28, 2006 would have been $4.1 million or 67.7% of revenue.

Cost of Revenue generally consists of two components: direct costs and
prepublication cost amortization. In addition, in fiscal 2006 it also included
the Product Line Restructuring Charge as discussed above. 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 37.1% in
               fiscal 2006 to 33.6% in fiscal 2007. The decrease as a percent of
               revenue is primarily due to a reduction in product costs which is
               the result of the cost reduction initiatives implemented during
               the past nine months.

          -    Prepublication costs include one-time expenses associated with
               developing and producing new or revised proprietary products. It
               includes all editorial expenses, writing, page design and makeup,
               art and other permissions, prepress, and any other costs incurred
               up to the print/bind stage of the books. These prepublication
               costs also include expenses incurred for other forms of product
               development, such as expert reviews. Prepublication costs are
               capitalized and expensed on a straight-line basis over a three-
               or five-year period, based upon the product. We believe our
               amortization policy is in line with industry practice. For the
               three month period ending February 28, 2007 we amortized $1.5
               million of prepublication costs, compared to $1.8 million during
               the same period in the prior year.

MARKETING AND SELLING

Marketing and Selling expenses increased from $2.4 million for the three months
ended February 28, 2006 (40% of revenue) to $2.7 million in fiscal 2007 (45% of
revenue), an increase of 12%.

Marketing expense within this category increased $436,000 from fiscal 2006 to
fiscal 2007 primarily due to a $265,000 increase in catalog expense as a result
of the mailing of 13 state specific catalogs for our Testing, Assessment and
Instruction products. In fiscal 2006, we did not mail state specific catalogs
but instead utilized state specific brochures. In addition, promotional expense
increased $134,000 compared to the prior year due to new programs and products
introduced in fiscal 2007.

Selling expenses within this category decreased $140,000. The variance in
absolute dollars is due to a $149,000 decrease in commission expense as a result
of lower revenue, offset by an increase in selling salaries and related expenses
as a result of the growth in our sales infrastructure. In addition, we have
elected to participate in a state adoption for one of our major college
publishers within our College Preparation niche. We incurred $93,000 of
incremental expenses during the three months ended February 28, 2007. Revenue
related to this state adoption will not begin to be realized until the summer of
2007.


                                       15

<PAGE>

GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased 3.7% for the three months ended
February 28, 2007 compared to the same period in the prior year. Included in the
fiscal 2007 expense was $33,000 of FAS 123R stock option expense, compared to
$26,000 in fiscal 2006.

INTEREST EXPENSE

Interest expense for the three month period ended February 28, 2007 was
$212,000, compared to $158,000 for the same period in fiscal 2006. The change is
due to an increase in outstanding debt on a year over year basis.

NINE MONTHS ENDED FEBRUARY 28, 2007 VS. NINE MONTHS ENDED FEBRUARY 28, 2006

<TABLE>
<CAPTION>
                                                       Nine Months Ended February 28,
                                                     ---------------------------------
(Amounts in Thousands)                                     2007              2006
                                                     ---------------   ---------------
<S>                                                  <C>       <C>     <C>       <C>
Revenue
   Test Preparation, Assessment and Instruction      $18,827    63.8%  $18,995    64.7%
   College Preparation                                10,693    36.2%   10,342    35.3%
                                                     -------   -----   -------   -----
Total Revenue                                         29,520   100.0%   29,337   100.0%

Cost of Revenue
   Direct Costs                                       12,561    42.6%   13,047    44.5%
   Prepublication Cost Amortization                    4,390    14.9%    4,272    14.6%
      Product Line Restructuring                          --     0.0%    3,931    13.4%
                                                     -------   -----   -------   -----
Total Cost Of Revenue                                 16,951    57.5%   21,250    72.5%

Gross Profit                                          12,569    42.5%    8,087    27.5%

Selling, General and Administrative Expenses
   Marketing and Selling                               8,651    29.3%    7,831    26.7%
   General and Administrative                          3,573    12.1%    3,758    12.8%
                                                     -------   -----   -------   -----
Total Selling, General and Administrative Expenses    12,224    41.4%   11,589    39.5%

Operating Income (Loss)                                  345     1.1%   (3,502)  -12.0%

Other Expenses                                            22     0.1%       58     0.2%
Interest Expense                                         781     2.6%      403     1.4%
                                                     -------   -----   -------   -----
Net Loss Before Taxes                                   (458)   -1.6%   (3,963)  -13.6%

Income Tax Benefit                                      (151)   -0.5%   (1,416)   -4.8%
                                                     -------   -----   -------   -----
Net Loss                                             $  (307)   -1.1%  $(2,547)   -8.8%
                                                     =======   =====   =======   =====
</TABLE>

REVENUE

Overview

Total revenue for the nine-month period ended February 28, 2007 was $29.5
million, compared to $29.3 million during the same period in the prior year.
Although revenue was up a modest 1% on a year over year basis, our results
outperformed the K-12 educational publishing industry, which recorded a 7% year
over year decrease, according to the Association of American Publishers.


                                       16
<PAGE>

Test Preparation, Assessment, and Instruction

Revenue from this product group was $18.8 million for the nine months ended
February 28, 2007 compared to $19.0 million in the prior year. Test Preparation
and Assessment revenue within the group decreased 1% on a year-over-year basis
primarily due a large, $542,000 district sale in the prior year, which did not
reoccur in the current year. Excluding this non-recurring sale, revenue
increased 2% on a year over year basis. Focused Instruction revenue increased
28% from the prior year as we continue to actively market and develop new titles
for this product line. In addition revenue from our remedial, multicultural and
professional development materials decreased by $358,000 or 52%, as we are not
actively marketing these products.

College Preparation

College Preparation product line revenue for the nine months ended February 28,
2007 was $10.7 million, an increase of 3.4% from the same period in the prior
year. Distribution revenue, which accounts for over 90% of the total revenue
within this revenue group, was up 2% on a year over year basis. Proprietary
revenue was $361,000, which represents an increase of over 84% on a year over
year basis. We are continuing to invest in new proprietary product development
and actively market our distribution products within this line as we continue to
be optimistic about the opportunities for growth in this market niche.

COST OF REVENUE

Cost of Revenue for the nine months ended February 28, 2007 was $17.0 million
(57.5% of revenue) compared to $21.2 million (72.5% of revenue) during the same
period in fiscal 2006. Excluding the $3.9 million Product Line Restructuring
Charge (as discussed in the results of operations for the three months ended
February 28) the proforma Cost of Revenue for the nine months ended February 28,
2006 would have been $17.3 million or 59.1% of revenue.

Cost of Revenue generally consists of two components: direct costs and
prepublication cost amortization. In addition, in fiscal 2006 it also included
the Product Line Restructuring Charge. 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 44.5% in
               fiscal 2006 to 42.6% in fiscal 2007. The decrease as a percent of
               revenue is primarily in product costs as we have begun to realize
               the benefits of the cost reduction initiatives we implemented
               during the past nine months.

          -    Prepublication costs include one-time expenses associated with
               developing and producing new or revised proprietary products. It
               includes all editorial expenses, writing, page design and makeup,
               art and other permissions, prepress, and any other costs incurred
               up to the print/bind stage of the books. These prepublication
               costs also include expenses incurred for other forms of product
               development, such as expert reviews. Prepublication costs are
               capitalized and expensed on a straight-line basis over a three or
               five-year period, based upon the product. We believe our
               amortization policy is in line with industry practice. For the
               nine month period ending February 28, 2007 we amortized $4.4
               million of prepublication costs, compared to $4.3 million in
               2006.

MARKETING AND SELLING

Marketing and Selling expenses increased from $7.8 million for the nine months
ended February 28, 2006 (26.7% of revenue) to $8.7 million in fiscal 2007 (29.3%
of revenue), an increase of 10.5%.

Marketing expense within this category increased $599,000 primarily due to a
$523,000 increase in catalog expense as a result of the two mailings of 13 state
specific catalogs for our Testing, Assessment and Instruction products. In
fiscal 2006, we did not mail state specific catalogs but instead utilized state
specific brochures.


                                       17

<PAGE>

Selling expenses within this category increased $221,000 and increased as
percent of revenue from 20.0% in fiscal 2006 to 20.6% in fiscal 2007. The
increase in absolute dollars is primarily due to $239,000 of incremental
expenses associated with our participation in a state adoption for one of our
major college publishers within our College Preparation niche. Revenue related
to this adoption will not begin to be realized until the summer of 2007. In
addition, salaries and related expenses increased as a result of the growth of
our sales infrastructure.

GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased from $3.8 million to $3.6 million,
a decrease of 4.9%. The decrease in a result of the cost containment initiatives
implemented during the past twelve months. Included in the fiscal 2007 expense
was $77,000 of FAS 123R stock option expense, compared to $26,000 in fiscal
2006.

INTEREST EXPENSE

Interest Expense for fiscal 2007 was $781,000 compared to $403,000 in fiscal
2006. The fluctuation is due to an increase in the average debt outstanding on a
year over year basis and the recording of $57,000 of interest expense related to
the termination of our previous term loan in conjunction with our new bank
facility.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for the nine-month period ending
February 28, 2007 was $3.4 million. Cash was primarily provided by our
profitability before depreciation and amortization, as well as a decrease in
accounts receivable and accounts payable offset by an increase in inventory.
Accounts receivable and accounts payable decreased, while inventory increased,
due to the cyclical nature of the Company's revenue cycle.

Net cash used in investing activities was $5.5 million, consisting primarily of
prepublication cost expenditures of $5.3 million. Prepublication expenditures
for the nine-months ended February 28, 2007 decreased $3.1 million and 36.4% for
the same period in the prior year. The decrease in expenditures is primarily due
to efficiencies realized within our production and editorial departments which
allowed us to reduce the development costs on new and revised titles.

Net cash provided by financing activities was $1.6 million, consisting primarily
of net borrowings under our new bank agreement.

On February 15, 2007, the Company entered into a new $20 million credit
agreement with Sovereign Bank to refinance its previous bank credit agreement
with Manufacturers and Traders Bank. Amounts borrowed under the agreement are
secured by substantially all of the assets of the Company. The agreement
provides for a $10 million revolving line of credit and a $10 million term loan.

     -    The revolving line of credit provides for advances up to $10.0 million
          and expires in March 2012. The interest rate on the revolving line of
          credit is in a range from LIBOR plus 2.0% to LIBOR plus 2.25%, or
          prime to prime plus 0.5%, with the exact interest rate based on the
          ratio of the Company's Total Funded Debt to EBITDA. At February 28,
          2007, $4.3 million was outstanding under this facility, and $5.7
          million was still available for borrowing.

     -    The term loan is for $10.0 million and matures in December 2012. The
          term loan provides for payments of interest only for the first twelve
          months and for 20 equal quarterly payments of principal and interest
          thereafter until maturity. The term loan bears interest at the same
          rate as the revolving line of credit.

The credit agreement contains certain financial covenants, calculated on a
consolidated basis for the Company and its subsidiary, which, among other
things, impose a maximum ratio of total funded debt to


                                       18

<PAGE>

EBITDA, and a minimum fixed charge coverage ratio. These financial covenants
restrict the payment of dividends on the Company's common stock.

A summary of our contractual cash obligations at February 28, 2007, excluding
the outstanding line of credit balance (as described above), is as follows:

<TABLE>
<CAPTION>
CONTRACTUAL CASH OBLIGATIONS          TOTAL       2007        2008         2009         2010         2011
----------------------------      -----------   --------   ----------   ----------   ----------   ----------
<S>                               <C>           <C>        <C>          <C>          <C>          <C>
Term Loan
   (including interest portion)   $ 9,138,000   $180,000   $1,558,000   $2,618,000   $2,467,000   $2,315,000
Capital Leases
   (including interest portion)       302,000     60,000      160,000       47,000       35,000           --
Operating Leases                    1,349,000    144,000      536,000      475,000      194,000           --
                                  -----------   --------   ----------   ----------   ----------   ----------
Total                             $10,789,000   $384,000   $2,254,000   $3,140,000   $2,696,000   $2,315,000
                                  ===========   ========   ==========   ==========   ==========   ==========
</TABLE>

We use our cash and borrowing availability under our financing arrangements,
together with cash generated from operations, to meet our cash needs. We believe
that our borrowing capacity together with our existing sources of cash will be
sufficient to meet our anticipated cash needs for the balance of the fiscal
year. We intend to continue investing in prepublication costs for our
proprietary products, using cash generated from operations, and borrowings under
financing arrangements. As we develop more products, additional investments in
inventory will be required.

OFF-BALANCE SHEET ARRANGEMENTS

None.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

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

Revenue Recognition and Allowance for Returns

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

Deferred Prepublication Costs

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

Allowance for Excess and Slow-Moving Inventory

The Company continuously monitors its inventory on hand for salability. This
monitoring includes review of historical sales experience, projected sales
activity by title, and any planned changes to a title that are known by
management. Any slow-moving or non-salable inventory identified is reserved or
written down at that time. The reserve of $348,000 at February 28, 2007 is
believed to be adequate to cover inventory loss exposure.


                                       19

<PAGE>

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.

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 $12.7 million, a one percent
change in the applicable rate would have caused the Company's interest expense
for the quarter to change by approximately $32,000. The Company's management
believes that these amounts are not material to the Company's operations.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF 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.

Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, will be or have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitation in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

In the first quarter of calendar year 2005, we began implementation of our
project to document and test our internal control procedures in order to satisfy
the requirements of Section 404 of the Sarbanes-Oxley Act. We have engaged a
third party consulting firm to assist us in this effort. We are currently in the
documentation phase of the project. We are currently not required to comply with
Section 404 until the end of our fiscal year 2008. Management has not identified
any deficiencies in internal control that would constitute a material weakness.
There have not been significant changes in our internal control over


                                       20

<PAGE>

financial reporting as a result of our documentation efforts. However, as we
move into the remediation phase of the project we expect that there may be
changes to our internal control structure in order to comply with Section 404.

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 February 28, 2007, we did not issue any
     securities without registration under the Securities Act of 1933

     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. At February 28, 2007, 83,768 shares remained that
     could be purchased under the plan or programs. No share repurchase plan or
     program expired, or was terminated, during the period covered by this
     report.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

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

     None.

ITEM 5. OTHER INFORMATION

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


                                       21

<PAGE>

ITEM 6. EXHIBITS

     Exhibit 10.1   Loan Agreement dated February 15, 2007, by and between
                    Peoples Educational Holdings, Inc. and Sovereign Bank [filed
                    as Exhibit 10.1 to the Company's Current Report on Form 8-K
                    filed February 15, 2007 and incorporated herein by
                    reference].

     Exhibit 10.2   $10 million Revolving Credit Promissory Note dated February
                    15, 2007 payable by Peoples Educational Holdings, Inc. to
                    Sovereign Bank [filed as Exhibit 10.2 to the Company's
                    Current Report on Form 8-K filed February 15, 2007 and
                    incorporated herein by reference].

     Exhibit 10.3   $10 million Term Promissory Note dated February 15, 2007
                    payable by Peoples Educational Holdings, Inc. to Sovereign
                    Bank [filed as Exhibit 10.3 to the Company's Current Report
                    on Form 8-K filed February 15, 2007 and incorporated herein
                    by reference].

     Exhibit 10.4   Security Agreement dated February 15, 2007, by and between
                    Peoples Educational Holdings, Inc., Peoples Education, Inc.
                    and Sovereign Bank [filed as Exhibit 10.4 to the Company's
                    Current Report on Form 8-K filed February 15, 2007 and
                    incorporated herein by reference].

     Exhibit 10.5   Guaranty and Suretyship Agreement dated February 15, 2007,
                    by Peoples Educational Holdings, Inc. and Peoples Education,
                    Inc. in favor of Sovereign Bank [filed as Exhibit 10.5 to
                    the Company's Current Report on Form 8-K filed February 15,
                    2007 and incorporated herein by reference].

     Exhibit 10.6   Pledge of Stock Agreement dated February 15, 2007, by
                    Peoples Educational Holdings, Inc. in favor of Sovereign
                    Bank [filed as Exhibit 10.6 to the Company's Current Report
                    on Form 8-K filed February 15, 2007 and incorporated herein
                    by reference].

     Exhibit 10.7   Amendment to Employment Agreement between Peoples Education,
                    Inc. (f/k/a The Peoples Publishing Group, Inc.) and James J.
                    Peoples, dated September 17, 2006 [filed as Exhibit 10.1 to
                    the Company's Current Report on Form 8-K filed September 17,
                    2006 and incorporated herein by reference].

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

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

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

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


                                       22

<PAGE>

SIGNATURES

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

Dated: April 13, 2007                  PEOPLES EDUCATIONAL HOLDINGS, INC.


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


                                       23