<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 March 31, 2006

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

             For the transition period from _________ to _________.

                          Commission File No. 000-50916

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

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

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

                                 (201) 712-0090
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

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

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

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

Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practical date: 4,441,673 shares of Common Stock
(par value $0.02 per share) outstanding on May 11, 2006.


                                        1

<PAGE>

                                TABLE OF CONTENTS

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

   Item 1: Financial Statements:
      Consolidated Balance Sheets as of March 31, 2006 (Unaudited)
         and December 31, 2005 ..........................................     3
      Unaudited Consolidated Statements of Operations for the Three
         Months Ended March 31, 2006 and 2005 ...........................     4
      Unaudited Consolidated Statement of Changes in Stockholders
         Equity for the Three Months Ended March 31, 2006 ...............     5
      Unaudited Consolidated Statements of Cash Flows for the Three
         Months Ended March 31, 2006 and 2005 ...........................     6
      Condensed Notes to Consolidated Financial Statements (Unaudited) ..     7
   Item 2: Management's Discussion and Analysis of Financial Condition
      and Results of Operations .........................................    11
   Item 3: Quantitative and Qualitative Disclosures About Market Risk....    16
   Item 4: Controls and Procedures ......................................    16

PART II. OTHER INFORMATION
   Item 1: Legal Proceedings ............................................    17
   Item 1A: Risk Factors ................................................    17
   Item 2: Unregistered Sales of Equity Securities and Use of Proceeds ..    17
   Item 3: Defaults Upon Senior Securities ..............................    17
   Item 4: Submission of Matters to a Vote of Security Holders ..........    17
   Item 5: Other Information ............................................    17
   Item 6: Exhibits .....................................................    17

SIGNATURES ..............................................................    18

EXHIBITS ................................................................    19
</TABLE>


                                        2

<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                                                         (unaudited)
                                                                       March 31, 2006   December 31, 2005
                                                                       --------------   -----------------
<S>                                                                    <C>              <C>
ASSETS
Current Assets
Cash and Cash Equivalents                                               $   488,874        $   228,665
Accounts Receivable Net of Allowances for
   Doubtful Accounts and Returns                                          1,462,124          2,799,224
Inventory                                                                 4,615,494          3,525,315
Prepaid Expenses and Other                                                  340,599            390,601
Income Taxes Receivable                                                   1,040,720            693,442
Deferred Income Taxes                                                       684,500            684,500
                                                                        -----------        -----------
   Total Current Assets                                                   8,632,311          8,321,747
Equipment - At Cost, Less Accumulated Depreciation
   of $1,323,000 in 2006 and $1,244,000 in 2005                             862,350            915,983
                                                                        -----------        -----------
Other Assets
Deferred Prepublication Costs, Net                                       15,736,614         14,316,531
Deferred Income Taxes                                                       561,500            561,500
Trademarks, Net                                                             119,609            102,780
Deposits and Other                                                          161,661            153,616
                                                                        -----------        -----------
   Total Other Assets                                                    16,579,384         15,134,427
                                                                        -----------        -----------
Total Assets                                                            $26,074,045        $24,372,157
                                                                        ===========        ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long Term Obligations                             $   965,695        $   834,565
Accounts Payable                                                          5,677,653          7,741,132
Accrued Compensation                                                        479,635            328,235
Other Accrued Expenses                                                      303,673            271,733
Deferred Revenue                                                            304,550            343,192
                                                                        -----------        -----------
   Total Current Liabilities                                              7,731,206          9,518,857
Long Term Obligations, less current maturities                           10,747,832          6,587,432
                                                                        -----------        -----------
Total Liabilities                                                        18,479,038         16,106,289
                                                                        -----------        -----------
Commitments and Contingencies
Stockholders' Equity
Common stock, $0.02 par value; authorized 8,500,000 shares;
   issued and outstanding in 4,438,573 in 2006 and 4,384,198 in 2005         88,771             87,684
Additional Paid In Capital                                                7,766,092          7,662,424
Retained Earnings (Deficit)                                                (253,872)           521,744
Less cost of 1,174 shares of Treasury Stock                                  (5,984)            (5,984)
                                                                        -----------        -----------
Total Stockholders' Equity                                                7,595,007          8,265,868
                                                                        -----------        -----------
Total Liabilities and Stockholders' Equity                              $26,074,045        $24,372,157
                                                                        ===========        ===========
</TABLE>


                                        3

<PAGE>

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

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                                March 31
                                                       -------------------------
                                                           2006          2005
                                                       -----------   -----------
<S>                                                    <C>           <C>
Revenue, Net                                           $ 5,814,201   $ 4,923,593

Cost of Revenue
   Direct Costs                                          2,020,192     1,755,989
   Prepublication Cost Amortization                      1,174,274       995,694
                                                       -----------   -----------
   Total                                                 3,194,466     2,751,683

Gross Profit                                             2,619,735     2,171,910

Selling, General and Administrative Expenses             3,676,296     3,576,329
                                                       -----------   -----------
Loss from Operations                                    (1,056,561)   (1,404,419)

Other Expenses, Net                                         16,858         5,089
Interest Expense                                           177,697        64,875
                                                       -----------   -----------
Net Loss Before Income Taxes                            (1,251,116)   (1,474,383)

Federal and State Income Tax Benefit                      (475,500)     (590,000)
                                                       -----------   -----------
Net Loss                                               $  (775,616)  $  (884,383)
                                                       ===========   ===========
Net Loss per Common Share
   Basic and Diluted                                   $     (0.17)  $     (0.23)

Weighted-average Number of Common Shares Outstanding
   Basic and Diluted                                     4,437,365     3,809,198
                                                       ===========   ===========
</TABLE>


                                       4

<PAGE>

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

<TABLE>
<CAPTION>
                                       Additional    Retained
                              Common     Paid-In    Earnings    Treasury
                              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        1,087       64,163                              65,250
Stock-Based Compensation                   39,505                              39,505
Net Loss                                             (775,616)               (775,616)
                             -------   ----------   ---------   -------    ----------
Balance, at March 31, 2006   $88,771   $7,766,092   $(253,872)  $(5,984)   $7,595,007
                             =======   ==========   =========   =======    ==========
</TABLE>


                                       5

<PAGE>

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

<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                                   -------------------------
                                                                    March 31,     March 31,
                                                                       2006          2005
                                                                   -----------   -----------
<S>                                                                <C>           <C>
Cash Flows From Operating Activities
Net Loss                                                           $  (775,616)  $  (884,383)
Adjustments to Reconcile Net Loss to Net Cash
   Provided by (Used in) Operating Activities
      Depreciation                                                      79,246        74,503
      Amortization of Prepublication Costs and Intangible Assets     1,175,254       996,234
      Stock-Based Compensation                                          39,505            --
Changes in Assets and Liabilities
      Accounts Receivable                                            1,337,100       305,865
      Inventory                                                     (1,090,179)     (286,840)
      Prepaid Expense and Other                                         50,002      (199,664)
      Advance Royalties                                                     --        12,098
      Deposits and Other                                                (8,045)      (50,409)
      Accounts Payable and Accrued Expenses                         (1,880,139)      699,927
      Deferred Revenue                                                 (38,642)      (73,457)
      Income Taxes Payable or Refundable                              (347,278)     (590,000)
                                                                   -----------   -----------
         Net Cash Provided by (Used in) Operating Activities        (1,458,792)        3,874
                                                                   -----------   -----------
Cash Flows From Investing Activities
      Purchases of Equipment                                           (25,613)     (143,078)
      Expenditures for Intangibles                                     (17,809)           --
      Expenditures for Prepublication Costs                         (2,594,357)   (2,401,985)
                                                                   -----------   -----------
         Net Cash Used in Investing Activities                      (2,637,779)   (2,545,063)
                                                                   -----------   -----------
Cash Flows From Financing Activities
      Net Borrowings Under Line of Credit                            4,220,588     2,479,803
      Proceeds From the Exercise of Stock Options                       65,250            --
      Proceeds from Long Term Debt                                     159,703       187,151
      Principal Payments on Long Term Debt                             (88,761)      (76,752)
                                                                   -----------   -----------
         Net Cash Provided by Financing Activities                   4,356,780     2,590,202
                                                                   -----------   -----------
         Net Increase in Cash and Cash Equivalents                     260,209        49,013
Cash and Cash Equivalents
      Beginning of Period                                              228,665       134,317
                                                                   -----------   -----------
      End of Period                                                $   488,874   $   183,330
                                                                   ===========   ===========
Supplemental Cash Flow Information
      Cash Payments for:
         Interest                                                  $   177,697   $    64,875
         Income Taxes                                              $        --   $        --
                                                                   ===========   ===========
</TABLE>


                                       6
<PAGE>

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

NOTE 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
by the Company without audit and in accordance with the instructions to Form
10-Q and therefore do not include all information and disclosures necessary for
a fair presentation of financial position, results of operations, and cash flows
in conformity with accounting principles generally accepted in the United States
of America. These unaudited 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 March 31, 2006, are not necessarily
indicative of the operating results to be expected for the full fiscal year.
Accordingly, these condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the related
notes included in our Annual Report on Form 10-K for the year ended December 31,
2005.

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 March 31, 2006, and December
31, 2005, were $423,000 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 both
periods presented, diluted shares were the same as basic shares since the effect
of options and warrants would have been anti-dilutive.

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 March 31, 2006
and 2005, are as follows:

<TABLE>
<CAPTION>
                                       Three Months Ended
                                            March 31
                                   -------------------------
                                       2006          2005
                                   -----------   -----------
<S>                                <C>           <C>
Balances, Beginning                $14,316,531   $11,666,604
   Prepublication Cost Additions     2,594,357     2,401,985
   Amortization Expense             (1,174,274)     (995,694)
                                   -----------   -----------
Balances, Ending                   $15,736,614   $13,072,895
                                   ===========   ===========
</TABLE>


                                        7

<PAGE>

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 2006              $4,061,000
For the year ended December 31, 2007    4,733,000
For the year ended December 31, 2008    3,641,000
For the year ended December 31, 2009    2,015,000
For the year ended December 31, 2010    1,069,000
Thereafter                                218,000
</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 March 31, 2006
and 2005 are as follows:

<TABLE>
<CAPTION>
                          Three Months Ended
                               March 31
                          ------------------
                            2006       2005
                          --------   -------
<S>                       <C>           <C>
Balances, Beginning       $102,780   $57,486
   Additions                17,809        --
   Amortization Expense       (980)     (540)
                          --------   -------
Balances, Ending          $119,609   $56,946
                          ========   =======
</TABLE>

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

<TABLE>
<S>                                    <C>
For the remainder of 2006              $  3,000
For the year ended December 31, 2007      4,000
For the year ended December 31, 2008      4,000
For the year ended December 31, 2009      4,000
For the year ended December 31, 2010      4,000
Thereafter                              101,000
</TABLE>

NOTE 6 - Financing Arrangements

In May of 2005, the Company entered into a new $12 million financing facility,
which consists of a revolving line of credit and a term loan:

     -    The revolving line of credit provides for advances up to $7,000,000
          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 March 31, 2006, $6,200,000 was outstanding
          under this facility, and $800,000 was still available for borrowing.


                                        8

<PAGE>

     -    The term loan is for $5,000,000 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. We have the option to convert the term loan
          to a fixed rate, at prevailing rates anytime within the first 12
          months of the agreement.

Borrowings under the facility are secured by substantially all Company assets.
The credit agreement contains certain financial covenants, calculated on a
consolidated basis for the Company and its subsidiaries, which, among other
things, impose a maximum ratio of senior funded debt to EBITDA, require the
Company to maintain a minimum debt service coverage ratio, a minimum annual
EBITDA and a minimum annual stockholders' equity, 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.

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 fiscal
year 2006.

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 condensed consolidated financial statements as of
and for the first quarter of fiscal 2006 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 first quarter of
fiscal 2006 was approximately $40,000 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 for the first quarter
of 2005. If compensation cost had been determined based on fair values at the
date of grant under SFAS 123, "Accounting for Stock-Based Compensation",
pro-forma net loss and loss per share would have been as follows:

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                             March 31, 2005
                                                           ------------------
<S>                                                        <C>
Net Loss, as reported                                          $(884,383)
Deduct: Total stock-based employee compensation
   expense determined under the fair value-based
   method for all awards, net of the related tax effects         (57,392)
                                                               ---------
Proforma net loss                                              $(941,775)
                                                               =========
Net loss per common share:
   Basic and diluted - as reported                             $   (0.23)
   Basic and diluted - proforma                                $   (0.25)
</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


                                        9

<PAGE>

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.

The following table represents stock option activity for the quarter ended March
31, 2006:

<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                         WEIGHTED    AVERAGE
                                                          AVERAGE   REMAINING
                                             NUMBER OF   EXERCISE    CONTRACT
                                               SHARES      PRICE       LIFE
                                             ---------   --------   ---------
<S>                                          <C>         <C>        <C>
Outstanding options at beginning of period    880,175      $3.29
Granted                                         3,336       4.77
Exercised                                     (54,375)      1.20
Canceled                                           --         --
                                              -------
Outstanding options at end of period          829,136      $3.39    5.23 Yrs.
                                              =======
Outstanding exercisable at end of period      633,299      $3.26    5.03 Yrs.
                                              =======
</TABLE>

Shares available for future stock grants to employees and directors under
existing plans were 59,162 at March 31, 2006. At March 31, 2006, the aggregate
intrinsic value of options outstanding was $1,185,000, and the aggregate
intrinsic value of options exercisable was $1,001,000. Total intrinsic value of
options exercised was $212,000 for the first quarter ended March 31, 2006.

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

<TABLE>
<CAPTION>
                                                 NUMBER OF
                                                   SHARES
                                                 ---------
<S>                                              <C>
Nonvested stock options at beginning of period     91,444
Vested                                            (18,480)
Canceled                                               --
Granted                                             3,336
                                                  -------
Nonvested stock options at end of period           76,300
                                                  =======
</TABLE>


                                       10
<PAGE>

At March 31, 2006, there was approximately $308,000 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 quarter and year to date, ended March 31, 2006 and
2005 was computed using an estimated combined federal and state tax rate of
approximately 38% and 40%, respectively. The overall tax rate is expected to
remain at approximately 38% for the remainder of 2006.

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 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 - 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 will be effective May 31, 2006.

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, its
wholly owned subsidiary, Peoples Education, Inc. ("PEI") (formerly known as "The
Peoples Publishing Group, Inc."), and their 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
and PEI's ability to retain qualified personnel, (7) PEI's ability to retain its
distribution agreements in the College Preparation market, (8) the sufficiency
of PEI's copyright protection, and (9) PEI'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 or PEI achieve 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.


                                       11

<PAGE>

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>
                                                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>

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

Overview

Net revenue increased 18.1% for the first quarter of 2006 compared to the same
period in 2005. Net Loss for the quarter was $776,000 in 2006, compared to
$884,000 in 2005, a decrease of 12.2%.

<TABLE>
<CAPTION>
                                                               Three Months Ended
                                                                    March 31,
                                                ------------------------------------------------
                                                   2006         2005       Variance   % Variance
                                                ----------   ----------   ---------   ----------
<S>                                             <C>          <C>          <C>         <C>
Net Revenue
Test Preparation, Assessment, and Instruction   $4,989,000   $4,274,000   $ 715,000      16.7%
College Preparation                                825,000      650,000     175,000      26.9%
                                                ----------   ----------   ---------     -----
   Total                                        $5,814,000   $4,924,000   $ 890,000      18.1%
                                                ==========   ==========   =========     =====
Net Loss                                        $  776,000   $  884,000   $(108,000)    -12.2%
</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 was 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.


                                       12

<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 $4.3 million in 2005 to $5.0 million in 2006, an increase of
16.7%. This increase was primarily led by a 11.7% increase in Test Preparation
revenue and a 202.9% increase in Focused Instruction revenue. The increase in
Test Preparation revenue is primarily due to increased market penetration and
the continued growth in states in which we recently entered with additional
products. The increase in Focused Instruction revenue is a result of the rollout
of the product from one state as of March 31, 2005 to eight states as of
March 31, 2006.

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 we 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 three months ended March 31,
2006 was $825,000, compared to $650,000 during the same period in 2005,
representing an increase of 26.9%. Revenue from the two major college publishers
was up $140,000 for the first quarter of 2006 compared to the same period in
2005. The proprietary products and the new distribution agreements within this
line accounted for the balance of the increase during the third quarter. 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 three months ended March 31, 2006 was $2.6 million compared
to $2.2 million during the same period in 2005. Gross Profit as a percent of
revenue for the quarter increased from 44.1% in 2005 to 45.1% 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 35.7% in 2005 to 34.7%
in 2006. The decrease is due primarily to revenue mix, and 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
practice. For the first quarter of 2006, we amortized $1.2 million of


                                       13

<PAGE>


prepublication costs, compared to $1.0 million in 2005. Amortization expense for
the first quarter, as a percent of revenue was 20.2% for both 2006 and 2005. Our
prepublication expenditures for the first quarter increased 8.0% from $2.4
million in 2005 to $2.6 million in 2006.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                                                     Three Months Ended
                                                         March 31,
                                      -----------------------------------------------
                                         2006         2005      Variance   % Variance
                                      ----------   ----------   --------   ----------
<S>                                   <C>          <C>          <C>        <C>
Selling, General and Administrative   $3,676,000   $3,576,000   $100,000      2.8%
</TABLE>

Marketing expenses within this expense category decreased $258,000 for the first
quarter of 2006 compared to same period in 2005. It also decreased as a percent
of revenue from 20.2% in 2005 to 12.7% in 2006. In the first quarter of 2005, we
incurred significant expenses related to new product line launches. We had no
new launches in 2006 that required significant expenditures.

Selling expenses within this category increased $187,000, primarily in salary
and related expenses ($150,000) as a result of the investment in our sales
infrastructure. As a percent of revenue selling expenses decreased from 31.0% in
2005 to 29.5% in 2006.

General and administrative expenses within this category for the quarter
increased by $172,000, due to an increase in general corporate overhead and FAS
123R Stock option expense in the amount of $40,000.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities for the three-month period ending March
31, 2006 was $1.5 million. Cash was primarily provided by our predepreciation
and amortization profitability, and a decrease in accounts receivable, offset
primarily by increases in inventory, refundable income taxes and a decrease in
accounts payable and accrued expenses.

Accounts receivable and accounts payable decreased, while inventory and accrued
expenses increased due to the cyclical nature of the Company's revenue cycle.
Refundable income taxes increased as a result of the tax benefit for the
quarter, offset by a tax refund that was received.

Net cash used in investing activities was $2.6 million, consisting primarily of
prepublication cost expenditures.

Net cash provided by financing activities was $4.4 million, consisting primarily
of net borrowings under our line of credit of $4.2 million, proceeds from
long-term debt of $160,000, and proceeds from the exercise of stock options of
$65,000, offset by principal payments of long-term debt of $89,000.

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

     -    The revolving line of credit provides for advances up to $7,000,000
          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 March 31, 2006, $6.2 million was outstanding
          under this facility, and $800,000 was still available for borrowing.

     -    The term loan is for $5,000,000 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. We have the option to convert the term loan
          to a fixed rate, at prevailing rates anytime through May 17, 2006.


                                       14

<PAGE>

Borrowings under the facility are secured by substantially all Company assets.
The credit agreement contains certain financial covenants, calculated on a
consolidated basis for the Company and its subsidiaries, which, among other
things, impose a maximum ratio of senior funded debt to EBITDA, require the
Company to maintain a minimum debt service coverage ratio, a minimum annual
EBITDA and a minimum annual stockholders' equity, 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 March 31, 2006, excluding the
outstanding line of credit balances (as described above), is as follows:

<TABLE>
<CAPTION>
                                                             PAYMENTS DUE BY PERIOD
                                  ---------------------------------------------------------------------------
                                                REMAINDER
CONTRACTUAL CASH OBLIGATIONS         TOTAL       OF 2006       2007         2008         2009         2010
----------------------------      ----------   ----------   ----------   ----------   ----------   ----------
<S>                               <C>          <C>          <C>          <C>          <C>          <C>
Term Loan
   (including interest portion)   $5,560,000   $  760,000   $1,200,000   $1,200,000   $1,200,000   $1,200,000
Capital Leases
   (including interest portion)      588,000      220,000      232,000       77,000       47,000       12,000
Operating Leases                   1,861,000      436,000      563,000      475,000      387,000           --
                                  ----------   ----------   ----------   ----------   ----------   ----------
Total                             $8,009,000   $1,416,000   $1,995,000   $1,752,000   $1,634,000   $1,212,000
                                  ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

Due to the seasonality of our business, our cash availability and requirements
fluctuate from quarter to quarter. Historically, significant expenditures for
product development occur during the first quarter. In addition, inventory
levels typically increase during this period in anticipation of the upcoming
larger revenue periods. 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 remainder of 2006. 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


                                       15
<PAGE>

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 $240,000 at March 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.

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 $7.0 million, a one percent change
in the applicable rate would have caused the Company's annual interest expense
to change by approximately $70,000. 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


                                       16

<PAGE>

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.

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 fiscal year ended December 31, 2005.

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

     During the three months ended March 31, 2006, the Company did not issue any
     securities without registration under the Securities Act of 1933, except as
     follows: On January 13, 2006, the Company issued 54,375 shares of common
     stock to a director upon the exercise of a stock option. The aggregate
     exercise price of $65,250 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.

     During the three months ended March 31, 2006, the Company did not
     repurchase any of its equity securities.

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.

ITEM 6. EXHIBITS

<TABLE>
<S>            <C>
Exhibit 31.1   CEO Certification pursuant to Rule 13a-14(a).

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

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

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


                                       17

<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: May 11, 2006                    PEOPLES EDUCATIONAL HOLDINGS, INC.


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


                                       18