Princeton Review (REVU) 10-K/A 2005 FY Annual report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K/A

(Amendment No. 1)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                    TO                    

COMMISSION FILE NUMBER 000-32469

THE PRINCETON REVIEW, INC.

(Exact name of registrant as specified in its charter)

Delaware	22-3727603
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
2315 Broadway
New York, New York	10024
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (212) 874-8282

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered

None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $0.01 par value

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso       Noþ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act Rule 12b-2 Yeso       Noþ

     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. Yesþ       Noo

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-Ko

     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.

Large accelerated filero       Accelerated filerþ       Non-accelerated filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso       Noþ

     The aggregate market value of registrant’s common stock held by non-affiliates, based upon the closing price of the common stock on June 30, 2005, as reported by the NASDAQ National Market, was approximately $96 million. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock, based on Schedule 13G filings, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     The registrant had 27,572,172 shares of $0.01 par value common stock outstanding at March 10, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain information required in Part III of this Form 10-K is incorporated by reference to the Proxy Statement for the registrant’s 2006 Meeting of Stockholders to be held on June 15, 2006.

EXPLANATORY NOTE

     The Princeton Review, Inc. (“we,” “us,” or the “Company”) is filing this Amendment No. 1 (this “Amendment”) to its Annual Report on Form 10-K for the year ended December 31, 2005 to restate its consolidated financial statements and related financial information to correct an error in the Company’s accounting and disclosures for its Convertible, Redeemable Series B-1 Preferred Stock issued on June 4, 2004 (the “Preferred Stock”). On October 24, 2006, the Audit Committee of the Board of Directors of the Company, in consultation with the Company’s management and its independent registered public accounting firm, Ernst & Young LLP, concluded that the Company’s method of accounting for the Preferred Stock must be changed. This conclusion was reached following a thorough evaluation of the Company’s accounting treatment of the Preferred Stock in response to a comment letter from the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (“SEC”) relating to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. While we have concluded that the Preferred Stock was properly accounted for as “Mezzanine Equity” consistent with generally accepted accounting principles (GAAP), the Company did not properly account for certain derivatives embedded within the Preferred Stock and associated rights to acquire additional shares of preferred stock that were granted simultaneously with the issuance of the Preferred Stock. Under GAAP, these embedded derivatives and rights are required to be recorded as liabilities at fair value, and adjusted to their fair values in subsequent periods. Accordingly, we are restating our financial statements to reflect this accounting treatment.

     These non-cash adjustments will not have any impact on our previously reported revenue or net cash flows.

     This Amendment to our Annual Report on Form 10-K for the year ended December 31, 2005, initially filed with the SEC on March 16, 2006 (the “Original Filing”), is being filed to reflect restatements of (i) the Company’s consolidated balance sheets at December 31, 2005 and December 31, 2004, and (ii) the Company’s consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2005 and 2004, and the notes related thereto. For a more detailed description of these restatements, see Note 2, “Restatement of Financial Statements,” to the accompanying audited consolidated financial statements and the section entitled “Restatement” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Amendment.

          The information contained in this Amendment, including the financial statements and the notes thereto, amends only Items 1A, 6, 7, 8 and 9A of the Original Filing, in each case to reflect only the restatement discussed herein. No other information in the Original Filing is amended hereby. Currently-dated certifications from our Chief Executive Officer and our Chief Financial Officer and the consent of our independent registered public accounting firm have been included as exhibits to this Amendment. As discussed in Item 9A, Controls and Procedures (as restated), management identified a control deficiency that relates to the restatement that, under the circumstance constitutes a material weakness.

     The foregoing items have not been updated to reflect other events occurring after the filing date of the Original Filing or to modify or update those disclosures affected by subsequent events. Except for the foregoing amended information, this Amendment continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date.

     We have not amended and do not intend to amend our previously-filed Annual Reports on Form 10-K or our Quarterly Reports on Form 10-Q for the periods affected by the restatement described herein that ended prior to January 1, 2005. For this reason, the consolidated financial statements, auditors’ reports and related financial information for the affected periods contained in such reports should no longer be relied upon.

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TABLE OF CONTENTS

PART I	3
Item 1. Business	3
Item 1A. Risk Factors	12
Item 1B. Unresolved Staff Comments	21
Item 2. Properties	21
Item 3. Legal Proceedings	21
Item 4. Submission of Matters to a Vote of Security Holders	21
PART II	21
Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters	21
Item 6. Selected Consolidated Financial Data	23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk	34
Item 8. Financial Statements and Supplementary Data	35
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	65
Item 9A. Controls and Procedures	65
Item 9B. Other Information	67
PART III	67
Item 10. Directors and Executive Officers of the Registrant	67
Item 11. Executive Compensation	68
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	69
Item 13. Certain Relationships and Related Transactions	69
Item 14. Principal Accountant Fees and Services	69
PART IV	69
Item 15. Exhibits and Financial Statement Schedules	69
SIGNATURES	74
EX-23.1: CONSENT OF ERNST & YOUNG
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-23.1: CONSENT OF ERNST & YOUNG LLP
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

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PART I

     All statements in this Annual Report on Form 10-K that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by words such as “believe,” “intend,” “expect,” “may,” “could,” “would,” “will,” “should,” “plan,” “project,” “contemplate,” “anticipate” or similar statements. Because these statements reflect our current views concerning future events, these forward-looking statements are subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, the factors described under the caption “Risk Factors” and elsewhere in this Annual Report on Form 10-K. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

     In this Annual Report on Form 10-K, unless the context indicates otherwise, “The Princeton Review,” “the Company,” “we,” “us” and “our” refer to The Princeton Review, Inc. and its subsidiaries and predecessors.

Item 1. Business

Overview

     The Princeton Review provides integrated classroom-based, print and online products and services that address the needs of students, parents, educators and educational institutions. The Company was founded in 1981 by our Chairman and Chief Executive Officer, John Katzman, as an SAT preparation course. Today, based on our experience in the test preparation industry, we now believe that we offer the leading SAT preparation course and are among the leading providers of test preparation courses for most major post-secondary and graduate admissions tests. In 2005, the Company and its franchisees provided test preparation courses and tutoring services for the SAT, GMAT, MCAT, LSAT, GRE and other standardized admissions tests to more than 129,000 students in over 1,500 locations throughout the United States and abroad.

     Over the course of several years, beginning in 1998, The Princeton Review has transformed itself from primarily a test preparation company to an integrated provider of standardized test preparation, K-12-focused products and services and post-secondary admissions services. We launched our K-12 Services division; complemented our traditional test preparation products with a range of online options; invested in and acquired new web-based admissions services capabilities and generally broadened our offerings throughout our core markets. While we still derive more than half of our revenue from standardized test preparation, the percentage of our revenue from our newer products and services has increased from 19% in 2001 to 38% in 2005 allowing us to become a more diversified company with clear opportunity for growth.

     The Company operates through the following three divisions:

• The Test Preparation Services division,founded in 1981, provides classroom-based as well as online test preparation courses. The Test Preparation Services division also provides tutoring and No Child Left Behind (NCLB) Supplemental Education Services. Additionally, the division receives monthly royalties from its independent franchisees who provide classroom-based test preparation courses under the Princeton Review brand.

• The K-12 Services division,founded in 1998, provides a range of services to K-12 schools and school districts to help primary and secondary school students and teachers measurably improve academic performance. With a strong conviction that Every Child Can Achieve^TM this division also provides online and print-based assessment, professional development, and materials to support school based intervention programs.

• The Admissions Services division,founded in 1986, provides marketing services and web-based admissions products to higher education institutions. Admissions Services also provides post-secondary counseling services and web-based products to secondary schools and school districts.

     The Company also authors more than 200 print and software titles on test preparation, academic admissions and related topics under the Princeton Review brand. Books are sold primarily through Random House, Inc., from which the Company collects fees for advances, royalties and editing and marketing arrangements.

     The Company was incorporated in Delaware in March 2000. The Company’s Internet address iswww.PrincetonReview.com. On its Investors web site, located atwww.PrincetonReview.com, the Company posts the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings on the Investors web site are available free of charge.

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Our Products and Services

Test Preparation Services Division

     The Test Preparation Services division provides test preparation services to students taking the following major U.S. standardized tests.

SAT	LSAT (Law School Admissions Test)
GMAT (Graduate Management Admissions Test)	MCAT (Medical College Admissions Test)
GRE (Graduate Record Examination)	ACT (American College Test)
TOEFL (Test of English as a Foreign Language)	PSAT
USMLE (United States Medical Licensing Examination)	SAT II

     Our Classroom-Based Course Offerings

     Our test preparation courses focus on customer service and quality instruction. Our experienced teachers and tutors generally work with groups of 12 or fewer students in our SAT classes. We have successfully updated all of our SAT products and materials to reflect the changes made to the SAT as of March 2005. Our GMAT and GRE classes generally have no more than eight students in each class to maximize individual attention and grouping by similar ability. We have also completely redesigned our LSAT course offerings to offer two options — one longer and more intensive, and one designed to maximize instruction over a shorter time frame. In 2006, our GRE and MCAT courses will be completely updated to reflect significant changes to these tests.

     We believe that an important part of our test preparation courses is the high quality study materials and the advanced diagnostic analysis that our students receive. We spend significant resources on research and development to enhance the supplemental materials used in our courses. As a result, each of our students receives in-depth analytical materials, sample questions, testing drills, model exams and diagnostic analysis of their progress as they take the course.

     Our Private Tutoring Offerings

     The Princeton Review private tutoring program is our most exclusive, customized offering. We offer one-to-one, high-end admissions counseling and tutoring services for all of the admissions tests. In addition, we provide individual assistance with academic subjects. Tutoring is chosen by students and parents who want customized instruction from our very best instructors on a flexible schedule.

     Our Online Course Offerings

     Our award-winning online courses are fully interactive and are particularly attractive to students who need the flexibility to prepare at any time of the day or night and on short notice. This product line is also very profitable and among our fastest growing. The online courses have been remapped for use by all of our classroom-based and tutoring students as well. Students can take tests, make up classes, or simply do extra work online on their own schedule. Our online tools have enriched all of our products while providing more flexibility by offering all Princeton Review students the ability to choose their best and most convenient way of learning as they go through our programs.

     Our School-Based Offerings

     In addition to offering our standardized test preparation courses to individual students, we also offer our SAT, SAT II and ACT test preparation services to schools and districts around the United States. The Princeton Review works with hundreds of such institutional clients to provide test preparation services to their students. These clients range from remote private schools to large urban school districts and other sponsoring non-educational organizations. Our institutional test preparation courses are custom designed to meet the needs of these institutional clients and their students. Using the same materials and techniques, we train our own teachers and, occasionally, district teachers to deliver test preparation, remediation and enrichment to districts of all demographics. We also offer extensive testing and professional development services.

     Additionally, since 2003, our Test Preparation Services division has teamed up with our K-12 Services division to become a major provider of Supplemental Education Services (SES) under NCLB. By combining content and materials developed by our K-12 Services division with our Test Preparation Services division’s teaching professionals we deliver remediation and enrichment services directly to thousands of students in school districts throughout the country. Our customized SES services offer students intensive, live instruction related to Math and English language arts (including reading) within a small group setting. School-based services provide a significant growth opportunity in the coming years.

     Our Test Preparation Publications and Software

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     Examples of the books and educational software products developed by the Test Preparation Services division include the following:

Cracking the SAT	Cracking the AP Calculus	Anatomy Coloring Book
Cracking the GMAT	Cracking the AP Chemistry	Human Brain Coloring Book
Cracking the LSAT	Cracking the AP US History	Physiology Coloring Book
Cracking the GRE	Cracking the AP European History	Cracking the Praxis
WordSmart	Cracking the GED	Cracking the ASVAB
MathSmart	GMAT Math Workbook	Crash Course for the SAT
GrammarSmart	GMAT Verbal Workbook	Crash Course for the GRE

     The Princeton Review: Inside the SAT and ACT 2003 Edition(CD ROM software title)

K-12 Services Division

     Services for Schools

     The accountability movement, which has gained momentum over the past 10 years and has been codified by new federal laws, including NCLB, places testing at the center of K-12 education. Performance on these tests carries important consequences for students, teachers and administrators alike. Students who perform poorly can face mandatory summer school, a repeated grade, or denial of a high school diploma. For teachers and school administrators, these tests exert strong pressure on teaching and learning, and class or school performance increasingly affects the direction of their careers.

     The K-12 Services division partners with schools to help them meet these challenges and measurably improve academic performance. Recognizing that schools need a broad range of products and services, we offer customized solutions that include formative and benchmarking assessments, professional development, and materials to support after school programs. Research indicates that the synergy of effective assessments, improvements in teacher quality, and skill-specific, standards-aligned instruction can significantly improve student performance, and our goal is to provide schools with the right tools to achieve this result. In 2005, we worked with the U.S. Department of Education and a number of states and districts across the country, including: Virginia, and Maryland, the School District of Philadelphia, Los Angeles Unified School District, Chicago City Schools, and The New York City Department of Education.

     We provide the following three major solutions to school districts throughout the country. Each solution can be combined into customized programs to meet the specific needs of each school district.

Assessments to Inform Instruction

     We offer districts interim, low-stakes assessments aligned to their curriculum and state standards. These instruments can be delivered in traditional paper and pencil format or online through our Homeroom.com platform. Homeroom.com is a powerful, web-based tool that enables educators to quickly assess students’ academic strengths and weaknesses while providing immediate feedback and tailored educational resources for improving performance. Results are provided in a timely, usable and actionable format for teachers, administrators, parents and students.

     These assessments have four important features for school districts:

• Quick Turnaround. Detailed reports are delivered online, soon after test administration.

• Useful Reporting. Our reports are designed to be maximally useful for teachers to guide instruction and for students and parents to provide meaningful guidance.

• Connection to Learning Resources. Teachers, students and parents have access to specific resources based on actual areas of need. These resources include proprietary Princeton Review lessons and direct links to web-based resources.

• Ties to Professional Development. The Princeton Review works with teachers and administrators to ensure that they understand the solution, and follows up with the instructional leadership of the schools to review profiles of learning outlined by the data. In addition, The Princeton Review works with districts to provide “parent nights” to help inform the community.

     Professional Development

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     We provide ongoing, comprehensive professional development to help teachers ensure the academic success of their students. Our professional development programs are ongoing in order to continually build upon knowledge and to ensure proper implementation of skills and resources introduced throughout our sessions. Programs are flexible and customized.

     We offer three main professional development programs:

• Ongoing data-differentiated instruction and assessment support.We implement ongoing professional development programs that focus on using data in the classroom to drive individualized instruction, with the ultimate goal being mastery in the classroom and improvements on state standardized tests. The Princeton Review works with instructional leaders to help them learn how to interpret and use reports generated through The Princeton Review’s assessments, as well as from their state standards test, to drive student instruction.

• Individualized professional development programs.Using several data streams, from teacher self-evaluations to low stakes interim assessments, we create individualized professional development for a district’s staff. With this program, teachers work in an ongoing manner with a Princeton Review consultant who helps each teacher focus instruction on the area of his or her students’ needs. Our consultants help each teacher evaluate data and reports gathered from low-stakes assessments administered throughout the program and subsequently recommend individualized professional development in order to expand each teachers knowledge of his or her students skill set.

• Product Training.Training is a crucial component of any successful, comprehensive program. Every program The Princeton Review offers contains some form of training and/or staff development.

Intervention Programs

     We offer a comprehensive Math and Reading off-the-shelf intervention program called SideStreets. SideStreets was designed to meet the needs of struggling students in grades 2 through 8. SideStreets provides engaging, guided classroom instruction that reaches students at their levels. The program is uniquely designed to build students’ essential skills, step-by-step, so under-performing students can move quickly towards proficiency.

     Aligned to state and national standards, SideStreets is suitable for during school, after school, extended day, summer school, and SES programs. Program components include a full set of student and teacher materials that integrate assessment, instruction, and professional development. Prior to and during the program, certified trainers work with clients to provide professional development to ensure successful implementation.

     We also have the expertise and capacity to build custom intervention programs (instruction, assessment, and professional development) specific to client needs.

     Our K-12 Publications

     The K-12 Services division also authors more than 60 print titles under the Princeton Review brand, including the following:

Roadmap to the CAHSEE(California)	North Carolina Roadmap Series
Roadmap to the FCAT(Florida)	Virginia Roadmap Series
Roadmap to the HSPA(New Jersey)	Cracking the Virginia SOL Series
Roadmap to the OPT(Ohio)	Cracking the Texas End-of-Course Series
Roadmap to the MCAS(Massachusetts),	Smart Junior Series
Roadmap to the Regents(New York)

Admissions Services Division

     We sell a range of products and services that help higher education institutions attract new applicants and manage the student recruitment process more efficiently. Additionally, we work closely with high schools to aid them in the college and career counseling they deliver. Our goal is to guide students and parents through the challenging transition from high school to college. We also guide college students to graduate or professional school programs, and offer career advice services through the information available on our free web site, www.PrincetonReview.com. Additionally we offer more than 70 print titles on these topics.

     The following are some of the major products, services and tools we offer to higher education institutions, high schools, school districts and individual students and parents.

     Post Secondary Institutions. We sell academic institutions a broad range of marketing and web-based products on a subscription and transactional basis.

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• Marketing Products and Services. Colleges and graduate schools may include an in-depth profile about their school in our books and on our web site for which the institutions pay us a subscription fee. More importantly, we promote these institutions to students who match their profile. The institutions also pay us when these students request further information.

• Embark® Prospect Management Services. We provide a series of online services for colleges to help manage the admissions process and maximize their yield with prospective students. These include highly sophisticated online applications, communications tools, interview and recruiting event schedulers, and data integration capabilities.

     Secondary Schools and School Districts. We sell K-12 school districts support for their post-secondary counseling efforts by offering customizable packages of services that include college counseling advisors, our college guidance books and a web-based college counseling support product

• Post-secondary Counseling Management Tools. Supported by a combination of online and print tools, we help districts set interim and outcome goals and track the progress of their schools towards those goals.

• Post-Secondary Counseling Support. We provide teams of specialists who provide professional development and counseling services on-line and/or in schools, supporting the efforts of school-based counselors.

     Princetonreview.com visitors.We attract students to Princetonreview.com by offering extensive, free useful tools and content. We leverage our high volume of student site usage through our marketing relationships with post-secondary institutions, as well as by selling test preparation services to these students.

• School Information. We provide detailed information about colleges and graduate schools, including, in many cases, students’ opinions about faculty, workload, social life, sports and more. This information is largely derived from our bestselling guidebooks.

• Major, Career and Other Searches. Through a series of “wizards” or matching tools, we help students narrow down their list of potential schools, majors, internships, scholarships, and other related educational and career options.

• Discussion Boards and Communication Tools.We provide a forum for students to discuss college and graduate school admissions experiences, ask questions of students and administrators on campus, and obtain advice from Princeton Review moderators.

• Organization. We help students keep track of information about their prospective schools, and try to make the process simplerand less stressful.

Our Admissions Services Publications

Complete Book of Colleges	Complete Book Law Schools
Internship Bible	Complete Book Medical Schools
Visiting College Campuses	Paying for College Without Going Broke
Best Value Colleges	Paying for Graduate School
Guide to Study Abroad	K&W Guide
Guide to Summer Programs	145 Things to Do When You Grow Up
Complete Book Business Schools	Guide to College Majors
Best 361 Colleges

Our Franchised Operations

     Our classroom-based test preparation courses and tutoring services are delivered through company-operated locations and through our independent franchisees. Our franchisees provide these test preparation courses and tutoring services under the Princeton Review brand within a specified territory, in accordance with franchise agreements with us. The royalties paid to us by our franchisees are comprised of a general royalty ranging from 8%–9.5% (starting in 2006) of their cash receipts collected under the Princeton Review name, an additional royalty of 2% of the cash receipts of our domestic franchisees, which is allocated to an advertising fund that we also contribute to, and a 10% fee for use by their students of our online supplemental course tools. Our franchisees also purchase our course and marketing materials, which they use in conducting and promoting their classes. Royalties collected from our independent franchisees and revenue from their purchases of materials together accounted for approximately 5% of our total 2005 revenue.

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     Our franchisees do not provide Princeton Review Online courses. However, to the extent we provide our Princeton Review Online courses to customers residing within the exclusive jurisdictions of our franchisees, we generally pay those franchisees a royalty of 10% of all of our revenue derived from selling Princeton Review Online courses to students residing in their territories, net of certain administrative expenses. We have not entered into any such royalty arrangements with our franchisees for our other web-based products and services.

     We have authorized certain of our domestic franchisees to offer SES programs as part of their Princeton Review businesses, for which they pay us royalties in the same manner as for other authorized courses. These franchisees paid a fee in 2005 to reimburse us for an allocated share of our SES development expenses. We have also established contract terms with domestic franchisees relating to other live K-12 student instruction in their territories. If we offer these programs in the franchisees’ territories, the terms give us the option to subcontract a customer agreement to the franchisee and pay the franchisee 85% of the net program receipts or to deliver the program directly and pay the franchisee a royalty of 5% of net program receipts.

     As of December 31, 2005, the Company had six franchisees operating approximately 18 offices under the Princeton Review name in the United States and 15 franchises with approximately 38 offices in 19 countries.

     Our independently-owned domestic franchisees currently provide test preparation courses and tutoring services in the following jurisdictions:

	Number of
	Counties
California		12
Colorado		8
Connecticut		7
Florida		57
Massachusetts		4
Michigan		4
Nevada		1
New Mexico		33
New York		5
Ohio		4
Pennsylvania		4
Rhode Island		5
Utah		29

     Our independently-owned international franchises are located in Egypt, India, Israel, Japan, Jordan, Lebanon, Malaysia, Mexico, Pakistan, People’s Republic of China, the Philippines, Saudi Arabia, Singapore, South Korea, Syria, Taiwan, Thailand, Turkey and The United Arab Emirates. We intend to continue to expand our international presence through the sale, in the next several years, of additional franchises, primarily in Asian, Middle Eastern and South American markets.

     Over the last several years, we completed a number of acquisitions of businesses operated by our former domestic franchisees, as more fully described below under “Recent Acquisitions.” The majority of our domestic franchise agreements were renegotiated toward the end of 2005. We terminated one domestic franchisee for various defaults under its franchise agreement in July 2005. We initiated an arbitration proceeding to confirm the validity of the termination and to recover amounts owed and seek damages from the former franchisee. We opened a company-owned office to service that franchisee’s former territory.

Recent Acquisitions

     Franchise Acquisitions

     In the last several years, we completed acquisitions of the businesses of a number of our former domestic franchisees.

     In October, 2004, we completed a small acquisition of the independent franchise that provided test preparation courses in Puerto Rico for a purchase price of approximately $130,000. In July 2003, we completed a small acquisition of 77% of Princeton Review of North Carolina, Inc., the independent franchise that provided test preparation courses in North Carolina, for a purchase price of approximately $890,000, of which approximately $760,000 was financed with notes to the seller, including imputed interest. In November 2003 we purchased the remaining 23% for approximately $248,000, of which approximately $208,000 was financed with notes to the seller, including imputed interest. In October 2002, we completed a small acquisition involving the assets of Princeton Review of St. Louis, one of our franchisees that provided test preparation courses in Missouri, for a purchase price of approximately $850,000, of which approximately $470,000 was financed with a note to the sellers. In June 2001, we acquired the assets comprising the business of T.S.T.S., Inc., which offered test preparation courses in Texas, Arizona, Oklahoma, Louisiana and New Mexico under franchise agreements with us, for a purchase price of approximately $6.3 million. We financed approximately $4.8 million of the

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purchase price under our then existing line of credit and issued a subordinated promissory note to the seller for the remaining approximately $1.5 million. In March 2001, we acquired the assets comprising the businesses of Princeton Review of Boston, Inc. and Princeton Review of New Jersey, Inc., at a combined purchase price of $13.8 million. We financed approximately $10.2 million of the purchase price under our then existing line of credit and issued two subordinated promissory notes for the remaining approximately $3.6 million. In March 2001, we also purchased the assets of another franchisee, Princeton Review Peninsula, Inc., for a purchase price of approximately $2.7 million, which was financed through borrowings under our then existing line of credit. Princeton Review Peninsula provided test preparation courses in several counties in California.

     Embark

     In October 2001, we acquired substantially all of the operating assets of Embark.com, Inc., a developer of online products and services for the college and graduate school admissions market. The acquired business consisted primarily of Embark’s customer contracts with academic institutions and its technological platform for submitting electronic applications and related services. The purchase price paid by us at closing consisted of 875,000 shares of our common stock valued at approximately $5.2 million, approximately $3.4 million in assumed indebtedness and approximately $2.1 million in other assumed liabilities of Embark, consisting primarily of deferred revenue relating to customer contracts assumed by us, net of acquired receivables of approximately $1.0 million. In accordance with the earn-out provisions entitling Embark to additional consideration based on the performance of the acquired business, Embark earned a payment of 9,128 shares of our common stock and approximately $1.5 million in cash, based on the revenue performance of the acquired business through June 30, 2003. In addition to the purchase price, in connection with the transaction, we made a $1.8 million loan to Embark, which was secured by 300,000 of the shares of our common stock that Embark received as part of the purchase price. The approximate $1.5 million earn-out was applied against the loan balance, which was repaid in full as of December 31, 2003.

     We intend to continue to pursue strategies to maximize stockholder value, which may continue to include acquisitions that will help us further expand our product offerings or grow geographically or other strategic alternatives, such as dispositions, reorganizations, recapitalizations or other similar transactions. We expect our acquisition focus to be on companies with complementary products or services, including those businesses operated by our remaining domestic franchisees that we can acquire on favorable terms. From time to time, we have made investments in businesses with which we wanted to build strategic relationships, and we may do so in the future. We anticipate that future acquisitions or strategic investments, if consummated, would involve some combination of cash, debt and the issuance of our stock.

Sales and Marketing

     The majority of our students and their parents choose our test preparation programs based on the recommendations of other students, parents, teachers and counselors. We also build awareness of our brand and promote our products through relationships with other companies that publish and distribute our products, including Random House, which publishes and distributes the books we author. We also utilize an institutional sales force within our K-12 division and engage in some national and local advertising.

     In the last several years, we have substantially increased our sales and marketing efforts in order to market and support our newer products and services, such as our web-based marketing, application and admissions management products, our K-12 products, our online and institutional test preparation offerings and our SES programs. Our sales and marketing activities by division are as follows:

     Test Preparation Services Division.Nationally, we use mass print media, conferences, direct mail and electronic media to market our products and services to students, parents and educators. Locally, we and our franchisees primarily advertise in local and school newspapers, distribute posters and sponsor school activities. We also conduct extensive free information sessions and practice tests to expose our products to our markets. Virtually everyone in our regional offices is part of the sales force. They and our regional phone centers counsel students and parents regarding specific courses. Our Princeton Review one-to-one admissions counseling and tutoring initiative is marketed to high-end customers utilizing a distinctive message and dedicated marketing resources. Our Princeton Review Online products are marketed through electronic media and e-commerce partnerships, as well as through our classroom course marketing efforts. We recently consolidated our school sales force into the K-12 Division; but continue to retain a sales staff for our SES business. We expect that marketing to educational institutions will continue to constitute a major focus of the marketing activities of the Test Preparation Services division.

     K-12 Services Division.We are marketing our K-12 services to schools and school districts through a number of channels, including national conferences, direct mail, electronic media and telemarketing. Our K-12 Services division manages our company-wide sales and marketing force of approximately 30 people. Homeroom is also integrated in the offerings of, and sold by, our business partners such as Plato Learning, Inc. and SchoolNet.

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     Admissions Services Division.Admissions Services has a dedicated sales and marketing team of 12 people that primarily solicits post-secondary institutions to purchase our products and services.

Product Design and Development

     We believe that successful product design, development and enhancement has been, and will continue to be, essential to the success of our business. We believe that the strength of our reputation and brand name is directly attributable to the quality of our products and services, and expect to continue to devote significant resources to enhancing our current products and services and offering additional high-quality products and services that are responsive to our customers’ needs.

     Test Preparation Services Division. We rely on our development staff, teachers and other education experts to create and refine the materials used in our Test Preparation Services division. Our goal is to design and improve our products in such a way as to offer our students the best and most productive overall experience, while addressing their preferences and fitting within their lifestyles. We seek to accomplish this by:

• continually updating and enhancing our test preparation materials and our teaching methods;

• ensuring that our designated personnel take virtually every major standardized test for which we offer courses, so that our techniques and materials remain current;

• performing quantitative and qualitative research into the preferences and needs of our customers;

• regularly soliciting and reviewing feedback from students taking our courses;

• enhancing the services and functionality of our online test preparation tools and content; and

• frequently updating our standardized test preparation publications.

     Overall, we seek to provide a complementary mix of online and offline offerings that students can choose from to best fit their needs and achieve their goals.

     K-12 Services Division. We rely on a team of teachers, educational experts and developers to research, design, enhance and deliver our K-12 educational products and services, which include, live instruction, online and paper-based assessments, professional development and publications. Our programs are designed to provide customized and highly focused resources to improve student performance. Our focus in the K-12 Services division is to continue to expand and refine our offerings to afford schools and school districts the highest degree of flexibility possible in the mix of products they choose to purchase from us, while delivering measurable results. In 2005, we introduced SideStreets, an innovative off-the-shelf intervention program, to supplement our customized programs.

     Admissions Services Division. Since launching our Review.com (now www.PrincetonReview.com) web site in 1994, we have continually expanded the material available and made improvements to its content and functionality. The online informational materials and tools are developed and enhanced by our authors and design engineers, through strategic partnerships with third parties and through feedback from guidance and admissions counselors. We regularly modify and enhance our web site to provide students, parents and guidance counselors with additional information and interactive tools designed to assist them with the school selection, admissions and financial aid processes. We also continually strive to provide our educational institution customers with more effective ways to reach potential applicants, and streamline and manage the various facets of the admissions process. To this end, we periodically refine our web-based marketing, admissions and prospect management solutions to provide our higher education institution customers with the most technologically advanced and flexible products possible. Finally, our publications are frequently updated by our staff and freelance authors and editors to ensure that new editions are up to date and include the most current information available on college and graduate school admissions and related subjects.

Significant Customers

     No single customer exceeded 10% of our revenue in any of the last three years. In the K-12 Services division, the top two customers accounted for 56% and 59% of that division’s revenues in 2005 and 2004, respectively.

Competition

     The markets for our educational products and services are highly competitive. Following is our competitive landscape, by division:

     Test Preparation Services Division. Our Test Preparation Services division faces competition in standardized test preparation primarily from one other established national company, Kaplan, Inc., a division of The Washington Post Company. We also face competition from many local and regional companies that provide test preparation, career counseling and application assistance to students. In the SES market, national competitors include Edison

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Schools, Platform Learning, Sylvan (a division of Educate, Inc.) and Kaplan, with many smaller providers competing with us on a local level.

     K-12 Services Division. Our K-12 Services division faces competition primarily from the four national textbook companies, Pearson Plc, Harcourt, Inc. (an affiliate of Reed Elsevier Group Plc), Houghton Mifflin Company and McGraw-Hill Companies, some of which have acquired online and supplemental providers.

     Admissions Services Division.Our Admissions Services division provides a wide variety of products and services that face competition from a variety of companies that, to different extents, provide products and services similar to ours for the higher education market. In particular, The College Board, a non-for-profit membership association, provides a similar range of products and services to the undergraduate market.

     We believe that the principal competitive factors in our markets include the following:

• brand recognition;

• ability to demonstrate measurable results;

• availability of integrated online and offline solutions;

• overall quality of user experience;

• alignment of offerings with specific needs of students, parents and educators; and

• value and availability of products and services.

     We believe that our primary competitive advantage is our well-known and highly trusted Princeton Review brand, our extensive experience in test preparation and admissions and our innovative, high-quality educational products and services and our employees. We also believe that our ability to attract students, parents and educators to our Princetonreview.com web site offers higher education institutions access to a large body of potential applicants and offers sponsors and merchandisers an attractive source of potential consumers. However, some of our competitors may have more resources than we do, and they may be able to devote greater resources than we can to the development, production and sale of their services and respond more quickly than we can to new technologies or changes in the education marketplace. As a result, we may not be able to maintain our competitive advantages or otherwise compete effectively with current or future competitors.

Intellectual Property and Property Rights

     Our copyrights, trademarks, service marks, trade secrets, proprietary technology and other intellectual property rights distinguish our products and services from those of our competitors, and contribute to our competitive advantage in our target markets. To protect our brand, products and services and the systems that deliver those products and services to our customers we rely on a combination of copyright, trademark and trade secret laws as well as confidentiality agreements and licensing arrangements with our employees, customers, independent contractors, sponsors and others.

     We strategically pursue the registration of our intellectual property rights. However, effective patent, trademark, service mark, copyright and trade secret protection may not always be available. Existing laws do not provide complete protection, and monitoring the unauthorized use of our intellectual property requires significant resources. We cannot be sure that our efforts to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate these rights. In addition, there can be no assurance that competitors will not independently develop similar intellectual property. If others are able to copy and use our products and delivery systems, we may not be able to maintain our competitive position. If litigation is necessary to enforce our intellectual property rights or determine the scope of the proprietary rights of others, we may have to incur substantial costs or divert other resources, which could harm our business.

     We have used “The Princeton Review” as our principal service and trademark for test preparation services and related publications and materials since 1982. In the past, Princeton University did not object to our use, provided we used an express disclaimer of affiliation with the University in connection with most of our uses. In February of 2005, we entered into an agreement with Princeton University under which it has agreed not to oppose or contest our use or registration of these marks anywhere in the world and also to provide us consent and assistance where necessary to secure such registration, as long as we include the disclaimer of affiliation with the University in the size and manner specified in the agreement and annually inform our employees and franchisees of the requirement for use of the disclaimer.

     In order to develop, improve, market and deliver new products and services, we may be required to obtain licenses from others. There can be no assurance that we will be able to obtain licenses on commercially reasonable terms or at all or that rights granted under any licenses will be valid and enforceable.

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     In addition, competitors and others may claim that we have infringed their intellectual property rights. Defending any such lawsuit, whether with or without merit, could be time-consuming, result in costly litigation or prevent us from offering our products and services, which could harm our business. If a lawsuit against us is successful, we may lose the rights to use our products or be required to modify them, or we may have to pay financial damages. We have been subject to infringement claims in the past and expect to be subject to legal proceedings and claims from time to time in the ordinary course of business, including claims of alleged infringement of the trademarks, patents and other intellectual property rights of third parties.

Government Regulation

     To offer franchises in the U.S., we must comply with regulations adopted by the Federal Trade Commission and with several state laws that regulate the offer and sale of franchises. Federal and state franchise sales laws may apply to transfers and renewals of existing franchises in some circumstances. The FTC’s Trade Regulation Rule on Franchising, or the FTC Rule, and various state laws require that we (1) furnish prospective franchisees with a franchise offering circular containing prescribed information; and (2) in some states, register the franchise offering before an offer is made.

     Our existing franchise relationships are subject to a number of state laws that regulate substantive aspects of the franchisor-franchisee relationship, including:

• those governing the termination or non-renewal of a franchise without good cause;

• requirements that a franchisor deal with its franchisees in good faith;

• prohibitions against interference with the right of free association among franchisees; and

• those regulating discrimination among franchisees in charges, royalties or fees.

     Some foreign countries also have laws affecting the offer, sale or termination of franchises within their borders and to their citizens. Although unlikely, U.S. federal and state franchise regulation may be deemed applicable to our efforts to establish franchises abroad. Failure to comply with these laws could limit or preclude our ability to expand internationally through franchising.

     To date, these laws have not precluded us from seeking franchisees in any given area and have not had a material adverse effect on our operations. However, compliance with federal, state and international franchise laws can be costly and time consuming, and we cannot be certain that we will not encounter delays, expenses or other difficulties in this area.

Employees

     As of December 31, 2005, we had 633 full-time employees, including 73 in content and editorial, 65 in administration, finance, legal and human resources, 74 in information systems, 27 in marketing, 36 in sales, 112 in customer support and 246 in our regional offices performing multiple tasks, including sales, administrative, and teaching functions. In addition, we had approximately 2,900 part-time employees, comprised mainly of teachers.

     None of our employees are covered by a collective bargaining agreement. We consider our employee relations to be good.

Our Restructuring

     The Company recently completed a restructuring in order to recognize certain operational efficiencies from our corporate structure. Effective January 1, 2005, we merged four of our six subsidiaries with and into The Princeton Review, Inc.

Segment Information

     For financial information relating to our operating divisions by business segment, see Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Item 1A. Risk Factors

     You should carefully consider the following risk factors together with all of the other information contained in this Annual Report on Form 10-K before making an investment decision with respect to our common stock. Any of the following risks, as well as other risks and uncertainties described in this Annual Report on Form 10-K, could harm our business, financial condition and results of operations and could adversely affect the value of our common stock.

Risks Related to Our Business

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We have a recent history of significant operating losses and may not be able to achieve sustained profitability if we are unable to increase revenue from our newer products and services and successfully implement a number of new initiatives, in which case we could experience an adverse change in the market price of our common stock.

     Over the last few years, the Company has invested heavily in the expansion of existing business lines and the development of new businesses. These investments, combined with Sarbanes-Oxley compliance costs and rising overhead expense, have driven losses in two of our last three fiscal years. We have incurred net losses of approximately $2.2 million and $29.5 million for the years ended December 31, 2005 and 2004, respectively. As of December 31, 2005, we had an accumulated deficit of approximately $65.8 million.

     In order to achieve sustained profitability we will need to implement changes to existing business processes, significantly reduce overhead expense and drive profitable revenue growth in our K-12 Services Division. The Company is in the initial stages of a company-wide re-engineering effort to reduce our overhead, continue to improve our internal control management process and upgrade or replace certain critical business systems.

     If we are unable to achieve these objectives, we may fail to achieve or sustain profitability in subsequent periods, in which case the market price of our common stock may be adversely affected.

If colleges and universities reduce their reliance on standardized admissions tests or there is a substantial reduction in the emphasis placed by federal and state governments on assessment and remediation in K-12 education, our business will be materially adversely affected.

     The success of our Test Preparation and K-12 services businesses depends on the continued use of standardized tests. If the use of standardized tests declines or falls out of favor with educational institutions or state and local governments, the markets for many of our products and services will deteriorate and our business will be materially adversely affected. Additionally, the SES market, which is serviced by our Test Preparation Services division, is dependent on the availability of federal funding under NCLB. A substantial reduction in funds available for SES programs under this Act could have an adverse effect on our operating results.

Our contracts with schools, school districts, municipal agencies and other governmental bodies present several risks, including the nature and timing of revenue recognition which combined with fixed expenses puts a strain on our working capital requirements.

     As the Company has grown over the last several years, we have begun to enter into more and more large, multiple element contracts with schools, school districts, municipal agencies, and other governmental bodies, requiring us to deliver a combination of products and services, including online and print-based assessment, professional development, and face-to-face instruction. These contracts present several types of risks and uncertainties.

     The approval processes of some of our customers in this area, which are required for formal contract execution, are lengthy and cumbersome and, in many cases, are not completed prior to the time we begin performance. This means that we, at times, incur substantial costs prior to the formal execution of these agreements by the customer. While to date we have found that, following the award of the contract to us, final approval required for the customer to sign the agreement is usually a formality, our revenue recognition policies preclude us from recognizing revenue from these contracts until there is a final agreement binding on the customer. Costs, however, are recorded as incurred, whether or not the contract is signed. While we do not incur significant costs until we are awarded a project and we do everything possible to expedite the formal execution of these agreements by the customer, the timing of this final step is outside our control. Until we complete our transition over to a school-based fiscal year our current calendar-based fiscal year makes it more difficult for us to forecast quarterly revenue streams from these contracts. This may make it more difficult for us to deliver operating results in line with analysts’ forecasts, and could therefore adversely affect our stock price.

     Because our customers are unable to begin payment for services until formal approval of the agreement, this delay in formal contract execution may also cause our cash balances to fluctuate significantly from period to period and may expose us to credit risk. We believe that we may be able to recover monies owed from a customer for which we have performed services but who fails to render payment in the absence of a signed contract based on several legal theories designed to prevent unjust enrichment. However, this basis of recovery may not be available in all jurisdictions where we enter into these contracts, or may limit our recovery with respect to amounts or timing. Accordingly, the absence of a signed agreement may, depending on the laws of the applicable jurisdiction, make it substantially more difficult or impossible for us to recover sums due to us under these agreements. While we have not experienced a default by a customer under such circumstances to date, and believe that the nature of the parties with which we are contracting makes such a default less likely, it is a possibility that such circumstances may arise in the future with respect to one or more of these contracts.

We face intense competition that could adversely affect our revenue, profitability and market share.

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     The markets for our products and services are highly competitive, and we expect increased competition in the future that could adversely affect our revenue, profitability and market share. Our current competitors include but are not limited to:

• providers of online and offline test preparation and tutoring services;

• companies that provide SES services;

• companies that provide print, software, web-based and other educational assessment and supplemental products and services to districts and states in the highly competitive K-12 market; and

• companies that offer both face-to-face and web-based products and services to assist individuals and educational organizations with counseling, marketing and student applications.

     Some of our competitors may have more resources than we do. These competitors may be able to devote greater resources than we can to the development, promotion and sale of their services and respond more quickly than we can to new technologies or changes in customer preferences. We may not be able to maintain our competitive position or otherwise compete effectively with current or future competitors, especially those with significantly greater resources.

     Some of our competitors that provide K-12 educational products and services may have more experience, larger customer bases and greater brand recognition in that market. Further, established companies with high brand recognition and extensive experience providing various educational products to the K-12 market may develop products and services that are competitive with ours.

Negative developments in school funding could reduce our institutional revenue.

     We expect to derive a growing portion of our revenue from sales of our products and services to educational institutions, including our K-12 Services division’s offerings, high school counseling products, SES programs and institutional test preparation offerings. Our ability to generate revenue from these sources may be adversely affected by decreased government funding of education. Public school funding is heavily dependent on support from federal, state and local governments and is sensitive to government budgets. In addition, the government appropriations process is often slow and unpredictable. Funding difficulties also could cause schools to be more resistant to price increases in our products, compared to other businesses that might be better able to pass on price increases to their customers.

The ineffectiveness of our internal control over financial reporting could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

     Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), and the rules and regulations promulgated by the SEC to implement Section 404, we are required to include in our Form 10-K an annual report by our management regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.

     As of December 31, 2005, our internal control over financial reporting was ineffective due to the presence of a material weakness, as more fully described in Item 9A of this Form 10-K. This could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which may have an adverse effect on our stock price.

Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter to quarter. This may result in volatility or adversely affect our stock price.

     We experience, and expect to continue to experience, seasonal fluctuations in our revenue because the markets in which we operate are subject to seasonal fluctuations based on the scheduled dates for standardized admissions tests and the typical school year. These fluctuations could result in volatility or adversely affect our stock price. We typically

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generate the largest portion of our test preparation revenue in the third quarter. However, as SES revenues increase, we expect to recognize these revenues primarily in the first and fourth quarters. The electronic application revenue recorded in our Admissions Services division is highest in the first and fourth quarters, corresponding with the busiest times of year for submission of applications to academic institutions. Our K-12 Services division experiences seasonal fluctuations in revenue, with the first and fourth quarters (corresponding to the school year) expected to have the highest revenue.

Our quarterly operating results are not indicative of future performance and are difficult to forecast.

     Our quarterly operating results may not meet expectations of public market analysts or investors, which could cause our stock price to decline. In addition to the seasonal fluctuations described above, our operating results may vary from quarter to quarter in response to a variety of other factors beyond our control, including:

• our customers’ spending patterns, which, in some cases, are difficult to predict;

• the timing of school districts’ funding sources and budget cycles;

• the timing of signing, expirations and renewals of educational institution contracts;

• variations in product mix, particularly in the case of our K-12 Services division;

• the timing of corporate sponsorships and advertising; and

• non-recurring charges incurred in connection with acquisitions or other extraordinary transactions.

     Due to these factors, we believe that quarter-to-quarter comparisons of our operating results may not be indicative of our future performance and you should not rely on them to predict the future performance of our stock price. In addition, our past results may not be indicative of future performance because several of our businesses were introduced or acquired relatively recently.

Loss of significant customers could significantly adversely affect our revenue or cause disruptions in our operations.

     As the business of our K-12 Services division has evolved, the contracts entered into with school districts have generally increased in size. As a result, two customers accounted for 56% and 59% of that division’s revenue in 2005 and 2004, respectively. The loss of one or more such customers could significantly adversely affect our revenue. Additionally, we rely on Random House as the publisher and distributor of all of the books we write. Royalties and other fees from books authored by us and published and distributed by Random House represented approximately 3% of our revenue in each of 2005 and 2004. Accordingly, termination of our relationship with Random House could adversely affect our revenue and cause disruption in our operations.

If we are not able to continually enhance our web-based products and services and adapt them to changes in technology, our future revenue growth could be adversely affected.

     If our improvement and adaptation of our web-based products and services is delayed, results in systems interruptions or is not aligned with market expectations or preferences, our revenue growth could be adversely affected. The online environment is rapidly evolving, and the technology used in web-based products changes quickly. We must therefore be able to quickly modify our solutions to adapt to emerging online standards and practices, technological advances, and changing user and sponsor preferences. Ongoing enhancement of our web site, web-based products and related technology will entail significant expense and technical risk. We may use new technologies ineffectively or fail to adapt our web site, web-based products and related technology on a timely and cost-effective basis.

If our domestic franchisees contest our interpretation of our agreements with them, our ability to offer our products in the domestic franchisees’ territories could be adversely affected, which could adversely affect our revenue.

     If our domestic franchisees contest our interpretation of our rights and obligations under our existing agreements with them, then our ability to deliver our products and services within their franchise territories could be hindered, and our revenue could be adversely affected. Through a series of franchise agreements and other agreements, our independent franchisees have various rights to provide test preparation products and services under the Princeton Review brand within specified territories, and to use our trademarks and other intellectual property in connection with providing these services. Similarly, we have various rights to market and sell our products and services in the franchisees’ territories. Our agreements have been reviewed and renegotiated to accommodate our business goals and the goals of our franchisees as they have both developed over the years.

If we do not adequately protect the intellectual property rights to our products and services, we may lose these rights and our business may suffer materially.

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     Failure to protect our intellectual property could materially adversely affect our business. We depend on our ability to protect our brand, our products and services and the systems that deliver those products and services to our customers. We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to protect these products. These intellectual property rights distinguish our products and services from those of our competitors. If others are able to copy, use and market these products and delivery systems, then we may not be able to maintain our competitive position. Despite our best efforts, we cannot assure you that our intellectual property rights will not be infringed, violated or legally imitated. Existing laws do not provide complete protection and policing the unauthorized use of our products and services requires significant resources.

If our products and services infringe the intellectual property rights of others, this may result in costly litigation or the loss of our own intellectual property rights, which could materially adversely affect our business.

     Competitors and others have claimed and may claim in the future that we have infringed their intellectual property rights. The defense of any lawsuit, whether with or without merit, could be time-consuming and costly. If a lawsuit against us is successful, we may lose, or be limited in, the rights to offer our products and services. Any proceedings or claims of this type could materially adversely affect our business.

We may be held liable for the content of materials that we author, content available on our web site or products sold through our web site.

     We may be subject to claims for defamation, negligence, copyright or trademark infringement or other legal theories based on the content of materials that we author, and content that is published on or downloaded from our web sites, accessible from our web sites through links to other web sites or posted by our users in chat rooms or bulletin boards. These types of claims have been brought, sometimes successfully, against online services as well as print publications in the past. Although we carry general liability insurance, our insurance may not cover potential claims of this type, such as trademark infringement or defamation, or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. In addition, these claims, with or without merit, would result in diversion of our management personnel and financial resources. Further, if print publications that we author contain material that customers find objectionable, these publications may have to be recalled, which could result in lost revenue and adverse publicity.

The loss of our senior management could have a material adverse effect on our business.

     We depend on the continued service of our senior management. The loss of any of our Chief Executive Officer, John Katzman, our President and Chief Operating Officer, Mark Chernis, or our Chief Financial Officer, Andrew Bonanni, could materially adversely affect our business.

Our business may be harmed by actions taken by our franchisees that are outside our control.

     Approximately 5% of our 2005 revenue was derived from royalties paid to us by our franchisees and from sales of our course and marketing materials to these franchisees. The quality of franchised test preparation operations may be diminished if our franchisees do not successfully provide test preparation services in a manner consistent with our standards and requirements, or do not hire and train qualified managers or instructors. As a result, our image and reputation may suffer and our revenue could decline.

Franchise regulations could limit our ability to terminate or replace unproductive franchises, which could adversely affect our results of operations, and could limit our ability to expand internationally through franchising.

     Applicable laws may delay or prevent us from terminating an unproductive franchise or withholding consent to renewal or transfer of a franchise, which could have an adverse effect on franchise royalties. We are subject to both federal and state laws regulating the offer and sale of franchises. These laws also frequently apply substantive standards to the relationship between franchisor and franchisee and limit the ability of a franchisor to terminate or refuse to renew a franchise. Some foreign countries also have laws affecting the offer and sale of franchises within their borders and to their citizens and U.S. federal and state franchise regulation may be applicable to our efforts to establish franchises abroad. Failure to comply with these laws could limit or preclude our ability to expand internationally through franchising.

     Compliance with federal, state and international franchise laws can be costly and time consuming, and we cannot be certain that we will not encounter delays, expenses or other difficulties in this area. Further, the nature and effect of any future legislation or regulation of our franchise operations cannot be predicted.

If we are unable to obtain additional capital, our business may be adversely affected.

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     We currently expect to secure a revolving line of credit to support our working capital requirements. In the future, we may require substantial additional capital to finance ongoing operations or the growth of our business. To the extent that our existing sources of liquidity, cash flow from operations and anticipated credit line are insufficient to fund our activities, we may need to raise additional funds.

     We cannot be certain that we will be able to obtain needed financing on favorable terms. If we fail to raise additional funds, we may need to sell debt or additional equity securities or to reduce our growth to a level that can be supported by our cash flow. Without additional capital, we may not be able to:

• further develop or enhance our services and products;

• acquire necessary technologies, products or businesses;

• expand operations in the United States or internationally;

• hire, train and retain employees;

• market our services and products; or

• respond to competitive pressures or unanticipated capital requirements.

Charges related to our recent acquisitions could negatively affect our results of operations.

     In connection with our acquisitions of the businesses of Embark.com, Inc. and several of our franchisees over the last five years, we recorded a total of approximately $33.4 million of goodwill. Statement of Financial Accounting Standards No. 142 (SFAS 142),Goodwill and Other Intangible Assets, requires goodwill and other intangible assets that have an indefinite useful life to be reviewed at least annually for impairment. To the extent these assets are deemed to be impaired, they must be written down. At December 31, 2004, we wrote down $8.2 million in goodwill associated with our acquisition of Embark, due to the Admission Services division’s poor performance. Any future write down of goodwill, while noncash, would similarly adversely affect our operating results. As of December 31, 2005, we had unamortized goodwill of $23.6 million related to these acquisitions.

We may engage in future acquisitions that could dilute the equity interest of our stockholders, increase our debt or cause us to assume contingent liabilities, all of which may have a detrimental effect on the price of our common stock. If any acquisitions are not successfully integrated with our business, our ongoing operations could be negatively affected.

     We may acquire the businesses of our remaining domestic franchisees or other businesses, products or technologies in the future. To facilitate future acquisitions, we may take actions that could have a detrimental effect on our financial condition, results of operations or the price of our common stock, including:

• issuing equity securities or convertible debt securities, which would dilute current stockholders’ percentage ownership;

• incurring substantial debt; or

• assuming contingent liabilities.

     Acquisitions also entail numerous business risks, including:

• difficulties in assimilating acquired operations, technologies or products;

• unanticipated costs that could materially adversely affect our results of operations;

• negative effects on our reported results of operations from acquisition related charges and amortization of acquired technology and other intangibles;

• diversion of management’s attention from other business concerns;

• adverse effects on existing business relationships with suppliers and customers;

• risks of entering markets in which we have no or limited prior experience; and

• the potential inability to retain and motivate key employees of acquired businesses.

If we fail to manage our growth effectively, our business may be harmed.

     Historically we have increased our work force, introduced a number of new products, made substantial enhancements to our existing products and consummated several acquisitions. At December 31, 2005, we had 633 full time employees, as compared with 335 full time employees at December 31, 2001. This recent growth has placed, and our anticipated growth in future operations will continue to place, significant demands on our management, and strain our operational,

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financial and technological resources. We expect that further expansion of our operations will be required to successfully implement our business strategy, including the continued enhancement of our product and service offerings. In order to manage our growth effectively, we must drive business process improvement, reduce our overhead costs, replace and or upgrade several significant systems and continue implementing internal control procedures and controls. If we fail to achieve these objectives our business could be materially and adversely affected.

We may undertake divestitures that may limit our ability to manage and maintain our business and may adversely affect our business.

     In the future, we may undertake sales or other strategic dispositions of certain businesses or operations to attempt to maximize stockholder value. These transactions involve a number of risks, including:

• Diversion of management attention and transaction costs associated with negotiating and closing the transaction;

• Inability to retain customers, management, key personnel and other employees due to the altered nature of our businesses after such transaction;

• Inability to realize the benefits of divestitures and collect monies owed to us; and

• Failure to realize the highest value of the divested business because we are selling it before its full potential has been achieved.

We could be liable for events that occur at facilities that we use to provide our services, and a liability claim against us could adversely affect our reputation and our financial results.

     We could become liable for the actions of instructors and other personnel at the facilities we use to provide our classroom-based services. In the event of on-site accidents, injuries or other harm to students, we could face claims alleging that we were negligent, provided inadequate supervision or were otherwise liable for the injuries. Although we maintain liability insurance, this insurance coverage may not be adequate to protect us fully from these claims. In addition, we may not be able to obtain liability insurance in the future at reasonable prices or at all. A successful liability claim could adversely affect our reputation and our financial results. Even if unsuccessful, such a claim could cause unfavorable publicity, entail substantial expense and divert the time and attention of key management personnel.

If we experience system failures, our reputation may be harmed and users may seek alternate service providers causing us to lose revenue.

     If our primary and backup computer systems were to fail or be disrupted, our services could be interrupted and we may lose revenue and future business. We depend on the efficient and uninterrupted operation of our computer and communications hardware and software systems. These systems and operations are vulnerable to damage or interruption from floods, fires and power loss and similar events, as well as computer viruses, break-ins, sabotage, intentional acts of terrorism, vandalism and other misconduct and disruptions or delays occurring throughout the Internet network infrastructure. Although all of our material systems are redundant, short-term service interruptions may take place if our primary systems were to fail or be disrupted and we are forced to transition to backup systems. All of our computer hardware necessary for our online operations is currently located at a professional datacenter in White Plains, NY. This facility has redundancy for power, A/C and internet access. Accordingly, our online operations are dependent on our ability to maintain our systems in effective working order and to protect them from disruptive events. We do not have a formal disaster recovery plan, and our insurance policies may not adequately compensate us for any losses that may occur due to failures of or interruptions in our systems.

     In addition, the system failures of third party Internet service providers could produce interruptions in our service for those users who access our services through these third party providers. Service interruptions could reduce our revenue and our future revenue will be harmed if our users believe that our system is unreliable.

If our systems are unable to accommodate a high volume of traffic on our web site, the growth of our revenue could be reduced or limited.

     If use of our web site infrastructure increases beyond our capacity, customers may experience delays and interruptions in service. As a result, they may seek the products and services of our competitors and the growth of our revenue could be reduced or limited. Because we seek to generate a high volume of traffic and accommodate a large number of customers on our web site, the satisfactory performance, reliability and availability of our web site, processing systems and network infrastructure are critical to our reputation and our ability to serve our customers. If use of our web site continues to increase, we will need to expand and upgrade our technology, transaction processing systems and network infrastructure. While slower response times have not had a material effect on our results of operations to date, our web sites have in the past and may in the future experience slower response times due to increased traffic.

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Future regulations or the interpretation of existing laws pertaining to the Internet could decrease the demand for our products or increase the cost of doing business.

     Any new law or regulation pertaining to the Internet, or the application or interpretation of existing laws, could increase our cost of doing business, decrease the demand for our products and services, or otherwise harm our business. We must comply with a variety of federal and state laws affecting the content of materials distributed over the Internet, as well as regulations and other laws restricting the collection, use and disclosure of personal information that we may obtain in the course of providing our online services. In particular, we must comply with the Children’s Online Privacy Protection Act, which, as implemented, mandates that we obtain verifiable, informed parental consent before we collect, use or disclose personal information from children under the age of 13. Future laws or regulations may relate to information retrieved from or transmitted over the Internet, consumer protection, online content, user privacy, taxation and the quality of products and services. Compliance with future laws and regulations, or existing laws as they may be interpreted in the future, could be expensive, time consuming, impractical or impossible.

We may be liable for invasion of privacy or misappropriation by others of our users’ information, which could adversely affect our reputation and financial results.

     Some of our services require the disclosure of sensitive information by the user. We rely on a number of security systems for our services to protect this information from unauthorized use or access. If the security measures that we use to protect personal information or credit card information are ineffective, we may be subject to liability, including claims for invasion of privacy, impersonation, unauthorized purchases with credit card information or other similar claims. In addition, the Federal Trade Commission and several states have investigated the use of personal information by certain Internet companies. We could incur significant expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated.

Risks Related to the Securities Markets and Ownership of Our Common Stock

Our stock price has been and may continue to be volatile, which could adversely affect our stockholders.

     Since our initial public offering in 2001, the market price of our common stock has been volatile, and it may continue to be volatile as a result of one or more of the following factors, most of which are beyond our control:

• variations in our quarterly operating results;

• changes in securities analysts’ estimates of our financial performance;

• loss of a major customer or failure to complete significant transactions;

• announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

• changes in market valuations of similar companies;

• the discussion of our company or stock price in online investor communities such as chat rooms;

• additions or departures of key personnel

• fluctuations in stock market price and volume, and

• our continuing operating losses.

     In addition, the market prices of the securities of Internet-related companies have been volatile, and have experienced fluctuations that often have been unrelated to or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our stock. In the past, securities class action lawsuits alleging fraud have often been filed against a company following periods of volatility in the market price of its securities. In the future, we may be the target of similar lawsuits. If a lawsuit were to be filed against us, it could result in substantial costs and the diversion of our management’s attention and resources, which could seriously harm our financial results or result in a decline in the market price of our common stock. Declines in the market price of our common stock could also harm employee morale and retention, our ability to attract qualified employees and our access to capital.

We have anti-takeover protections, which may discourage or prevent a takeover of us, even if an acquisition would be beneficial to our stockholders.

     Certain provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for another company to acquire us, even if a takeover would benefit our stockholders. The provisions in our corporate documents:

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• authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares, making a takeover more difficult and expensive;

• establish a staggered board of directors, so that it would take three successive annual meetings to replace all directors;

• prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

• prohibit stockholders from calling special meetings of stockholders;

• prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

• establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

     In addition, Section 203 of the Delaware General Corporation Law and the terms of our stock option plans may discourage, delay or prevent a change in our control, which may depress the market price of our common stock.

Concentration of ownership among our existing executive officers and directors may make it more difficult for other stockholders to influence significant corporate decisions and may hinder a change of control.

     As of March 10, 2006, our present directors and executive officers and their affiliates beneficially owned approximately 35% of our outstanding common stock. In particular, John S. Katzman, our Chief Executive Officer, beneficially owned approximately 32% of our outstanding common stock. This concentration of ownership may make it more difficult for other stockholders to influence matters requiring stockholder approval and may have the effect of delaying, preventing or deterring a change in control of our company, thereby possibly depriving our stockholders of an opportunity to receive a premium for their common stock as part of any sale or acquisition.

The issuance of our shares of common stock upon conversion or redemption of outstanding preferred stock may cause significant dilution to our stockholders and may have an adverse impact on the market price of our common stock.

     On June 4, 2004, we completed a private placement to Fletcher International, Ltd. of 10,000 shares of our Series B-1 Cumulative Convertible Preferred Stock (the “Series B-1 Preferred Stock”) for $10 million in the aggregate. Dividends on the Series B-1 Preferred Stock are payable quarterly, at our option in cash or registered shares of our common stock, at a minimum rate of 5% per annum. The Series B-1 Preferred Stock is convertible into 1,007,303 shares of our common stock at a conversion price of $9.9275 per share, subject to adjustment upon certain events. Fletcher may also redeem its shares of the Series B-1 Preferred Stock, in lieu of converting such shares, at any time on or after November 28, 2005, for shares of common stock, unless we satisfy the conditions for cash redemption, for an amount of shares of our common stock based upon redemption rate equal to 102.5% of the then prevailing price of our common stock plus the value of any accrued and unpaid dividends. Fletcher also has the right, for a period of twenty-four months, beginning on July 1, 2005, to purchase up to $20 million in newly created series of preferred stock having, except as set forth in our agreement with Fletcher, similar terms, conditions, rights, preferences and privileges as the Series B-1 Preferred Stock (the “Additional Preferred Stock”). The Additional Preferred Stock will be convertible into shares of our common stock at a conversion price equal to 108.3% of the then prevailing price of our common stock, subject to a minimum of $9.9275 per share.

     The issuance of our shares of common stock to Fletcher upon conversion or redemption of the Series B-1 Preferred Stock and the Additional Preferred Stock and their resale by Fletcher will increase our publicly traded shares. These resales could also depress the market price of our common stock. We will not control whether or when Fletcher elects to convert its securities for common stock. The perceived risk of dilution may cause our stockholders to sell their shares, which would contribute to a downward movement in the stock price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.

In connection with the private placement of Series B-1 Preferred Stock, we may be responsible for having the resale of shares issued or issuable to Fletcher registered with the SEC and may be subject to penalties if the shares are not registered with the SEC.

     Pursuant to our agreement with Fletcher, we are obligated to file a registration statement with the SEC at any time that the number of shares of common stock issued or issuable under the agreement exceeds 80% of the number of shares then registered. If we fail to file any such required registration statement and have it declared effective by the SEC, we must (i) issue to Fletcher a number of additional shares to reflect the number of shares it would have acquired if its purchase price was based on the actual conversion price reduced by five percent for each month in which we fail to satisfy our obligations and (ii) adjust the conversion price for the additional investment rights to such lower price. In addition, such failure will result in an extension of the investment term for each day we fail to satisfy our registration obligations.

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Item 1B. Unresolved Staff Comments

     None.

Item 2. Properties

     Our headquarters are located in New York, New York, where we lease approximately 30,000 square feet of office space under a lease that expires on December 31, 2014. As of December 31, 2005, we also leased an aggregate of approximately 229,000 square feet of office space for additional operations in New York, New York and our 55 regional offices or classroom locations located in Alabama, Arizona, California, Colorado, Georgia, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington, Washington D.C., Canada and Puerto Rico.

Item 3. Legal Proceedings

     On September 10, 2003, CollegeNet, Inc. filed suit in Federal District Court in Oregon, alleging that the Company infringed a patent owned by CollegeNet related to the processing of on-line applications. CollegeNet never served the Company and no discovery was ever conducted. However, based on adverse rulings in other lawsuits concerning the same patent, CollegeNet dismissed the 2003 case without prejudice on January 9, 2004 against the Company. Thereafter, on August 2, 2005, the Federal Circuit Court of Appeals issued an opinion favorable to CollegeNet from its appeal from the adverse rulings. Then on August 3, 2005, CollegeNet filed suit again against the Company alleging an infringement of the same CollegeNet patent related to processing on-line applications. The Company was served on November 22, 2005 and filed its answer and counterclaim on January 13, 2006. CollegeNet seeks injunctive relief and unspecified monetary damages. Because this proceeding is at a very preliminary stage, we are unable to predict its outcome with any degree of certainty. However, the Company believes that it has meritorious defenses to CollegeNet’s claims of infringement and intends to vigorously defend. In a related matter, the Company filed a request with the United Stated Patent and Trademark Office (“PTO”) for ex parte reexaminations of the CollegeNet No. 6,460,042 (‘042) patent on September 1, 2005 and the CollegeNet No. 6,910,045 (‘045) patent on December 12, 2005. The PTO granted the Company’s request and ordered reexamination of all claims of the CollegeNet ‘042 patent on October 31, 2005 and the CollegeNet ‘045 patent on January 27, 2006.

     On August 29, 2005, Test Services, Inc. (“TSI”), a franchisee of the Company under ten separate franchise agreements, six of which expired on December 31, 2005, filed suit against us in the United States District Court for the District of Colorado. TSI alleged that the terms we offered for renewal of the franchise relationship did not comply with TSI’s contractual renewal rights. TSI sought declaratory relief and specific performance and unspecified damages as to the alleged breaches of the renewal provisions. TSI’s complaint also included claims that we had breached the existing franchise agreements with TSI in ways unrelated to the core renewal dispute. On November 29, 2005, the court granted our motion to dismiss all of TSI’s claims relating to the core renewal dispute. On December 31, 2005, we entered into a settlement in which: (1) TSI agreed to execute a new franchise agreement for each of its ten franchise territories with certain negotiated changes; (2) TSI paid us $1 million in cash; (3) we, TSI and TSI’s parent company agreed on certain terms regarding competitive activities by the parent company, a potential spin-off of TSI, and a TPR option to acquire TSI at a formula value in certain circumstances; TSI agreed to increase royalty payments to us from 8% to 9½% (beginning January 1, 2006); and (4) all litigation was dismissed with prejudice and the parties exchanged releases as to all matters except amounts payable in the ordinary course of business under the superseded franchise agreements.

     In addition to the foregoing, from time to time, we are involved in legal proceedings incidental to the conduct of our business, none of which is likely to have a material adverse effect on us.

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

     No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.

PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

     Price Range of Common Stock

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     Our common stock trades on the NASDAQ National Market under the symbol “REVU.” The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the NASDAQ National Market.

	2005				2004
Fiscal Quarter	High		Low		High		Low
First	$	6.14	$	5.25	$	10.56	$	7.57
Second		5.95		5.46		9.21		6.81
Third		6.25		5.70		7.96		6.52
Fourth		6.03		5.05		8.26		5.41

     As of March 10, 2006, the last reported sale price of our common stock on the NASDAQ National Market was $5.50 per share. As of March 10, 2006, there were 71 stockholders of record of our common stock. This does not include the number of persons whose stock is in nominee or “street name” accounts through brokers.

     Dividend Policy

     We have never declared or paid any cash dividends on our common stock and we do not intend to pay any cash dividends with respect to our common stock in the foreseeable future. We currently intend to retain any earnings for use in the operation of our business and to fund future growth. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements and such other factors as the board of directors deems relevant.

     Securities Authorized for Issuance under Equity Compensation Plans

     As of December 31, 2005, the following securities were authorized for issuance under our 2000 Stock Incentive Plan:

	Number of
	securities to be
	issued upon
	exercise of		Weighted-average
	outstanding		exercise price of		Number of securities
	options, warrants		outstanding options,		remaining available
Plan category	and rights		warrants and rights		for future issuance
Stock Incentive Plan		3,299,881	$	7.00		702,525

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Item 6. Selected Consolidated Financial Data (Restated – See Note 2 of the Notes to the Consolidated Financial Statements)

     The consolidated statement of operations data for each of the years ended December 31, 2005, 2004 and 2003, and the consolidated balance sheet data as of December 31, 2005 and 2004 has been derived from our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K/A. The consolidated statement of operations data for the years ended December 31, 2002 and 2001 and the consolidated balance sheet data as of December 31, 2003, 2002 and 2001 has been derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K/A. The information shown below is qualified by reference to and should be read together with our consolidated financial statements and their notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K/A. We have calculated the weighted average shares used in computing net income (loss) per share as described in Note 1 to our consolidated financial statements.

	Years Ended December 31,
	2005			2004			2003		2002			2001
	(in thousands, except per share data)
	As restated			As restated
Statement of Operations Data:
Revenue
Test Preparation Services	$	87,310		$	74,744		$	71,719	$	67,930		$	55,340
K-12 Services		31,931			27,957			21,525		10,066			6,885
Admissions Services		11,252			11,084			11,218		11,240			6,890
Total Revenue		130,493			113,785			104,462		89,236			69,115
Cost of revenue
Test Preparation Services		28,144			23,584			20,809		18,516			17,608
K-12 Services		16,838			13,684			8,328		3,533			2,482
Admissions Services		4,615			3,385			2,836		2,888			1,653
Total cost of revenue		49,597			40,653			31,973		24,937			21,743
Gross profit		80,896			73,132			72,489		64,299			47,372
Operating expenses
Selling, general and administrative		85,144			78,381			65,634		65,482			60,993
Impairment of goodwill		—			8,199			—		—			—
Loss on early extinguishment of debt		—			—			—		—			3,130
Impairment of investment		—			—			—		344			—
Total operating expenses		85,144			86,580			65,634		65,826			64,123
Income (loss) from operations		(4,248	)		(13,448	)		6,855		(1,527	)		(16,751	)
Net income (loss)		(2,182	)		(29,495	)		4,309		(1,090	)		(10,334	)
Accreted dividends on Series A redeemable preferred stock		—			—			—		—			(2,309	)
Accreted dividends on Class B non-voting common stock		—			—			—		—			(1,956	)
Dividends and accretion on Series B-1 preferred stock		(2,446	)		(1,439	)		—		—			—
Net income (loss) attributed to common stockholders	$	(4,628	)	$	(30,934	)	$	4,309	$	(1,090	)	$	(14,599	)
Basic income (loss) per share	$	(0.17	)	$	(1.13	)	$	0.16	$	(0.04	)	$	(0.68	)
Diluted income (loss) per share	$	(0.17	)	$	(1.13	)	$	0.16	$	(0.04	)	$	(0.68	)
Weighted average shares used in computing net income (loss) per share
Basic		27,570			27,468			27,306		27,239			21,383
Diluted		27,570			27,468			27,467		27,239			21,383

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	As of December 31,
	2005		2004		2003		2002		2001
	(in thousands)
	As restated		As restated
Balance Sheet Data:
Cash and cash equivalents	$	8,002	$	19,197	$	13,937	$	11,963	$	21,935
Total assets		105,371		107,641		121,697		112,116		111,833
Long-term debt, net of current portion		2,845		4,213		5,710		5,656		6,830
Series B-1 preferred stock		10,000		8,147		—		—		—
Stockholders’ equity		50,453		55,104		84,467		79,298		80,233

__________________
    Period-to-period comparability of the above Selected Consolidated Financial Data is affected by the following:

     In 2005, as part of the franchise renewal process, four of our franchisees licensed the right to sell, under The Princeton Review brand, SES in their franchised territories for approximately $1.0 million.

     In 2004, we incurred an $8.2 million impairment charge for the write-down of goodwill related to Embark, and recorded a reserve against our deferred tax asset, in the form of a valuation allowance, in the amount of $22.1 million.

     In 2004, we sold our Series B-1 Preferred Stock for gross proceeds of $10.0 million.

     In 2003, we acquired the Princeton Review of North Carolina.

     In 2002, we acquired The Princeton Review of St. Louis.

     In 2001, we acquired Princeton Review of Boston, Princeton Review of New Jersey, Princeton Review Peninsula, T.S.T.S., and Embark.

     In 2001, we completed our initial public offering, resulting in net proceeds of $51.8 million.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those described under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

     The Princeton Review provides educational products and services to students, parents, educators and educational institutions. These products and services include integrated classroom-based and online instruction, professional development for teachers and educators, print and online materials and lessons, and higher education marketing and admissions management. We operate our businesses through three divisions, which correspond to our business segments.

     The Test Preparation Services division derives the majority of its revenue from classroom-based and Princeton Review Online test preparation courses and tutoring services. Additionally, Test Preparation Services receives royalties from its independent franchises who provide classroom-based courses under the Princeton Review brand. Since 2004, this division has also been providing SES programs to students in public school districts. This division has historically accounted for the majority of our overall revenue and accounted for approximately 66% of our overall revenue in 2005.

     The Test Preparation Services division’s revenue increased 17% from 2004 levels. During 2005, the fastest growing areas for this division were its SES courses, sales of which have increased in response to the increased emphasis on state assessments, and institutional sales, which is partially attributed to the new SAT test introduced in 2005. Tutoring and retail classroom revenues also contributed to the overall growth in this division.

     The K-12 Services division provides a number of services to K-12 schools and school districts, including assessment, professional development, intervention materials (workbooks and related products) and face-to-face instruction. As a result of the increased emphasis on accountability and the measurement of student performance in public schools in this country and the centralization of school districts’ purchasing of assessment, professional development and supplemental educational products and services, this division continues to see growing demand by the public school market for its products. During 2005 K-12 Services introduced its SideStreets after-school intervention materials. We believe this material will allow us to be more responsive to school districts needs and less reliant on providing custom made content.

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     The K-12 Services division experienced revenue growth of 14%, as compared to 2004 levels. As this division has grown over the last several years, we have begun to enter into more and more large, multiple element contracts with schools, school districts, municipal agencies, and other governmental bodies, requiring us to deliver a combination of products and services, including online and print-based assessment, professional development, and face-to-face instruction. The approval processes of some of our customers in this area, which are required for formal contract execution, are lengthy and cumbersome. These contracts therefore present several types of risks and uncertainties, including reducing our ability to effectively predict our operating performance, increasing variability in our cash balances and increasing credit risk. These risks and uncertainties are discussed in detail under the heading “Risk Factors” in this Form 10-K.

     While we see continued strong revenue growth in this division, operating results are difficult to predict accurately, due to the foregoing factors and the fact that each contract entered into by this division has its own, unique product mix. Because our various products in this division have different gross margins (professional development and live course instruction products typically have lower gross margins than fees for assessment products and printed materials), contracts with varying product mix could significantly alter this division’s operating results from period to period. Primarily due to changes in product mix, gross margins in this division declined from 51% in 2004 to 47% in 2005.

     Our Admissions Services division currently derives most of its revenue from the sale of web-based admissions and application management products and marketing services to educational institutions. In 2005, this division represented 9% of our overall revenue.

     In 2005, the division’s performance was again below management’s expectations, primarily due to a lack of increase in demand for subscription-based admissions and application management services. For the third consecutive year, revenue in this division did not grow appreciably over the prior year.

     We are currently in the process of refocusing this division’s overall direction, with the goal of changing the way we charge post-secondary academic institutions for our marketing services. We are moving from a model of pricing for various bundles of marketing services, to a model where payment is based upon actual leads we generate. We believe this model will allow us to better capitalize on the popularity of our web site with college and graduate school-bound students. To support this change in our marketing services model, we re-launched our web site with a view to optimizing our ability to match the right prospects with the post-secondary institutions looking to attract them. Additionally, we expanded our counseling services in this division by signing a multi-year contract with several schools in Texas. We believe that we will need to further increase revenues before this division will show sustainable operating profits, and it is management’s hope that this new direction of providing lead generation and college counseling services will provide the needed momentum to do so.

Revenue

     Test Preparation Services. The Test Preparation Services division derives revenue primarily from:

• classroom-based and online test preparation courses and tutoring services, which consists of tuition and fees paid to our company-operated sites. We recognize revenue from tuition paid for our courses over the life of the course, which is usually from five to 10 weeks depending on the course type. Tutoring revenue is based on an hourly fee and is recognized as the services are delivered. Course and tutoring revenue represented approximately 49% of our total revenue in 2005.

• SES programs, which consist of after school courses taught primarily in the K-12 grades. We are typically paid for these courses on a per-student basis, and recognize the revenue over the life of the courses. SES revenue represented approximately 3% of our total revenue in 2005.

• royalty fees paid to us by our independent franchisees. These royalties in 2005 are 8% of all cash receipts collected by our franchisees for all test preparation and tutoring services performed by them under the Princeton Review name. Royalties received from franchisees also include a 10% fee for use by their students of our online supplemental course tools. Royalties also include a fee of 2% of the domestic franchisees’ cash receipts for contribution to a national advertising fund. For a description of the advertising fund, see Note 8 to our consolidated financial statements. We recognize revenue from franchise royalties on a monthly basis. This revenue represented approximately 4% of our total revenue in 2005.

• sales of course and marketing materials and other products to our independent franchisees. This revenue is recognized upon the transfer of title to our customers, which occurs on the shipment dates of these materials. This revenue represented approximately 1% of our total revenue in 2005.

• authoring books published by Random House and providing content for software. This revenue consists of performance-based fees, including royalties and marketing fees from sales of books and software. We recognize

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these fees based on sales of the books and software when reported to us by the publishers. Additionally, we earn delivery-based fees from Random House in the form of advances and copy editing fees for books written by us. We recognize these fees as the products are delivered. This revenue represented approximately 2% of our total revenue in 2005.

     K-12 Services.The K-12 Services division derives revenue from the services we provide to primary and secondary schools and school districts, from authoring books published by Random House and from our work with McGraw-Hill.

     Revenue from the services we provide to schools and school districts is derived from:

• fees for training and professional development for schoolteachers and administrators, which we recognize over the period that the services are provided;

• fees for classroom instruction, principally during after school K-12 programs, which we recognize when the courses are delivered;

• fees for paper-based and online benchmark testing, which we recognize over the period the services are delivered;

• sales of printed materials, which we recognize when the materials are delivered; and

• annual subscription fees for the Homeroom subscription service, recognized by us ratably over the life of the subscription period, which is typically one or two years.

     The revenue we earned from the above services we provided to schools and school districts represented approximately 24% of our total revenue in 2005.

     Revenue from authoring books published by Random House is derived from performance-based fees, including royalties and marketing fees from sales of books. We recognize these fees based on sales of the books when reported to us by the publisher. Additionally, we earn delivery-based fees from Random House in the form of advances and copy editing fees for books written by us. We recognize these fees as the products are delivered. This revenue represented less than 1% of our total revenue in 2005.

     Revenue from McGraw-Hill is derived from royalties under an agreement that expired in September, 2003 for Princeton Review branded content that we provided for their textbooks, which we recognize based on sales reported by McGraw-Hill. Revenue from our contract with McGraw-Hill represented approximately 1% of our total revenue in 2005.

     Admissions Services.The Admissions Services division derives revenue from:

• web-based subscription, application and marketing fees. These fees consist of annual subscription fees and application processing fees paid to us by academic institutions for our online application and management products, annual subscription fees paid to us by secondary schools for our ECOS product, and annual marketing fees paid to us by academic institutions to promote their programs on our web site and in our publications. We recognize the subscription and marketing fees over the contract period, which is typically one or two years. We recognize the application processing fees in the month that the relevant applications are submitted. This revenue represented approximately 5% of our total revenue in 2005.

• college counseling fees paid by high schools. This revenue consists of annual subscription fees paid to us by secondary schools. We recognize these fees over the contract period, which is typically one to three years. This revenue represented approximately 1% of our total revenue in 2005.

• marketing fees paid to us by academic institutions based upon the number of student inquiries we generate. This revenue is recognized as leads are generated based on the price per lead in the applicable contracts, and represented 1% of our total revenue in 2005.

• authoring books published by Random House. This revenue consists of performance-based fees, including royalties and marketing fees from sales of books. We recognize these fees based on sales of the books when reported to us by the publisher. Additionally, we earn delivery-based fees from Random House in the form of advances and copy editing fees for books written by us. We recognize these fees as the products are delivered. This revenue represented less than 1% of our total revenue in 2005.

• sales of advertising and sponsorships to businesses and schools wishing to promote their products, services and programs on our web site. Advertising and sponsorship revenue is recognized each month based on contractual terms. This revenue represented approximately 1% of our total revenue in 2005.

Cost of Revenue

     Test Preparation Services. Cost of revenue consists of course expenses of our company-owned operations, cost of course materials sold and the costs to author, develop, edit and produce content for books and software. Course expenses

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consist of costs incurred to deliver test preparation courses, SES programs, tutoring and admissions counseling services, including rent of classroom space, teacher salaries, credit card fees, and costs of course materials. The largest components of cost of revenue in our Test Preparation Services division are rent for classroom spaces and teacher salaries, which together accounted for approximately 66% of the cost of revenue of this division in 2005. Also included in cost of revenue is a royalty we pay to our franchisees in exchange for allowing us to offer our Princeton Review Online courses within their territories. This royalty is calculated based on a fee per student which varies depending on the course. These fees are for Princeton Review Online courses provided to students residing within our franchisees’ territories, net of certain administrative expenses.

     K-12 Services. Cost of revenue primarily consists of the costs related to providing training, professional development, after school programs, authoring and producing workbooks, developing content for textbooks, our Homeroom subscription service and book development. Additionally, cost of revenue includes amortization expense related to our capitalized K-12 content, which are the direct costs we incur to write questions and lessons that are used across our various product categories in this division. These costs, primarily comprised of internal compensation costs of dedicated employees, are capitalized and amortized over a seven-year period, on a straight-line basis (see Note 1 to our Consolidated Financial Statements).

     Admissions Services. Cost of revenue includes the costs to author, develop and edit our books and the admissions services section of our web site. Cost of revenue also includes the costs to build and maintain our web-based products, primarily comprised of internal compensation costs of dedicated employees, and the commissions related to the sale of those products, which are recognized over the contract period, and credit card fees incurred in connection with processing student applications, which are recognized in the month the applications are processed. Additionally, cost of revenue includes the costs to provide counseling services to high schools contracting for this service.

     Selling, General and Administrative Expenses

     Selling, general and administrative expenses include payroll and payroll related expenses, advertising expenses and office facility expenses, including rent, utilities, telephone and miscellaneous expenditures, which collectively represented approximately 65% of our total selling, general and administrative expenses in 2005. Selling, general and administrative expenses also include costs associated with national advertising campaigns that benefit our company-owned locations as well as our independent franchisees. Finally, the remaining components of selling, general and administrative expenses include professional fees, travel and entertainment, health insurance and depreciation and amortization.

     Income Taxes

     As a result of the effect under SFAS No. 109,Accounting for Income Taxes, on the recoverability of our net deferred tax assets, we decided to record a 100% valuation allowance against any deferred tax benefits. In 2005, a deferred tax benefit of $1.5 million was offset by a further valuation allowance of the same amount, resulting in no net tax expense in 2005. During 2004, as a result of the establishment of a valuation allowance for net deferred tax assets we recorded an income tax expense of $16.7 million for 2004. Income tax expense was $3.2 million for 2003. Our effective income tax rate was 0% for 2005, 122% for 2004, and 42% for 2003.

     We currently have significant deferred tax assets related to net operating loss carryforwards, tax credit carryforwards and deductible temporary differences that will reduce taxable income in future years. Our loss in 2005 and 2004 and the emphasis placed on cumulative losses under generally accepted accounting principles represents sufficient evidence under SFAS No. 109,Accounting for Income Taxes,for us to determine that it was appropriate to establish a full valuation allowance against net deferred tax assets. Although management expects these assets will ultimately be fully utilized, future performance cannot be assured. The Company will continue to evaluate the need for the valuation allowance in future periods.

     Restatement of Financial Statements

     On October 24, 2006, the Audit Committee of the Board of Directors of the Company, in consultation with the Company’s management and its independent registered public accounting firm, Ernst & Young LLP, concluded that the Company’s method of accounting for the Preferred Stock must be changed. This conclusion was reached following a thorough evaluation of the Company’s accounting treatment of the Preferred Stock in response to a comment letter from the Staff of the Division of Corporation Finance of the SEC relating to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. While we have concluded that the Preferred Stock was properly accounted for as “Mezzanine Equity” consistent with GAAP, the Company did not properly account for certain derivatives embedded within the Preferred Stock and associated rights to acquire additional shares of preferred stock that were granted simultaneously with the issuance of the Preferred Stock. Under GAAP these embedded derivatives and rights are required to be recorded as liabilities at fair

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value, and adjusted to their fair values in subsequent periods. Accordingly, we are restating our financial statements to reflect this accounting treatment.

     The cumulative effect of the restatement through fiscal 2005 is an increase in the non-current liability related to derivative instruments of $393,000 , an increase in the non-cash accretion on Preferred Stock of $2.6 million and a non-cash gain on the derivative instrument of $2.2 million. As a result, retained earnings at the end of fiscal 2005 decreased by $393,000. The gain on derivative instruments for fiscal years ended 2005 and 2004 was $1.3 million and $918,000, respectively. Dividends due to accretion on Preferred Stock for fiscal years ended 2005 and 2004 increased by $1.6 million and $1.0 million, respectively. The restatement increased reported net loss per common share by $0.01 in each of the fiscal years ended 2005 and 2004.

     These non-cash adjustments will not have any impact on our previously reported net cash flows, sales, operating income or our compliance with any financial covenant under our revolving credit facility.

          Management’s Discussion and Analysis of Financial Condition and Results of Operations has been revised for the effects of the restatement. Further information on the nature and impact of these adjustments is provided in Note 2, “Restatement of Financial Statements” and Note 15, “ Quarterly Results of Operations (unaudited)” under Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K/A.

Results of Operations

Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004

     Revenue

     For the three months ended December 31, 2005 total revenue for the Company increased by $4.5 million, or 16.2%, from $27.8 million in 2004 to $32.3 million in 2005.

     Test Preparation Services revenue increased by $3.5 million, or 25.7%, from $13.6 million in 2004 to $17.1 million in 2005. This increase is driven by an increase of $2.1 million in retail, institutional and tutoring revenue, reflecting strong enrollment in SAT, LSAT, and MCAT courses and an increase of $1.0 million in SES revenue.

     K-12 Services revenue increased by $385,000, or 3.4%, from $11.2 million in 2004 to $11.6 million in 2005. This increase is primarily driven by $2.0 million of growth in assessment services and the receipt of $400,000 in prior year license fees. Reductions are driven primarily by the recognition of a certain professional development contract which combined both third and fourth quarter revenue into the fourth quarter of 2004 driving a year-over-year reduction of $1.7 million. After adjusting for this $1.7 million contract, revenue growth for the quarter would be approximately 22%.

     Admissions Services revenues increased by $648,000, or 21.6%, from $3.0 million in 2004 to $3.6 million in 2005. This increase was driven primarily by an increase of $643,000 in counseling contracts entered into during the third quarter of 2005.

     Cost of Revenue

     For the three months ended December 31, 2005 total cost of revenue for the Company increased by $4.0 million, or 38.1%, from $10.5 million in 2004 to $14.5 million in 2005.

     Test Preparation Services cost of revenue increased by $1.5 million, or 29.5%, from $5.1 million in 2004 to $6.6 million in 2005. This increase is driven by a $1.4 million volume increase related to retail enrollments which caused variable costs such as teacher salaries, site rent and course materials to increase. Costs associated with SES also increased by approximately $300,000. Gross margin declined by 1.1% from 62.1% to 61.0% due to higher costs of labor and materials in support of SES institutional based contracts and year end delays.

     K-12 Services cost of revenues increased by $2.2 million, or 50.5%, from $4.3 million in 2004 to $6.5 million in 2005. This increase is primarily related to an increase in content development and professional development costs of approximately $2.0 million. Gross margin declined by 17.5% from 61.7% to 44.2%. Adjusting for the additional $1.7 million of revenue during the fourth quarter of 2004 gross margin declines by 10.4% from 54.6% to 44.2% related to higher fourth quarter mix of professional development services and higher content development, production and distribution costs.

     Admissions Services cost of revenue increased by $320,000, or 29.8%, from $1.1 million in 2004 to $1.4 million in 2005. This increase is primarily driven by an increase of $378,000 related to counseling labor and related costs. Gross

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margin declined by 2.4% from 64.3% to 61.9%. This decrease is primarily related to ongoing expenses in support of the new counseling services contracts.

     Selling, general and administrative

     Selling, general and administrative expense increased by approximately $890,000 or 4.1%, from $21.6 million in 2004 to $22.5 million in 2005. Primary components of this increase are: increased rent and related costs of $450,000 and $400,000 of advertising expense primarily related to the SES business.

     Impairment of goodwill

     Our results for the fourth quarter of 2004 included a write-down of approximately $8.2 million of goodwill related to the Embark acquisition.

Comparison of Years Ended December 31, 2005 and 2004

     Revenue

     For the year ended December 31, 2005 total revenue for the Company increased by $16.7 million, or 14.7%, from $113.8 million in 2004 to $130.5 million in 2005.

     Test Preparation Services revenue increased by $12.6 million, or 16.8%, from $74.7 million in 2004 to $87.3 million in 2005. This increase is driven by an increase of $9.3 million in retail, institutional and tutoring revenue, once again reflecting strong enrollment in SAT, LSAT and MCAT courses, and $2.1 million in SES revenue.

     For the year, K-12 services revenue increased by $4.0 million or 14.2%, from $28 million in 2004 to approximately $32 million in 2005. This increase is driven by $2.4 million in assessment services, $1.8 million in workbook intervention materials (primarily SideStreets) and $943,000 of professional development services.

     For the year, Admissions Services revenue increased by $168,000, or 1.5%, from $11.1 million in 2004 to $11.3 million in 2005. This increase is driven by an increase of approximately $700,000 in revenue from counseling services, and a $1.4 million increase in higher education marketing fees. Reductions to revenue include a decrease in higher education technology fees and book related revenues related to timing.

     Cost of Revenue

     For the year ended December 31, 2005 total cost of revenue for the Company increased by $8.9 million, or 22%, from $40.7 million in 2004 to $49.6 million in 2005.

     Test Preparation Services cost of revenue increased by $4.6 million, or 19.3%, from $23.6 million in 2004 to $28.1 million in 2005. This increase is primarily driven by the variable expense increase related to higher retail enrollments, and higher tutoring and institutional revenue. Gross margin declined slightly by 0.6% from 68.4% to 67.8%.

     K-12 Services cost of revenue increased by $3.1 million, or 23.0%, from $13.7 million in 2004 to $16.8 million in 2005. This increase is driven by variable expense of approximately $2.1 million on $4.0 million of incremental revenue growth. In addition, there is an increase of $300,000 of web content amortization and approximately $889,000 increase related to incremental content production and labor related expense. Gross margin declined by 3.8% from 51.1% to 47.3% due to revenue timing and content production related costs. The Company expects margins to improve in 2006.

     Admissions Services cost of revenue increased by $1.2 million, or 36.3%, from $3.4 million in 2004 to $4.6 million in 2005. This increase is driven by an increase of $500,000 in counseling expense and $700,000 of other related expense in support of both the technology and marketing business. Gross margins declined by 10.5% from 69.5% to 59.0%. The key drivers of this reduction relate to $700,000 in revenue credits driving approximately 6% of the decline, as well as approximately 2% in consulting mix and another 1.5% attributed to the cost base.

     Selling, general and administrative

     Selling, general and administrative expense increased by approximately $6.7 million or 8.6%, from $78.4 million in 2004 to $85.1 million in 2005. This increase is attributed to: salary expense of $2.1 million, office rent and related expense of $730,000, professional fees primarily related to Sarbanes-Oxley of $2.8 million, $400,000 in advertising and recruitment expense and workers compensation fees of $300,000.

     Impairment of goodwill

     Our 2004 results included a write-down of approximately $8.2 million of goodwill related to the acquisition of Embark.

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     Sale of Rights to Franchises

     During the third quarter of 2005, we sold the right to provide SES programs to four of our independent franchisees for $990,000.

     Other Income (Expense), net

     Other income of $1.4 million in 2005 and $1.0 million in 2004, increased by approximately $400,000. This was principally due to the change in the fair value of derivatives and warrant.

     Dividends and Accretion on Series B-1 Preferred Stock

     As a result of the dividends accruing for the entire year 2005 compared with approximately six months in 2004, cash paid to the Series B-1 preferred stockholders in 2005 increased by $217,000. In addition, for the same reason, the accretion related to the Series B-1 Preferred Stock increased by $578,000.

Comparison of Years Ended December 31, 2004 and 2003

     Overall, results for 2004 were below expectations in all three divisions. After returning to profitability in 2003, we incurred a net loss of $30.4 million in 2004. In the Test Preparation Services division, weakness in enrollments in LSAT and GMAT courses offset growth in online courses, SES programs and tutoring, resulting in annual revenue growth of only 4%. Despite revenue growth for the year of 30%, the K-12 Services division experienced a longer sales cycle in closing on contracts. The Admissions Services division, despite rolling out a new counseling product, failed to grow revenue for the second year in a row, primarily due to weak demand for subscription-based services from its post-secondary institution customers. Gross margins for the company as a whole slipped from 69.4% in 2003 to 64.3% in 2004, due primarily to higher costs combined with lower enrollment in test preparation services and a less profitable product mix in K-12 services.

     On the expense side, professional fees, including those relating to Sarbanes Oxley compliance, were significantly higher than expected, and a bad debt expense relating to the write-off of aged accounts receivable in the Admissions Services and K-12 Services divisions further hurt our bottom line. Additionally, we recorded a valuation allowance relating to our net deferred tax assets as of December 31, 2004, of approximately $22.1 million, resulting in a tax charge of $16.7 million in 2004, and incurred an $8.2 million impairment charge relating to the write-down of goodwill.

     Revenue

     Our total revenue increased from $104.5 million in 2003 to $113.8 million in 2004, representing a 9% increase.

     Test Preparation Services revenue increased from $71.7 million in 2003 to $74.7 million in 2004, representing a 4% increase, comprised primarily of an increase of approximately $2.9 million in revenue from our company-owned operations. The increased revenue from company-owned operations resulted from an increase of approximately $488,000 in revenue attributable to the operations acquired from our former franchisee, Princeton Review of North Carolina, Inc., and an increase of approximately $2.5 million in course and tutoring revenue at our other locations. This $2.5 million increase is attributable to an increase in our tutoring, online course and SES revenue totaling $4.2 million, which was partially offset by a decrease in retail classroom revenue of approximately $2.3 million, primarily due to a drop in LSAT and GMAT course fees.

     K-12 Services revenue increased from $21.5 million in 2003 to $28.0 million in 2004, representing a 30% increase. This increase resulted primarily from an increase of approximately $6.8 million in revenue from schools for assessment tests, printed materials, professional development and Homeroom subscriptions, due to additional contracts signed in 2004, as well as increased revenue from contracts signed in 2003 which were in effect for the full year in 2004. The increase in revenue from schools was partially offset by a decrease in fees from McGraw-Hill.

     Admissions Services revenue decreased from $11.2 million in 2003 to $11.1 million in 2004, representing a 1% decrease. The approximate $750,000 in sales of college counseling services to high schools, a new product offering in 2004 by this division, was offset by a decrease in revenues from post-secondary institutions.

     Cost of Revenue

     Our total cost of revenue increased from $32.0 million in 2003 to $40.7 million in 2004, representing a 27% increase.

     Test Preparation Services cost of revenue increased from $20.8 million in 2003 to $23.6 million in 2004, representing a 13% increase, primarily as a result of increasing the number of tutoring sessions and SES programs delivered. Cost of revenue as a percentage of revenue increased due to reduction in the average class size due to reduced enrollment, primarily in our LSAT courses, as well as an increase in the relative cost of teachers and course materials.

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     K-12 Services cost of revenue increased from $8.3 million in 2003 to $13.7 million in 2004, representing a 65% increase. This increase is primarily attributable to an increase in costs incurred to service increasing numbers and increasingly complex contracts with school-based customers. The percentage increase in cost of revenue was significantly higher than the increase in revenue in this division primarily because of the increased revenues from the lower margin professional development services.

     Admissions Services cost of revenue increased from $2.8 million in 2003 to $3.4 million in 2004, representing a 21% increase, primarily due to increased customer support costs, including the new high school counseling product.

     Operating Expenses

     Selling, general and administrative expenses increased from $65.6 million in 2003 to $86.6 million in 2004, representing a 32% increase. This increase resulted from the following:

• a write-down of goodwill related to the acquisition of Embark of approximately $8.2 million;

• an increase of approximately $4.7 million in salaries and payroll taxes, resulting primarily from increased headcount;

• an increase of approximately $2.6 million attributable primarily to personnel related costs, including office rent and expenses, travel and entertainment, employee benefits and recruiting fees;

• an increase of approximately $2.4 million in professional fees, comprised primarily of legal, accounting and consultant fees, relating to Sarbanes-Oxley compliance, an internal corporate reorganization and other miscellaneous matters;

• an increase of approximately $2.2 million in web site technology and development expenses;

• an increase of approximately $1.1 million in bad debt allowance expense primarily due to an increase in aged accounts receivable in the Admissions Services and K-12 Services divisions; and

• an increase of approximately $725,000 in depreciation and amortization expenses, due primarily to increased amortization expense relating to the K-12 Services division’s web site development costs.

     Other Income (Expense), net

     Other income decreased by approximately $200,000. In 2003, other income resulted primarily from our sale of preferred stock in, and certain contractual rights with, Tutor.com for $1.0 million. In 2004, other income represented primarily the change in the fair value of derivatives and warrant of approximately $918,000.

     Dividends and Accretion on Series B-1 Preferred Stock

     Cash dividends paid during 2004, together with the accretion related to the issuance of Series B-1 Preferred Stock in June 2004 totaled $1.4 million.

Liquidity and Capital Resources

     Our primary sources of liquidity are cash and cash equivalents on hand and collections from customers. At December 31, 2005, we had $8.0 million of cash and cash equivalents. The $11.2 million decrease in cash from the December 31, 2004 balance is primarily attributed to investing activities of $13.6 million ($8.3 million in furniture, fixtures, equipment and software development and $5.6 million in capitalized content) along with $5.1 million related to financing activity that more than offset the $7.5 million cash increase provided by operating activities. Our Test Preparation Services division has historically generated, and continues to generate, the largest portion of our cash flow from its retail classroom and tutoring courses. These customers usually pay us in advance or contemporaneously with the services we provide, thereby supporting our short-term liquidity needs. Increasingly, however, across all of our divisions, we are generating a greater percentage of our cash from contracts with institutions such as the schools and school districts serviced by our K-12 Services division and the post-secondary institutions serviced by our Admissions Services division, all of which pay us in arrears. Typical payment performance for these institutional customers, once invoiced, ranges from 60 to 90 days. Additionally, the long contract approval cycles and/or delays in purchase order generation with some of our contracts with large institutions or school districts can contribute to the level of variability in the timing of our cash receipts.

     Cash provided by operating activities is our net income (loss) adjusted for certain non-cash items and changes in operating assets and liabilities. During 2005, cash provided by operating activities was $7.5 million, compared to $4.0 million for 2004, an increase of $3.5 million. The increase is primarily attributed to the year-over-year increase in accounts payable and accrued expenses of $5.9 million and an increase in net income adjusted for non cash items of $3.3 million. These increases were partially offset by a decrease in deferred income of $1.1 million and an increase in inventory, primarily SideStreets instruction books, of $1.7 million

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     During 2005, we used $13.6 million in cash for investing activities as compared to $8.3 million used during 2004. This increase is driven by increases of $2.5 million in capital expenditures due primarily to the Oracle implementation, an increase of $4.1 million in content expenditures related to the development of SideStreets content and an increase of $1.8 million in leasehold improvements.

     Financing cash flows consist primarily of transactions related to our debt and equity structure. We used approximately $5.1 million in 2005 compared to net proceeds of $9.6 million during 2004. During 2005, we repaid approximately $2.0 million of the debt we had borrowed in 2004 under a bank credit facility, and we repaid approximately $2.0 million in other debt. In 2004, we raised approximately $9.7 million net of issuance costs from the sale of Series B-1 Preferred Stock and repaid approximately $2.0 million of other debt.

     Our current cash balances and operating cash flow, will be sufficient to cover our normal operating requirements for the next 12 months as we implement a number of restructuring initiatives designed to significantly improve operating cash flow. We also expect to shortly secure a revolving line of credit in an amount of $5 million to $10 million to support any further working capital requirements.

Contractual Obligations and Commercial Commitments

     As of December 31, 2005, our principal contractual obligations and commercial commitments consisted of obligations outstanding under our long-term office and classroom leases, obligations under promissory notes entered into in connection with acquisitions, employment agreements and several capital leases of computer equipment. As of December 31, 2005, we operated from leased premises in New York, Alabama, Arizona, California, Colorado, Georgia, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington, Washington D.C., and Canada.

     The following table summarizes our contractual obligations and other commercial commitments set forth therein as of December 31, 2005.

	Payments due by period
	($ in millions)
			Less than						More than
Contractual Obligations	Total		1 year		1–3 years		3–5 years		5 years
Long-term debt obligations	$	3.1	$	0.7	$	2.3	$	0.1	$	—
Capital lease obligations		1.2		0.8		0.4		—		—
Operating lease obligations		28.5		5.1		9.2		6.8		7.4
Purchase obligations (1)		6.5		3.0		3.5		—		—
Total	$	39.3	$	9.6	$	15.4	$	6.9	$	7.4

(1) Purchase obligations consist of payments required under employment agreements.

Adoption of New Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R),“Share-Based Payment”(“SFAS 123(R)”). SFAS 123(R) establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123(R) requires that the fair value of such equity instruments be recognized as expense in the financial statements as services are performed. Prior to SFAS 123(R), only the pro forma disclosures of fair value were required. In March 2005, the SEC issued Staff Accounting Bulletin No. 107,“TOPIC 14: Share-Based Payment”which addresses the interaction between SFAS 123(R) and certain SEC rules and regulations and provides views regarding the valuation of share-based payment arrangements for public companies. SFAS 123(R) is effective for our first quarter of 2006 and the adoption of this new accounting pronouncement is expected to result in pre-tax stock-based compensation expense of between $0.3 million and $0.5 million in our fiscal year 2006.

     In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29”(“SFAS 153”). This new standard is the result of a broader effort by the FASB to improve financial reporting by eliminating differences between generally accepted accounting principles (“GAAP”) in the U.S. and GAAP developed by the International Accounting Standards Board (“IASB”). As part of this effort, the FASB and the IASB identified opportunities to improve financial reporting by eliminating certain narrow differences between their existing accounting standards. SFAS 153 amends Accounting Principles Board Opinion No. 29,“Accounting for Nonmonetary Transactions”(“APB 29”), that was issued in 1973. The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the

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amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” Previously, APB 29 required that the accounting for an exchange of a productive asset for a similar productive asset, or an equivalent interest in the same or similar productive asset, should be based on the recorded amount of the asset relinquished. The provisions of SFAS 153 were effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, and there was no impact on our consolidated financial statements.

     In May 2005, the FASB issued SFAS No. 154,“Accounting Changes and Error Corrections — a Replacement of APB Opinion No. 20 and FASB Statement No. 3”(“SFAS 154”). SFAS 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (our 2006 fiscal year) and is not expected to have a significant impact on our consolidated financial statements.

Critical Accounting Policies

     The estimates, methods and judgments we use in applying our accounting policies significantly impact the results we report in our financial statements. Some of our accounting policies require us to make subjective and difficult judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include the assessment of the collectability of our accounts receivable balances, which impacts bad debt write-offs; recoverability of goodwill, which impacts goodwill impairment expense; assessment of recoverability of long-lived assets, which primarily impacts operating margins when we record the impairment of assets or accelerate their depreciation; valuation of embedded derivatives and warrant, which impacts gain or loss on derivative instruments; recognition and measurement of current and deferred income tax assets and liabilities, which impacts our tax provision and, to a lesser extent, revenue recognition requirements, which impacts how and when we recognize revenue from our goods and services. Below, we discuss these policies further, as well as the estimates and judgments involved.

     We also have other policies that we consider to be key accounting policies. However, these policies do not meet the definition of critical accounting estimates because they do not generally require us to make estimates or judgments that are difficult or subjective.

     Accounts Receivable. We maintain allowances for doubtful accounts for losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances for uncollectible accounts may be required. We review our aged receivables monthly. This review includes discussions with our customers and their account representatives, the customers’ payment history and other factors. Based on these reviews we may increase or decrease our allowance for uncollectible accounts if we determine there is a change in the collectability of our accounts receivable.

     Goodwill and Territorial Marketing Rights. We perform an annual goodwill impairment review during the fourth quarter, or more frequently if indicators of potential impairment exist. No impairment was indicated in 2003 or 2005. In 2004, we recorded an impairment expense of $8.2 million against goodwill in our Admissions Services division due to the continued poor performance of this division. Our impairment review process is based on a discounted future cash flow approach that uses our estimates of revenue for the reporting units, driven by assumed market growth rates as well as appropriate discount rates. These estimates are consistent with the plans and estimates that we use to manage the underlying businesses.

     Long-Lived Assets.We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in our use of the assets. Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying amount of the asset grouping to the related total future undiscounted net cash flows. If an asset grouping’s carrying value is not recoverable through those cash flows, the asset grouping is considered to be impaired. The impairment is measured by the difference between the assets’ carrying amount and their fair value, based on the best information available, including market prices or discounted cash flow analysis.

     Embedded Derivatives and Warrant. Our Series B-1 Preferred Stock contains two embedded derivatives that, consistent with the requirements of Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities” are accounted for separately from the Preferred Stock. The two embedded derivatives, the “holder’s conversion option” and the “make whole” provision are accounted for on a combined basis and, along with the warrant, reported at fair value (See Notes 2 and 8 to our consolidated financial statements). Any changes to fair value are reflected in “Other Income (Expense)” and totaled $1.3 million and $918,000 for the years ended December 31, 2005 and 2004, respectively. We must calculate the fair value of these embedded derivatives and warrant at the end of each quarter. In making these calculations, the key estimates and assumptions that we use include the estimated life of the Preferred Stock and the warrant, the volatility rates applicable to the trading price of our common stock and the probability of events that would trigger the operation of the “make whole”. Factors considered in the determination of the key assumptions include likelihood of the holder's exercise of conversion or redemption based upon current stock prices and interest rates, as well as the historical stock prices to determine volatility. The Company’s use of derivatives is limited to the embedded features within its Preferred Stock.

     Income Taxes. In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.

     We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that we estimate will not ultimately be recoverable. At December 31, 2005, we had a net deferred tax asset of

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approximately $23.7 million, primarily relating to our net operating loss carryforwards of $53.7 million, which expire in varying amounts between 2021 and 2025.

     Realization of our deferred tax asset is dependent on generating sufficient taxable income in the United States prior to expiration of these loss carryforwards. As of December 31, 2004, we recorded a valuation allowance for the entire net deferred tax asset because our loss in 2004 and the emphasis placed on cumulative losses under generally accepted accounting principles represented sufficient evidence under SFAS No. 109 “Accounting for Income Taxes” for us to determine that it was appropriate to establish a full valuation allowance. If, in the future, an appropriate level and consistency of profitability is attained, we would reduce the valuation allowance, which could have a significant impact on our consolidated financial statements.

     Revenue Recognition. In general our revenue recognition policies do not require us to make estimates or judgments that are difficult or subjective, with the possible exception being the recognition of revenue for separate units of accounting in accordance with EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” In accounting for multiple-element arrangements, one of the key judgments to be made is the accounting value that is attributable to the different contractual elements. The appropriate allocation of value not only impacts which segment is credited with the revenue, it also impacts the amount and timing of revenue recorded in the consolidated statement of operations during a given period due to the differing methods of recognizing revenue for each product or service by each of the segments. Revenue is allocated to each element based on the accounting determination of the relative fair value of that element to the aggregate fair value of all elements. The fair values must be reliable, verifiable and objectively determinable. When available, such determination is based principally on the pricing of similar arrangements with unrelated parties that are not part of a multiple-element arrangement.

Impact of Inflation

     Inflation has not had a significant impact on our historical operations.

Seasonality in Results of Operations

     We experience, and we expect to continue to experience, seasonal fluctuations in our revenue because the markets in which we operate are subject to seasonal fluctuations based on the scheduled dates for standardized admissions tests and the typical school year. These fluctuations could result in volatility or adversely affect our stock price. We typically generate the largest portion of our test preparation revenue in the third quarter. However, as SES revenues increase, we expect to recognize these revenues primarily in the first and fourth quarters. The electronic application revenue recorded in our Admissions Services division is highest in the first and fourth quarters, corresponding with the busiest times of year for submission of applications to academic institutions. Our K-12 Services division experiences seasonal fluctuations in revenue, with the first and fourth quarters (corresponding to the school year) expected to have the highest revenue.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     Our portfolio of marketable securities includes primarily short-term money market funds. The fair value of our portfolio of marketable securities would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due primarily to the short-term nature of the portfolio. All of our currently outstanding long-term debt bears interest at fixed rates. Our Series B-1 Preferred Stock requires the payment of quarterly dividends at the greater of 5% or 1.5% above 90-day LIBOR (4.4% at December 31, 2005). During 2005 and 2004, we paid dividends on the Series B-1 Preferred Stock in an aggregate amount of $534,000 and $374,000, at an average rate of 5.3% and 7.5% in 2005 and 2004, respectively. A 100 basis point increase in the dividend rate would have resulted in a $100,000 increase in dividends paid during this period.

     We repaid and terminated our line of credit in February 2005. Our Series B-1 Preferred Stock contains embedded derivatives and a warrant to purchase additional preferred stock which are adjusted to fair value and remeasured quarterly.

     Revenue from our international operations and royalty payments from our international franchisees constitute an insignificant percentage of our revenue. Accordingly, our exposure to exchange rate fluctuations is minimal.

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Item 8. Financial Statements and Supplementary Data

     Index to Consolidated Financial Statements and Financial Statement Schedule

	Page
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm		41
Consolidated Balance Sheets		42
Consolidated Statements of Operations		43
Consolidated Statements of Stockholders’ Equity		44
Consolidated Statements of Cash Flows		45
Notes to Consolidated Financial Statements		46
Financial Statement Schedule:
Schedule II — Valuation And Qualifying Accounts		71

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
The Princeton Review, Inc.

     We have audited the accompanying consolidated balance sheets of The Princeton Review, Inc. (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Princeton Review, Inc. as of December 31, 2005 and 2004 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles. Also, in our opinion the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

     As discussed in Note 2, the Company has restated its consolidated balance sheets as of December 31, 2005 and 2004 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2005.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Princeton Review, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2006, except for the effects of the material weakness described in the sixth paragraph of that report as to which the date is March 22, 2007, expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.

/s/ ERNST & YOUNG LLP

New York, New York
March 13, 2006, except for Note 2, as to which
the date is March 22, 2007

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	December 31,
	2005			2004
	As restated
	(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents (including $255 restricted cash in 2005)	$	8,002		$	19,197
Accounts receivable, net of allowance of $1,601 in 2005 and $1,290 in 2004		22,493			20,652
Accounts receivable-related parties		1,591			1,682
Other receivables ($789 in 2005 and $1,049 in 2004 from related parties)		813			1,107
Inventories		2,798			1,054
Prepaid expenses		2,229			2,019
Other current assets		1,307			1,547
Total current assets		39,233			47,258
Furniture, fixtures equipment and software development, net		16,155			13,380
Goodwill, net		31,506			31,511
Investment in affiliates		1,938			1,847
Other intangibles, net		13,371			10,032
Other assets		3,168			3,613
Total assets	$	105,371		$	107,641
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,449		$	8,359
Accrued expenses		10,826			7,342
Current maturities of long-term debt		1,530			3,769
Deferred income		16,548			17,637
Total current liabilities		39,353			37,107
Deferred rent		2,327			1,388
Long-term debt		2,845			4,213
Fair value of derivatives and warrant		393			1,682
Series B-1 Preferred stock, $.01 par value; 10,000 authorized, issued and outstanding at December 31, 2005 and 2004 respectively (liquidation value of $10,000)		10,000			8,147
Stockholders’ equity
Preferred stock, $.01 par value; 4,990,000 shares authorized; none issued and outstanding at December 31, 2005 and 2004		—			—
Common stock, $.01 par value; 100,000,000 shares authorized; 27,572,172 and 27,569,764 issued and outstanding at December 31, 2005 and 2004, respectively		276			276
Additional paid-in capital		116,279			116,260
Accumulated deficit		(65,823	)		(61,195	)
Accumulated other comprehensive (loss)		(279	)		(237	)
Total stockholders’ equity		50,453			55,104
Total liabilities and stockholders’ equity	$	105,371		$	107,641

See accompanying notes.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

	Years Ended December 31,
	2005			2004			2003
	(in thousands, except per share data)
	As Restated			As Restated
Revenue
Test Preparation Services	$	87,310		$	74,744		$	71,719
K-12 Services		31,931			27,957			21,525
Admissions Services		11,252			11,084			11,218
Total revenue		130,493			113,785			104,462
Cost of revenue		—			—			—
Test Preparation Services		28,144			23,584			20,809
K-12 Services		16,838			13,684			8,328
Admissions Services		4,615			3,385			2,836
Total cost of revenue		49,597			40,653			31,973
Gross profit		80,896			73,132			72,489
Operating expenses		—			—			—
Selling, general and administrative		85,144			78,381			65,634
Impairment of goodwill		—			8,199			—
Total operating expenses		85,144			86,580			65,634
Income (loss) from operations		(4,248	)		(13,448	)		6,855
Interest expense		(354	)		(361	)		(607	)
Sale of rights to franchisees		990			—			—
Other income (expense), net		1,430			1,021			1,217
Income (loss) before provision from income taxes		(2,182	)		(12,788	)		7,465
(Provision) benefit for income taxes		—			(16,707	)		(3,156	)
Net income (loss)		(2,182	)		(29,495	)		4,309
Dividends and accretion on Series B-1 Preferred Stock		(2,446	)		(1,439	)		—
Net income (loss) attributed to common stockholders	$	(4,628	)	$	(30,934	)	$	4,309
Basic income (loss) per share	$	(0.17	)	$	(1.13	)	$	0.16
Diluted income (loss) per share	$	(0.17	)	$	(1.13	)	$	0.16
Weighted average shares used in computing net income (loss) per share
Basic		27,570			27,468			27,306
Diluted		27,570			27,468			27,467

See accompanying notes.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(in thousands)

Restated in 2004 and 2005

	Stockholders’ Equity (Deficit)
										Accumulated			Total
					Additional					Other			Stockholders’
	Common Stock				Paid-in		Accumulated			Comprehensive			Equity
	Shares		Amount		Capital		Deficit			Income (loss)			(Deficit)
Balance at January 1, 2003		27,261	$	273	$	113,972	$	(34,570	)	$	(377	)	$	79,298
Exercise of stock options		124		1		706		—			—			707
Issuance of non-employee options		—		—		151		—			—			151
Comprehensive income
Net income		—		—		—		4,309			—			4,309
Foreign currency gain (loss)		—		—		—		—			15			15
Unrealized loss on securities, net of applicable income tax expense of $10		—		—		—		—			(13	)		(13	)
Comprehensive income		—		—		—		—			—			4,311
Balance at December 31, 2003		27,385	$	274	$	114,829	$	(30,261	)	$	(375	)	$	84,467
Exercise of stock options		121		1		834		—			—			835
Shares issued in connection with an equity investment		64		1		499		—			—			500
Stock based compensation		—		—		98		—			—			98
Dividends and accretion on Series B-1 Preferred Stock		—		—		—		(1,439	)		—			(1,439	)
Comprehensive loss		—		—		—		—			—			—
Net loss		—		—		—		(29,495	)		—			(29,495	)
Foreign currency gain (loss)		—		—		—		—			138			138
Comprehensive loss		—		—		—		—			—			(29,357	)
Balance at December 31, 2004		27,570	$	276	$	116,260	$	(61,195	)	$	(237	)	$	55,104
Exercise of stock options		2		—		19		—			—			19
Dividends and accretion on Series B-1 Preferred Stock								(2,446	)					(2,446	)
Comprehensive loss
Net loss		—		—		—		(2,182	)		—			(2,182	)
Foreign currency gain (loss)		—		—		—		—			(42	)		(42	)
Comprehensive loss		—		—		—		—			—			(2,224	)
Balance at December 31, 2005		27,572	$	276	$	116,279	$	(65,823	)	$	(279	)	$	50,453

See accompanying notes.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2005			2004			2003
	(in thousand)
	As restated			As restated
Cash flows from operating activities:
Net income (loss)	$	(2,182	)	$	(29,495	)	$	4,309
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,776			1,609			1,664
Amortization		5,897			5,393			4,373
Impairment of goodwill		—			8,199			—
Bad debt expense		1,328			1,521			380
Write-off of deferred financing costs		117			—
Deferred income taxes		(1,520	)		(5,425	)		2,851
Valuation allowance for deferred tax assets		1,520			22,132			—
Stock based compensation		—			98			151
Other, net		(52	)		(698	)		392
Net change in operating assets and liabilities:
Accounts receivable		(2,785	)		(3,510	)		(6,664	)
Inventory		(1,744	)		(153	)		(262	)
Prepaid expenses		(211	)		9			(764	)
Other assets		880			(93	)		(1,617	)
Accounts payable and accrued expenses		5,575			(360	)		4,252
Deferred income		(1,089	)		4,758			86
Net cash provided by operating activities		7,510			3,985			9,151
Cash flows from investing activities:
Purchases of furniture, fixtures, equipment and software development		(8,258	)		(5,208	)		(4,272	)
Investment in affiliates		—			(850	)		—
Purchases of franchises and other businesses, net of cash acquired		—			(130	)		(568	)
Payment of related party loan		33			—			—
Note receivable		250			400			717
Additions to capitalized K-12 content, capitalized course costs		(5,595	)		(2,518	)		(1,706	)
Net cash used in investing activities		(13,570	)		(8,306	)		(5,829	)
Cash flows from financing activities:
Proceeds from the sale of Series B-1 Preferred Stock, net of issuance cost		—			9,682			—
Proceeds (payments) from revolving credit facility		(2,000	)		2,000			—
Notes issued in connection with sale of rights to franchisees		(956	)		—
Long-term debt borrowings		367			—			—
Capital lease payments		(717	)		(555	)		(274	)
Dividends on Series B-1 Preferred Stock		(591	)		(374	)		—
Notes payable related to acquisitions		(1,257	)		(1,779	)		(1,656	)
Proceeds from exercise of options		19			752			582
Payment of credit facility financing costs		—			(145	)		—
Net cash (used in) provided by financing activities		(5,135	)		9,581			(1,348	)
Net (decrease) increase in cash and cash equivalents		(11,195	)		5,260			1,974
Cash and cash equivalents, beginning of period		19,197			13,937			11,963
Cash and cash equivalents, end of period	$	8,002		$	19,197		$	13,937
Supplemental cash flow disclosures:
Cash paid during the year for interest	$	580		$	564		$	462
Supplemental schedule of noncash financing activities:
Equipment acquired through capital leases	$	316		$	1,276		$	595

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (As Restated)

1. Nature of Business and Significant Accounting Policies

Business

     The Princeton Review, Inc. and its wholly owned subsidiaries (together, the “Company”), are engaged in the business of providing courses that prepare students for college, graduate school and other admissions tests. The Company, through Princeton Review Operations, LLC, provides these courses in various locations throughout the United States and Canada and over the Internet. As of December 31, 2005, the Company had six franchisees operating approximately 18 offices under the Princeton Review name in the United States and 15 franchises with approximately 38 offices in 19 countries. The Company also sells support materials and equipment to its franchisees, author’s content for various books and software products published by third parties, sells marketing and web-based products to higher education institutions, operates a Web site providing education-related content and provides a number of services to K-12 schools and school districts to help them measurably improve academic performance.

Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of The Princeton Review, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.

Use of Estimates

     The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant accounting estimates used include estimates for uncollectible accounts receivable, deferred tax valuation allowances, impairment write downs, amortization lives assigned to intangible assets and fair values of assets and liabilities. Actual results could differ from those estimates.

Reclassifications

     Certain prior period balance sheet and cash flow amounts have been reclassified to conform with the current year presentation.

Cash and Cash Equivalents

     As of December 31, 2005 and 2004, cash and cash equivalents consist of investments in securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, which have maturities of 90 days or less at the date of purchase. As of December 31, 2005 approximately 90% of the Company’s cash and cash equivalents was on hand at one financial institution. As of December 31, 2004 approximately 90% of the Company’s cash and cash equivalents were on hand at two financial institutions.

Accounts Receivable and Allowance for Doubtful Accounts

     The Company provides credit, in the normal course of business, to its customers. The Company maintains an allowance for doubtful customer accounts for estimated losses that may result from the inability of the Company’s customers to make required payments. That estimate is based on a variety of factors, including historical collection experience, current economic and market conditions, and a review of the current status of each customer’s trade accounts receivable. The Company charges actual losses when incurred to this allowance.

Inventories

     Inventories consist of program support equipment, course materials and supplies. All inventories are valued at the lower of cost (first-in, first-out basis) or market.

Furniture, Fixtures and Equipment

     Furniture, fixtures and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets principally ranging from three to seven years. Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or its

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estimated economic useful life. Lease terms used are based upon the initial lease agreement and do not consider potential renewals or extensions until such time that the renewals or extensions are contracted.

Software and Web Site Development

     The Company accounts for internal use software development in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position (“SOP”) 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Useand Emerging Issues Task Force (“EITF”) 00-2,Accounting for Web site Development Costs.

     For the years ended December 31, 2005, 2004 and 2003, the Company expensed approximately $2.7 million, $3.8 million and $2.3 million, respectively, of product development costs that were incurred in the preliminary project stage under SOP 98-1. For the years ended December 31, 2005 and 2004, the Company capitalized approximately $5.0 million and $3.2 million, respectively, in product and web site development costs under SOP 98-1 and EITF 00-2. For the years ended December 31, 2005, 2004 and 2003, the Company recorded related amortization expense of approximately $3.1 million, $2.8 million and $2.4 million, respectively. As of December 31, 2005 and 2004, the net book value of these capitalized product and web site development costs were $7.2 million and $5.3 million, respectively. These capitalized costs are amortized using the straight-line method over the estimated useful life of the assets ranging from 12 to 60 months.

Goodwill, Capitalized Course Costs, Capitalized K-12 Content and Other Intangible Assets.

     Goodwill represents the excess purchase price of acquired businesses over the estimated fair value of net assets acquired.

     Territorial marketing rights represent rights contributed by our independent franchisees to our former subsidiary, Princeton Review Publishing, L.L.C., in 1995 in exchange for membership units of Princeton Review Publishing, L.L.C. to allow the marketing of the Company’s products on a contractually agreed-upon basis within the franchisee territories. Without these rights, the Company would be prohibited from selling its products in these territories due to the exclusivity granted to the franchisees within their territories. Should a franchisee decide not to renew its franchise agreement, which is unlikely unless there is a sale of the franchise back to the Company, these rights would remain with the Company. Since no legal, regulatory, contractual, competitive, or other factors limit the useful life of territorial marketing rights, the Company has deemed these intangible assets to have indefinite lives. Goodwill and territorial marketing rights were amortized on a straight-line basis until December 31, 2001, after which such amortization ceased upon the adoption of Statement of Financial Accounting Standards (“SFAS”) 142. Accordingly, the Company’s goodwill and territorial marketing rights that are deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests.

     Capitalized course costs include certain expenditures incurred by our Test Preparation Services division to develop test preparation courses and consist primarily of amounts paid to consultants and salaries of employees hired to develop course materials and curriculum. Course costs are capitalized only when a course is first developed or there is a major revision to a course or significant re-write of the course materials or curriculum, for example, when the related test changes. The amortization period for these costs is five years, based upon the average life cycle of the related standardized tests. Amortization of these capitalized course costs commences with the realization of course revenues. The cost of minor enhancements or annual updates to the curriculum and materials is expensed as incurred.

     Capitalized K-12 content includes certain expenditures incurred by our K-12 Services division to produce questions and lessons primarily for math, reading and language arts subjects typically taught in grades one through 11 and consist primarily of amounts paid to consultants and salaries of employees hired to produce these questions or lessons. These questions or lessons are used in numerous products sold by the K-12 Services division, including the Homeroom subscription service, printed materials and live instruction products. Only expenditures for questions or lessons that allow the Company to enter into new markets, such as new geographic areas or grades, or that significantly enhance the marketability of the Company’s products, such as a new subject area, are capitalized. The amortization period for these costs is seven years, based on numerous factors, including the average lives of similar products and the cycle of major changes in educational philosophies and methodologies as reflected by the adoption cycles of state tests and textbooks. Amortization of these capitalized K-12 content costs commences when the questions or lessons are available for use. The cost of planning, marketing and maintenance related to this content is expensed as incurred, as is the cost of design and feasibility work.

     Publishing rights primarily consist of amounts paid in 1995 to certain co-authors to purchase their rights to future royalties on certain books, includingCracking the SAT/PSAT, Cracking the LSAT, Cracking the GRE, Cracking the GMAT, The Best 361 CollegesandWord Smart. These books are primarily current reference materials that are updated

- 42 -

every one or two years. In 2005, the Company collected approximately $1.0 million in royalties from the publisher of these books. Publishing rights are being amortized on a straight-line basis over 25 years.

     Franchise costs represent the cost of franchise rights purchased by the Company from third parties and are amortized using the straight-line method over the remaining useful life of the applicable franchise agreement.

     Customer lists were purchased by the Company from Embark.com, Inc. (“Embark”) in 2001 and consist primarily of academic institution customers of the Company’s Admissions Service division. At the time of the acquisition, an independent party completed a valuation of the customer list using a discounted cash flow analysis and assumed an eight percent annual loss of customer revenues. Customer lists are amortized on a straight-line basis over 10 years.

     Other intangible assets are amortized on a straight-line basis over their useful lives: three to 20 years for trademarks/tradenames and for non-compete agreements.

     See Note 5 for further information with respect to the Company’s goodwill and other intangible assets.

Impairment

     Goodwill and Territorial Marketing Rights

     As noted above, the Company adopted SFAS 142, “Goodwill and Other Intangible Assets,” under which goodwill and territorial marketing rights are no longer amortized but instead goodwill and territorial marketing rights are assessed for impairment annually. In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. Goodwill is assigned to specific reporting units and is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. During the fourth quarter of 2005, the Company completed its annual assessment for impairment and determined that there was no such impairment against the current carrying amount. During 2004, the carrying amount of goodwill for one of its reporting units exceeded its fair value. As a result of the second step analysis, a goodwill impairment of approximately $8.2 million was recognized.

     Long-Lived Assets

     The Company reviews its long-lived assets, which excludes goodwill and territorial marketing rights, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such review indicates that an asset may not be recoverable, an impairment loss is recognized for the excess of the carrying amount over the fair value of an asset to be held and used or over the fair value less cost to sell an asset to be disposed. During 2005 and 2004, no impairment charge was required.

Investments in Affiliates

     The Company values its investments in affiliate companies in which it has a less than 50% ownership interest and can exercise significant influence using the equity method of accounting. Investments in affiliate companies in which the Company has a less than 20% ownership interest and does not have the ability to exercise significant influence are accounted for using the cost method of accounting. The Company has evaluated its investment under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” and concluded that consolidation is not required.

Deferred Income

     Deferred income represents tuition and customer deposits (which are refundable prior to the commencement of the program), college marketing fees and subscription services, professional development fees and fees for printed materials. Tuition is applied to income ratably over the periods in which it is earned, generally the term of the program. College marketing fees and subscription fees are applied to income ratably over the life of the agreements, which typically range from one to two years. Fees for professional development and printed materials are recognized as the services and products are delivered.

Revenue Recognition

     The Company recognizes revenue from the sale of products and services as follows:

     Course and Tutoring Income

     Tuition and tutoring fees are paid to the Company and recognized over the life of the course.

     Book, Software and Publication Income and Expenses

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     The Company recognizes revenue from both performance-based fees such as marketing fees and royalties and delivery-based fees such as advances, copy editing fees, workbook development and test booklet fees and books sold directly to schools. Performance-based fees, which represent royalties on books and software sold, are recognized when sales reports are received from the publishers. Delivery-based fees are recognized upon the completion and acceptance of the product by the publishers and/or customers. Until such time, all costs and revenues related to such delivery-based fees are deferred. Book advances are recorded as liabilities and deferred book expenses are included in other current assets.

     Royalty Service Fees

     As consideration of the rights and entitlements granted under franchise agreements, which entitle the franchisees to provide test preparation services utilizing the Princeton Review method in their licensed territories, the franchisees are required to pay to the Company a monthly royalty service fee equal to 8% (9.5% beginning in 2006) of the franchise’s gross receipts collected during the preceding month. In addition, these fees include a 10% fee charged to the Company’s franchisees for use by their students of the Company’s supplemental online course tools. The Company’s franchisees’ contributions to the advertising fund are also recognized by the Company as royalty revenue (see Note 8). Under the terms of the franchise agreements, the Company has the right to perform audits of royalty service fees reported by the franchisees. Any differences resulting from an audit, including related interest and penalties, if any, are recorded upon the completion of the audit when such amounts are determinable.

     Course Materials and Other Products

     The Company recognizes revenue from the sale of course materials and other products to the independently owned franchises upon shipment.

     Lead Generation Fees

     The Company recognizes revenue from lead generation fees as the service is delivered to these institutions.

     College Marketing and Subscription Fees

     The Company recognizes revenue from subscription fees for web-based services over the life of the contract, which is typically one to two years.

     Transaction Processing Fees

     The Company recognizes revenue from transaction processing fees, such as web-based school application fees, as the transactions are completed.

     Multiple-deliverable contracts

     Certain of the Company’s customer contracts represent multiple-element arrangements, which may include several of the Company’s products and services. Multiple-element arrangements are assessed to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if all of the criteria in EITF Issue 00-21,“Revenue Arrangements with Multiple Deliverables”are met. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value and the revenue policies described above are then applied to each unit of accounting.

     Other Revenue

     Other revenue consists of miscellaneous fees for other services provided to third parties primarily for assessment tests, authoring questions, advertising, training and professional development fees, which are recognized as the products or services are delivered. Other revenue also includes college marketing fees, such as newsletter or banner ads, which are recognized ratably over the period in which the marketing services are provided, which is typically one year.

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Revenue Components

     The following table summarizes the Company’s revenue and cost of revenue for the years ended December 31, 2005, 2004 and 2003:

	Years Ended December 31,
	2005		2004		2003
	(in thousands)
Revenue
Services	$	104,283	$	92,718	$	85,602
Products		18,214		14,066		11,045
Other		7,996		7,001		7,815
Total Revenue	$	130,493	$	113,785	$	104,462
Cost of Revenue
Services	$	40,354	$	33,099	$	25,286
Products		8,719		6,891		6,159
Other		524		663		528
Total Cost of Revenue	$	49,597	$	40,653	$	31,973

Foreign Currency Translation

     Balance sheet accounts of the Company’s Canadian subsidiary, with the exception of certain historical rate-based assets, are translated using year-end exchange rates. Statement of operations accounts, with the exception of depreciation and amortization, are translated at monthly average exchange rates. The resulting translation adjustment is recorded as a separate component of stockholders’ equity. Foreign exchange gains and losses for all the years presented were not significant. The accumulated balance as a component of comprehensive income, comprised entirely of foreign exchange differences, was approximately $262,000 and $221,000 at December 31, 2005 and 2004, respectively.

Advertising and Promotion

     Advertising and promotion costs are expensed in the year incurred. Costs related to producing mailers and other pamphlets are expensed when mailed. Due to the seasonal nature of the business, most advertising costs related to mailers and pamphlets are expensed by the end of the year. Total advertising and promotion expense was approximately $6.8 million, $6.4 million, and $7.6 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Fair Value of Financial Instruments

     For financial instruments including cash and cash equivalents, accounts receivable, other receivables and accounts payable, the carrying amount approximated fair value because of their short maturity. The carrying value of the Company’s debt approximated fair value as the interest rates for the debt approximated market rates of interest available to the Company for similar instruments.

Embedded Derivatives and Warrant

      The Company’s Series B-1 Preferred Stock contains two embedded derivatives that, consistent with the requirements of Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities” are accounted for separately from the Preferred Stock. The two embedded derivatives, the “holder’s conversion option” and the “make whole” provision are accounted for on a combined basis and reported at fair value. In addition, when the Company issued the Preferred Stock, it granted the holder the right (a warrant) to purchase up to 20,000 shares of additional Preferred Stock. (See Notes 2 and 8). The Company’s use of derivatives is limited to the embedded features within its Preferred Stock. Any changes to fair value are reflected in “Other Income (Expense)” and totaled $1.3 million and $918,000 for the years ended December 31, 2005 and 2004, respectively. The Company does not have any other derivative instruments.

Concentration of Credit Risk

     Financial instruments that potentially subject the Company to concentration of credit risk include cash and cash equivalents and accounts receivable arising from its normal business activities. The Company places its cash and cash equivalents with high credit quality financial institutions.

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     Concentrations of credit risks with respect to accounts receivable are limited due to the large number of entities comprising the payor base, and their dispersion across different states. The Company does not require collateral. At December 31, 2004, two customers accounted for approximately 18% and 10% of gross accounts receivable.

Income Taxes

     The Company accounts for income taxes based upon the provisions of SFAS No. 109,Accounting for Income Taxes. Under SFAS 109, the liability method is used for accounting for income taxes, and deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

Income (Loss) Per Share

     Basic and diluted net income (loss) per share information for all periods is presented under the requirements of SFAS No. 128,Earnings per Share. Basic net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is determined in the same manner as basic net income (loss) per share, except that the number of shares is increased assuming exercise of dilutive stock options, warrants and convertible securities. The calculation of diluted net income (loss) per share excludes potential common shares if the effect is antidilutive.

     During certain of the periods presented, stock options and securities convertible into or exercisable for common stock were outstanding that would be dilutive but were excluded because to include them would have been antidilutive (see Note 15).

Stock options

     The Company accounts for the issuance of stock options using the intrinsic value method in accordance with Accounting Principles Board (“APB”) No. 25,Accounting for Stock Issued to Employees, and related interpretations. Generally for the Company’s stock option plans, no compensation cost is recognized in the Consolidated Statements of Operations because the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant. Had the Company accounted for its employee stock options under the fair-value method of that statement, the Company’s net income per share would have been decreased and net loss per share would have been increased to the pro forma amounts indicated:

	Year Ended December 31,
	2005			2004			2003
	(in thousands, except per share amounts)
	As restated			As restated
Net income (loss) attributed to common stockholders, as reported	$	(4,628	)	$	(30,934	)	$	4,309
Total stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects		(3,467	)		(1,178	)		(1,326	)
Pro forma net income (loss) attributed to common stockholders	$	(8,095	)	$	(32,112	)	$	2,983
Basic and diluted income (loss) per share:
As reported	$	(0.17	)	$	(1.13	)	$	0.16
Pro forma	$	(0.29	)	$	(1.17	)	$	0.11

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After the Company’s initial public offering, these options were valued using a Black-Scholes option pricing model. The following weighted-average assumptions were used under this method:

	Year Ended December 31,
Assumptions	2005			2004			2003
Expected life (years)		5.0			5.0			4.8
Risk-free interest rate		4.25	%		4.25	%		4.50	%
Dividend yield		0	%		0	%		0	%
Volatility factor		41	%		66	%		76	%

     This option-valuation method requires input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because change in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing methods do not necessarily provide a reliable single measure of the fair value of its employee stock options. The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts and additional awards in future years are anticipated. For purposes of pro forma disclosure, the estimated fair value of the equity awards is amortized to expense, on a straight-line basis, over the options’ vesting period. The weighted average fair value of options granted during the years ended December 31, 2005, 2004 and 2003 was $5.77, $4.42, and $2.75, respectively. As of December 31, 2005, there were approximately 2,461,000 options exercisable with a weighted average remaining contractual life of approximately 6.4 years.

     As of December 23, 2005, the Compensation Committee of the Board of Directors of the Company approved the acceleration of vesting of unvested stock options granted to employees of the Company outstanding as of December 31, 2005 that have an exercise price at or greater than $7.00 and which are scheduled to vest in the 24-month period following December 31, 2005. Options held by the Company’s Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and the Board of Directors are excluded from the vesting acceleration. There are approximately 360,000 options to purchase the Company’s common stock that were accelerated. Options accelerated on behalf of the Company’s Executive Officers are as follows:

			Weighted
		Number of	Average
		Accelerated	Exercise Price
Officer	Title	Options	Per Share
Margot Lebenberg	Executive Vice President, Secretary and General Counsel	27,500	$	7.56
Stephen Quattrociocchi	Executive Vice President	23,019	$	7.35
Young J. Shin.	Executive Vice President	10,000	$	7.30

     The decision to accelerate vesting of these “out-of-the-money” stock options was made primarily to minimize future compensation expense that the Company would otherwise have been required to recognize in its consolidated statements of operations pursuant to Financial Accounting Standards Board Statement No. 123(R) (revised 2004), “Share-Based Payment,” which becomes effective as to the Company beginning in the first fiscal quarter of 2006. The Company believes that the aggregate future expense that will not be included in future consolidated statements of operations as a result of this acceleration of vesting is approximately $1.6 million.

New Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123(R) requires that the fair value of such equity instruments be recognized as expense in the financial statements as services are performed. Prior to SFAS 123(R), only the pro forma disclosures of fair value were required. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “TOPIC 14: Share-Based Payment” which addresses the interaction between SFAS 123(R) and certain SEC rules and regulations and provides views regarding the valuation of share-based payment arrangements for public companies. SFAS 123(R) is effective for our first quarter of 2006 and the adoption of this new accounting pronouncement is expected to result in pre-tax stock-based compensation expense of between $0.3 million and $0.5 million in 2006.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29” (“SFAS 153”). This new standard is the result of a broader effort by the FASB to improve financial

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reporting by eliminating differences between generally accepted accounting principles (“GAAP”) in the U.S. and GAAP developed by the International Accounting Standards Board (“IASB”). As part of this effort, the FASB and the IASB identified opportunities to improve financial reporting by eliminating certain narrow differences between their existing accounting standards. SFAS 153 amends Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions” (“APB 29”), that was issued in 1973. The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” Previously, APB 29 required that the accounting for an exchange of a productive asset for a similar productive asset, or an equivalent interest in the same or similar productive asset, should be based on the recorded amount of the asset relinquished. The provisions of SFAS 153 were effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, and there was no impact on the Company’s consolidated financial statements.

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and are not expected to have a significant impact on the Company’s consolidated financial statements.

2. Restatement of Financial Statements

     On October 24, 2006, the Audit Committee of the Board of Directors of the Company, in consultation with the Company’s management and its independent registered public accounting firm, Ernst & Young LLP, concluded that the Company’s financial statements should be restated to correct the Company’s method of accounting for its Cumulative, Convertible, Redeemable Series B-1 Preferred Stock (the “Preferred Stock”). Specifically, based on the below analysis, the Company has concluded that (a) certain terms of the Preferred Stock constitute “embedded derivatives,” and must therefore be accounted for separately from the Preferred Stock, and (b) the rights to acquire additional Preferred Stock granted to the purchaser simultaneously with the issuance of the Preferred Stock constitute a warrant that must also be accounted for separately from the Preferred Stock. Accordingly, the Company has restated its financial statements to reflect this accounting treatment, as follows.

     On June 4, 2004, the Company issued 10,000 shares of Preferred Stock with a Stated Value of $1,000 per share to Fletcher International LTD (referred to below, together with any transferree of the Preferred Stock, as the “Holder”) in a private placement for $10,000,000 (“Stated Value”). (See Note 8 for a description of the Preferred Stock.) The Preferred Stock includes, among others, the following terms, which the Company has concluded constitute embedded derivatives:

• Holder Conversion Option — The Preferred Stock is convertible into the Company’s common stock at the option of the holder at any time. The initial conversion price was $11.00 per common share, but was decreased to $8.0860 per common share due to a delay in the effectiveness of the registration statement relating to the Company’s common stock issuable upon conversion of the Preferred Stock and the subsequent failure to keep the registration statement effective in accordance with the agreement with the Holder. The Company may be required to further reduce the conversion price upon certain events such as the issuance of common stock at a price below the conversion price or if the Company fails to keep the registration statement current.

• “Make Whole” Provision — In the event that the Company is party to one of several transactions classified as a “business combination,” upon consummation of the transaction, the Holder is entitled to receive (at the Holder’s election)

a)	the consideration to which the Holder would have been entitled had it converted the Preferred Stock into common stock immediately prior to consummation,
b)	the consideration to which the Holder would have been entitled had it redeemed the Preferred Stock for common stock immediately prior to consummation, or
c)	cash, initially equal to 160% of the aggregate redemption amount of the Preferred Stock less 5% of the redemption amount for each full year the Preferred Stock was outstanding.

     In addition, when the Company issued the Preferred Stock, it granted the holder the right (a “warrant”) to purchase up to 20,000 shares of additional Preferred Stock at a price of $1,000 per share. The additional Preferred Stock that will be issued if the Holder were to exercise the warrant is similar to the Preferred Stock initially issued, except the conversion price will be the greater of $8.0860 or 88.21% of the prevailing price of the common stock at the time of exercise. These rights are exercisable by the holder for a two-year period, beginning July 1, 2005, subject to extension by one day for each day the registration requirements are not met.

Embedded Derivatives

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     Under Statement of Financial Accounting Standards No. 133,“Accounting for Derivatives and Hedging Activities”(SFAS 133), certain contractual terms that meet the accounting definition of a derivative must be accounted for separately from the financial instrument in which they are embedded. The conversion option meets SFAS 133’s definition of an embedded derivative. In addition, the conversion option is not considered “conventional” because the number of shares received by the Holder upon exercise of the option could change under certain conditions. The conversion option is considered an equity derivative and its economic characteristics are not considered to be clearly and closely related to the economic characteristics of the Preferred Stock, which is considered more akin to a debt instrument than equity. Accordingly, SFAS 133 requires that this embedded derivative be accounted for separately from the Preferred Stock.

     Similarly, the embedded “make whole” provision also must be accounted for separately from the Preferred Stock. The “make whole” provision specifies if certain events (such as a business combination) that constitute a change of control occur, the Company may be required to settle the Preferred Stock at 160% of its face amount. Accordingly, the “make whole” provision meets SFAS 133’s definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of the Preferred Stock.

     Under SFAS 133, these two embedded derivatives are required to be bundled into a single derivative instrument and accounted for separately from the Preferred Stock at fair value.

Warrant

     Upon exercise of the warrant, the holder is entitled to receive preferred shares that are similar to the Preferred Stock. The preferred shares that the holder is entitled to receive may be redeemed, effectively “put” back to the Company, at a future date. Statement of Accounting Standards No. 150,“Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”(SFAS 150), requires that a warrant which contains an obligation that may require the issuer to redeem the shares in cash, be classified as a liability and accounted for at fair value.

     The Company determined that the fair value of the combined embedded derivative at inception was $1,746,000 and the initial fair value of the warrant was $854,000. Because the Company did not historically account for these items separately, the accompanying consolidated financial statements as of December 31, 2005 and 2004 and for the years ended December 31, 2005 and 2004 have been restated.

     The accounting adjustments decreased the amount of proceeds originally credited to the Preferred Stock by $2,600,000 and increased long-term liabilities by $1,746,000 for the embedded derivatives and $854,000 for the fair value of the warrant. In subsequent periods, these liabilities are accounted for at fair value, with changes in fair value recognized in earnings. In addition, the Company recognized a discount to the recorded value of the Preferred Stock resulting from the allocation of proceeds to the embedded derivatives and warrant. This discount was accreted as a Preferred Stock dividend to increase the recorded balance of the Preferred Stock to its redemption value at its earliest possible redemption date (November 28, 2005).

     The embedded derivatives and warrant were valued at each fiscal quarter-end. The key assumptions used in the pricing model were based on the terms and conditions of the embedded derivatives and the actual stock price of the Company’s common stock at each fiscal quarter-end. Adjustments were made to the conversion option value to reflect the impact of potential registration rights violations and the attendant reductions in the conversion price of the underlying shares. Other assumptions included a volatility rate ranging from 30%-40%, and a risk-free rate corresponding to the estimated life of the security, based on its likelihood of conversion or redemption. The estimated life ranged from a high of four years at the inception of the Preferred Stock in June 2004, to just under three years at December 31, 2005.

     The value of the make-whole provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was assumed to be very low at issuance, escalating to a 2% probability in year 3 and beyond. These assumptions were based on management’s estimates of the probability of a change in control event occurring.

     Since the dividend rate on the Preferred Stock adjusts with changes in market rates due to the LIBOR-Index provision, the key component in the valuation of the warrant is the estimated value of the underlying embedded conversion option. Accordingly, similar assumptions as those used to value the compound derivative were used to value the warrant, including, the fiscal quarter-end stock price, the exercise price of the conversion option adjusted for changes resulting from the registration rights agreement, an assumed volatility rate ranging from 30% to 40% and a risk-free rate based on the estimated life of the warrant.

The following is a summary of the effects of the restatement on the Company’s consolidated financial statements.

	As Previously
Year ended December 31, 2005(in thousands, except per share data)	Reported			As Restated
Other income (loss)	$	138		$	1,430
Net loss		(3,474	)		(2,182	)
Dividends and accretion on Series B-1 Preferred Stock		(854	)		(2,446	)
Net loss attributable to common stockholders		(4,328	)		(4,628	)
Loss per common share – basic	$	(0.16	)	$	(0.17	)
Loss per common share – diluted	$	(0.16	)	$	(0.17	)

	As Previously
Year ended December 31, 2004(in thousands, except per share data)	Reported			As Restated
Other income (loss)	$	435		$	1,021
Net loss		(30,413	)		(29,495	)
Dividends and accretion on Series B-1 Preferred Stock		(428	)		(1,439	)
Net loss attributable to common stockholders		(30,841	)		(30,934	)
Loss per common share – basic	$	(1.12	)	$	(1.13	)
Loss per common share – diluted	$	(1.12	)	$	(1.13	)

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	As Previously
As of December 31, 2005(in thousands)	Reported			As Restated
Derivative instruments – noncurrent liability	$	—		$	393
Total long-term liabilities		5,172			5,565
Accumulated deficit		(65,430	)		(65,823	)
Total stockholders’ equity		50,846			50,453

	As Previously
As of December 31, 2004(in thousands)	Reported			As Restated
Derivative instruments – noncurrent liability	$	—		$	1,682
Total long-term liabilities		5,601			7,283
Accumulated deficit		(61,102	)		(61,195	)
Total stockholders’ equity		55,197			55,104

	As Previously
Year ended December 31, 2005(in thousands)	Reported			As Restated
Cash flow from operating activities:
Net loss	$	(3,474	)	$	(2,182	)
Other, net		1,241			(52	)

	As Previously
Year ended December 31, 2004(in thousands)	Reported			As Restated
Cash flow from operating activities:
Net loss	$	(30,413	)	$	(29,495	)
Other, net		219			(698	)

     The Company’s inability to timely file its Form 10Q for the third quarter of 2006 stemming from the need to file restated financial statements for prior periods to correct the accounting treatment for the Company’s Series B-1 Preferred Stock resulted in the Company failing to maintain an effective registration statement for the benefit of the holder of the Preferred Stock and losing its eligibility to register securities on Form S-3. Under the Company’s agreement with the holder of the Preferred Stock, if the holder requests a redemption of the Preferred Stock and the Company elects to redeem in common shares, the Company must issue registered common shares. If the Company cannot issue registered shares, then it must redeem for cash. Accordingly, there is the possibility that the Company may be required to fund any future redemptions in cash until it is again able to maintain an effective resale registration statement for the benefit of the holder of the Preferred Stock in accordance with the terms of the agreement governing the registration requirements.

     As of March 20, 2007, Series B-1 Preferred Stock of $6 million was outstanding and available for redemption. If the holder of the Preferred Stock currently demanded redemption, there exists substantial doubt that the Company would have sufficient cash to complete the redemption. As a result of this possibility, the Company is negotiating to increase its available line of credit should the funds be needed to effect any such potential redemption. However, no assurances can be given that the Company successfully will be able to increase the line of credit either timely or in sufficient amount.

3. Other Assets

     Other assets (current) consist of the following:

	December 31,
	2005		2004
	(in thousands)
Deferred book costs	$	297	$	782
Deferred financing expenses		—		117
Loans to officers, current portion		168		190
Loan receivable		781		250
Other		61		208
	$	1,307	$	1,547

     Other assets (non-current) consists of the following:

	December 31,
	2005		2004
	(in thousands)
Security deposits	$	655	$	701
Content and software development in progress		910		1,493
Loans to officers		457		1,062
Loan receivable		1,146		350
Other		—		8
	$	3,168	$	3,614

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4. Furniture, Fixtures, Equipment and Software Development

	December 31,
	2005		2004
	(in thousands)
Computer equipment	$	7,019	$	5,829
Furniture, fixtures and equipment		2,054		1,662
Computer and phone equipment under capital lease		3,258		2,902
Automobiles		—		22
Software and web site development — third party		4,648		2,540
Software and web site development — internally developed		10,374		8,128
Leasehold improvements		6,732		5,482
		34,085		26,565
Less accumulated depreciation and amortization, including $1,719 in 2005 and $1,182 in 2004 of accumulated depreciation for assets under capital leases		17,930		13,185
	$	16,155	$	13,380

5. Investment in Affiliates

     On June 25, 2004, the Company invested $625,000 and issued 63,562 shares of the Company’s common stock, with an approximate value of $500,000 at the time of issuance, and incurred approximately $162,000 of acquisition costs for an approximate 25% equity interest in Oasis Children’s Services, LLC (“Oasis”), a privately held company. Under the agreement, the Company guaranteed a minimum market value of the shares issued. Oasis sold all of the shares in the open market in December, 2005. The proceeds from the sale of the shares fell short of the guaranteed amount, requiring the Company to pay an additional $117,000 in cash.

     Oasis works with schools, school systems and communities to operate summer and after-school programs. In conjunction with the investment, Oasis and the Company have agreed to, from time to time, jointly develop, market and sell summer programs for the K-12 market that combine recreational and enrichment programs and activities provided by Oasis with educational programs and activities provided by the Company. The Company accounts for its investment in Oasis using the equity method. This investment is carried as a corporate asset.

     The Company has an ownership interest of approximately 20% in Student Monitor, LLC, a privately held company. At December 31, 2005 and 2004, as a result of recording its shares of losses, the Company’s investment in this company was recorded as $0.

     At December 31, 2005 and 2004, the Company’s net investment in Tutor.com was recorded as $0, as a result of recording its share of Tutor.com losses. Pursuant to an agreement entered into on December 31, 2003, the Company terminated its strategic relationship with Tutor.com and sold preferred stock it held in Tutor.com for $300,000 in cash. As consideration for the termination of certain strategic agreements and the restructuring of certain rights, the Company received an additional $200,000 in cash and $500,000 in notes. The Company retains a common stock position in Tutor.com, representing approximately 2.5% of its outstanding equity, which was recorded as $0 as of December 31, 2005.

     During 2001 and 2002, the Company invested $700,000 in SchoolNet, Inc.(“SchoolNet”), a privately held education technology solutions company. The Company currently owns approximately 5% of SchoolNet. The Company maintains a strategic marketing relationship with SchoolNet, through which SchoolNet markets and distributes a version of the Company’s Homeroom product called “Homeroom Inside.” As of December 31, 2005 and 2004, the value of the Company’s investment in SchoolNet was approximately $356,000, net of an impairment writedown of approximately

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$344,000 in 2002. This investment is carried in the K-12 Services Segment. The Company has also contracted with SchoolNet to provide Enterprise Resource Planning software that monitors the use of the Homeroom.com Web site.

6. Goodwill and Other Intangible Assets

     The following table summarizes the components of goodwill which is no longer subject to amortization:

	December 31,
	2005		2004
	(in thousands)
Gross carrying amount	$	33,065	$	33,070
Less accumulated amortization		1,559		1,559
	$	31,506	$	31,511

     The following table summarizes the change in the carrying amount of segment goodwill for the periods indicated:

	Test
	Preparation			K-12		Admissions
	Services			Services		Services			Total
	(in thousands)
Balance as of January 1, 2004	$	30,881			—	$	8,699		$	39,580
Net change from acquisitions		130			—		—			130
Impairments		—			—		(8,199	)		(8,199	)
Balance as of December 31, 2004		31,011			—		500			31,511
Other		(5	)							(5	)
Balance as of December 31, 2005	$	31,006			—	$	500		$	31,506

     As a result of the Company’s annual evaluation of the impairment of intangible assets, the Company recorded an $8.2 million charge for the impairment of goodwill related to the 2001 acquisition of Embark. This impairment resulted from the Admission Services division’s operating results in 2004, and while this division continues to operate and expects to generate future cash flows from the sale of its new marketing services, these future cash flows are still uncertain.

     The following is a summary of other intangible assets:

	December 31, 2005						December 31, 2004
	(in thousands)
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
Subject to Amortization
Franchise costs	$	283	$	239	$	44	$	283	$	212	$	71
Publishing rights		1,761		757		1,004		1,761		684		1,077
Capitalized K-12 content		12,867		4,617		8,250		7,732		3,180		4,552
Trademark / tradename		338		254		84		338		193		145
Non-compete agreements		1,244		1,198		46		1,244		1,067		177
Customer lists		2,700		1,147		1,553		2,700		878		1,822
Capitalized course costs		1,610		701		909		1,151		444		707
	$	20,803	$	8,913		11,890	$	15,209	$	6,658		8,551
Not Subject to Amortization
Territorial marketing rights						1,481						1,481
					$	13,371					$	10,032

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	(in thousands)
Aggregate amortization expense:
Actual:
2003		1,625
2004		2,152
2005		2,255
Estimate for fiscal year:
2006		3,191
2007		3,097
2008		2,997
2009		1,389
2010		342

7. Line of Credit and Long-Term Debt

Line of Credit

     On May 21, 2004, the Company entered into a credit agreement with Commerce Bank, N.A. for a three-year revolving credit facility with a maximum aggregate principal amount of $5.0 million. As of December 31, 2004, the effective interest rate was 3.9% and $2.0 million was outstanding. In February 2005, the Company repaid the entire outstanding balance and terminated the facility. The outstanding balance at the time of payment was $2.0 million. Additionally, the Company wrote off unamortized deferred financing costs of approximately $0.1 million.

Notes Payable

     On March 2, 2001, the Company completed its acquisition of Princeton Review of New Jersey, Inc. and Princeton Review of Boston, Inc. The Company financed part of this acquisition with notes to the sellers totaling $3,625,000. This balance was comprised of two notes. The first promissory note of $3,125,000 is payable as to principal in 20 equal quarterly installments beginning with the 17th calendar quarter following the closing date of the acquisition and bears interest at the rate of 8.25% per year, payable quarterly. The second promissory note for $500,000 bears interest at the rate of 8.25% per year, payable on a quarterly basis, and is payable as to the entire principal amount four years from its date of issuance. At December 31, 2005 and 2004, $2,500,000 and $3,625,000 was outstanding, respectively.

     On July 11, 2003, the Company acquired 77% of Princeton Review of North Carolina, Inc with the balance acquired from the minority shareholders on November 13, 2003. The Company financed part of this acquisition with two notes to the sellers in the amount of $609,000 and $740,000, including imputed interest at 5% per year, which were outstanding as of December 31, 2005 and 2004. The notes are payable in annual installments, including interest, of approximately $121,000 per year in years 2006 through 2010 when the loans are due.

     The annual maturities of notes payable as of December 31, 2005 are approximately as follows:

	Amount
As of December 31,	Maturing
	(in thousands)
2006	$	744
2007		750
2008		758
2009		765
2010		144
	$	3,161

Capital Lease Obligations

     At December 31, 2005, the Company has leased approximately $3.3 million of computer and phone equipment under capital leases, all of which are included in fixed assets

     The following is a schedule of the future minimum capital lease obligation payments together with the present value of the minimum lease payments at December 31, 2005:

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Year ending December 31,	(in thousands)
2006	$	855
2007		390
2008		55
Total		1,300
Less: amounts representing interest (effective interest rate ranges from 6% to 11%)		(86	)
Present value of minimum lease payments		1,214
Less: current portion of capital lease obligations		786
Long-term portion of capital lease obligations	$	428

Total Long-Term Debt

     Long-term debt consists of the following:

	December 31,
	2005		2004
	(in thousands)
Notes payable	$	3,161	$	6,365
Capital lease obligations		1,214		1,616
Auto loan		—		1
		4,375		7,982
Less current portion		1,530		3,769
	$	2,845	$	4,213

8. Series B-1 Preferred Stock

     On June 4, 2004, the Company sold 10,000 shares of its Series B-1 Preferred Stock to Fletcher International, Ltd. (“Fletcher”) for proceeds of $10,000,000. These shares are convertible into common stock at any time. Prior to conversion, each share accrues dividends at an annual rate of the greater of 5% and the 90-day London Interbank Offered Rate (LIBOR) plus 1.5% (4.4% at December 31, 2005), subject to adjustment. Dividends are payable, at the Company’s option whether or not declared by the Board of Directors, in cash or registered shares of common stock. At the time of issuance of the Series B-1 Preferred Stock to Fletcher, each share of Series B-1 Preferred Stock was convertible into a number of shares of common stock equal to: (1) the stated value of one share of Series B-1 Preferred Stock plus accrued and unpaid dividends, divided by (2) the conversion price of $11.00 subject to adjustment. As of December 31, 2005, the conversion price was $9.9275 per share, having been decreased in accordance with the agreement with Fletcher, because effectiveness of the registration statement relating to the Fletcher shares was delayed until December 28, 2004 (See Note 2).

     Fletcher may redeem its shares of the Series B-1 Preferred Stock, in lieu of converting such shares, at any time on or after November 28, 2005, for shares of common stock unless the Company satisfies the conditions for cash redemption. If Fletcher elects to redeem its shares and the Company does not elect to make such redemption in cash, then each share of Series B-1 Preferred Stock will be redeemed for a number of shares of common stock equal to: (1) the stated value of $1,000 per share of Series B-1 Preferred Stock plus accrued and unpaid dividends, divided by (2) 102.5% of the prevailing price of common stock at the time of delivery of a redemption notice (based on an average daily trading price formula). If Fletcher elects to redeem its shares and the Company elects to make such redemption in cash, then Fletcher will receive funds equal to the product of: (1) the number of shares of common stock that would have been issuable if Fletcher redeemed its shares of Series B-1 Preferred Stock for shares of common stock; and (2) the closing price of the common stock on the NASDAQ National Market on the date notice of redemption was delivered. As of June 4, 2014 the Company may redeem any shares of Series B-1 Preferred Stock then outstanding. If the Company elects to redeem such outstanding shares, Fletcher will receive funds equal to the product of: (1) the number of shares of Series B-1 Preferred Stock so redeemed, and (2) the stated value of $1,000 per share of Series B-1 Preferred Stock, plus accrued and unpaid dividends.

     In addition, the Company granted Fletcher certain rights entitling Fletcher to purchase up to 20,000 shares of additional preferred stock, at a price of $1,000 per share, for an aggregate additional consideration of $20,000,000. These rights to purchase additional shares are legally detachable from the Series B-1 Preferred Stock and may be exercised by the holder separately from actions taken with regard to the originally issued Series B-1 Preferred Stock. The agreement with Fletcher provides that any shares of additional preferred stock will have the same conversion ratio as the Series B-1 Preferred Stock, except that the conversion price will be the greater of (1) $11.00, or (2) 120% of the prevailing price of common

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stock at the time of exercise of the rights (based on an average daily trading price formula), subject to adjustment upon the occurrence of certain events. Due to the delay in the effectiveness of the registration statement relating to the Series B-1 Preferred Stock, the conversion price for any such additional series of preferred stock was reduced, and, as of December 31, 2005, was the greater of (1) $9.9275, or (2) 108.3% of the prevailing price of common stock at the time of exercise of the rights (See Note 2). These rights may be exercised by Fletcher on one or more occasions commencing July 1, 2005, and for the 24-month period thereafter, which period may be extended under certain circumstances. The Agreement with Fletcher also provides that shares of additional preferred stock will also be redeemable upon terms substantially similar to those of the Series B-1 Preferred Stock.

     The Series B-1 Preferred Stock also contains a “make whole” provision that indicates that if the Company is party to a certain acquisition, asset sale, capital reorganization or other transaction in which the power to cast the majority of the eligible votes at a meeting of the Company’s shareholders is transferred to a single entity or group, upon consummation of the transaction, the holder is entitled to receive (at the holder’s election)

a)	the consideration to which the holder would have been entitled had it converted the Series B-1 Preferred Stock into common stock immediately prior to consummation,
b)	the consideration to which the holder would have been entitled had it redeemed the Series B-1 Preferred Stock for common stock immediately prior to consummation, or
c)	cash, initially equal to 160% of the aggregate redemption amount of the Series B-1 Preferred Stock less 5% of the redemption amount for each full year the Series B-1 Preferred Stock was outstanding.

     During 2005 and 2004, cash dividends in the amount of $534,200 and $373,600, respectively were paid to the Series B-1 Preferred stockholder.

9. Commitments and Contingencies

Advertising Fund

     All domestic franchisees are required to pay a monthly advertising fee to the Company, for contribution to an advertising fund, equal to 2% of their franchises’ gross receipts, as defined, for the preceding month. In accordance with the terms of the franchise agreements, the Company is required to use all advertising fees it receives for the development, placement and distribution of regional and national consumer advertising, designed at its discretion to promote consumer demand for services and products available from the franchises.

     The Company is required to keep separate advertising fund accounting records and to maintain the advertising funds collected from the franchisees in a separate bank account. Franchisee payments to the Company for the advertising fund are recorded in the Company’s revenue and advertising expenses of the advertising fund are recorded in the Company’s selling, general and administrative expenses.

Office and Classroom Leases

     The Company has entered into various operating leases in excess of one year, primarily office and classroom site locations. Minimum rental commitments under these leases, including fixed escalation clauses, which are in excess of one year, as of December 31, 2005, are approximately as follows:

Years Ending December 31,	(in thousands)
2006	$	5,137
2007		4,861
2008		4,364
2009		3,655
2010		3,066
Thereafter		7,418
	$	28,501

     Rent expense for the years ended December 31, 2005, 2004 and 2003 was approximately $9.5 million, $8.6 million, and $7.7 million, respectively. These amounts include rent expense for the rental of space on a month-to-month basis, as well as those amounts incurred under operating leases for longer periods. Certain leases provide for early termination without penalty.

Legal Matters

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     On September 10, 2003, CollegeNet, Inc. filed suit in Federal District Court in Oregon, alleging that the Company infringed a patent owned by CollegeNet related to the processing of on-line applications. CollegeNet never served the Company and no discovery was ever conducted. However, based on adverse rulings in other lawsuits concerning the same patent, CollegeNet dismissed the 2003 case without prejudice on January 9, 2004 against the Company. Thereafter, on August 2, 2005, the Federal Circuit Court of Appeals issued an opinion favorable to CollegeNet from its appeal from the adverse rulings. Then on August 3, 2005, CollegeNet filed suit again against the Company alleging an infringement of the same CollegeNet patent related to processing on-line applications. The Company was served on November 22, 2005 and filed its answer and counterclaim on January 13, 2006. CollegeNet seeks injunctive relief and unspecified monetary damages. Because this proceeding is at a very preliminary stage, we are unable to predict its outcome with any degree of certainty. However, the Company believes that it has meritorious defenses to CollegeNet’s claims of infringement and intends to vigorously defend. In a related matter, the Company filed a request with the United Stated Patent and Trademark Office (“PTO”) for ex parte reexaminations of the CollegeNet No. 6,460,042 (‘042) patent on September 1, 2005 and the CollegeNet No. 6,910,045 (‘045) patent on December 12, 2005. The PTO granted the Company’s request and ordered reexamination of all claims of the CollegeNet ‘042 patent on October 31, 2005 and the CollegeNet ‘045 patent on January 27, 2006.

     On August 29, 2005, Test Services, Inc. (“TSI”), a franchisee of the Company under ten separate franchise agreements, six of which expired on December 31, 2005, filed suit against the Company in the United States District Court for the District of Colorado. TSI alleged that the terms the Company offered for renewal of the franchise relationship did not comply with TSI’s contractual renewal rights. TSI sought declaratory relief and specific performance and unspecified damages as to the alleged breaches of the renewal provisions. TSI’s complaint also included claims that the Company had breached the existing franchise agreements with TSI in ways unrelated to the core renewal dispute. On November 29, 2005, the court granted the Company’s motion to dismiss all of TSI’s claims relating to the core renewal dispute. On December 31, 2005, the Company entered into a settlement in which: (1) TSI agreed to execute a new franchise agreement for each of its ten franchise territories with certain negotiated changes; (2) TSI paid the Company $1 million in cash; (3) the Company, TSI and TSI’s parent company agreed on certain terms regarding competitive activities by the parent company, a potential spin-off of TSI, and a Company option to acquire TSI at a formula value in certain circumstances; TSI agreed to increase royalty payments to the Company from 8% to 9-½% (beginning January 1, 2006); and (4) all litigation was dismissed with prejudice and the parties exchanged releases as to all matters except amounts payable in the ordinary course of business under the superseded franchise agreements.

     In addition to the foregoing, from time to time, the Company is involved in legal proceedings incidental to the conduct of the Company’s business, none of which is likely to have a material adverse effect on the Company.

Co-authorship Agreements

     In connection with its publishing agreements, the Company has entered into various co-authorship agreements for the preparation of manuscripts. These agreements require payment of nonrecourse advances for services rendered at various established milestones. The Company did not have any future contractual commitments under the co-authorship agreements for manuscripts not yet delivered for the years ended December 31, 2005 and 2004, however there were approximately $30,000 in commitments as of December 31, 2003. In addition, the co-authors are entitled to a percentage of the future royalties earned by the Company, which are first to be offset against such advances. The total costs incurred under these co-authorship agreements by the Company for advances and royalties were approximately $524,000, $585,000, and $528,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

     The expense related to co-author payments is accrued monthly. This expense is adjusted based upon actual expenditures paid to the co-authors. These expenditures are a percentage of the royalties paid to the Company by the publisher. Royalties from the publisher are recorded as revenue with the co-author expenditures recorded as expense.

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10. Income Taxes

     The (provision) benefit for income taxes consists of the following:

	Year Ended December 31,
	2005		2004			2003
	(in thousands)
Current tax (provision) benefit:
U.S. Federal	$	—	$	—		$	(112	)
State		—		—			(67	)
Foreign		—		—			—
		—		—			(179	)
Deferred tax (provision) benefit:
U.S. Federal		—		(14,832	)		(2,217	)
State		—		(1,859	)		(857	)
Foreign		—		(16	)		97
		—		(16,707	)		(2,977	)
Total (provision) benefit for income taxes	$	—	$	(16,707	)	$	(3,156	)

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     Significant components of the Company’s deferred tax assets and liabilities are as follows at:

	December 31,
	2005			2004
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	22,281		$	20,764
Tax credit carryforwards		85			85
Allowance for doubtful accounts		663			522
Equity compensation		188			187
Capitalized inventory costs		168			46
Deferred rent		911			574
Unrealized losses		147			147
Accumulated amortization including write down of intangibles		621			1,368
Other		464			401
Total deferred tax assets		25,528			24,094
Deferred tax liabilities:
Software development costs		(1,133	)		(1,155	)
Accumulated depreciation		(743	)		(807	)
Total deferred tax liabilities		(1,876	)		(1,962	)
Net deferred tax before valuation allowance		23,652			22,132
Valuation allowance		(23,652	)		(22,132	)
	$	—		$	—

     The net deferred income tax asset decreased from an asset of $16.7 million at December 31, 2003, to $0 at December 31, 2004 and 2005. The $16.7 million change in the net deferred tax balance is primarily attributable to the establishment of a valuation allowance on the net deferred tax asset. The net deferred tax asset at December 31, 2003 was included in the Company’s consolidated balance sheet as other current assets of approximately $852,000, and noncurrent deferred tax assets of approximately $15.8 million. As of December 31, 2005 the Company has a net operating loss carryforward totaling approximately $53.7 million which expires in the years 2021 through 2025, and other timing differences which will be available to offset regular taxable income during the carryforward period.

Deferred Tax Valuation Allowance

     SFAS No. 109,“Accounting for Income Taxes,”requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The cumulative pre-tax loss of $9.7 million incurred in the most recent three years represents sufficient negative evidence under the provisions of SFAS No. 109 for the Company to determine that the establishment of a full valuation allowance against the deferred tax asset is appropriate. This valuation allowance will offset assets associated with future tax deductions as well as carryforward items. Although management expects that these assets will ultimately be fully utilized, future performance cannot be assured.

     A reconciliation setting forth the differences between the effective tax rate of the Company for the years ended December 31, 2005, 2004 and 2003 and the U.S. federal statutory tax rate is as follows:

	Years ended December 31,
	2005					2004					2003
	as restated					as restated
	(in thousands)
U.S. Federal income tax benefit (provision) expenses at statutory rate	$	1,181		34	%	$	4,660		34	%	$	(2,537	)	34	%
Effect of permanent differences and other		15		0	%		39		0	%		(121	)	1	%
Effect of state taxes		324		9	%		726		5	%		(498	)	7	%
Valuation allowance		(1,520	)	(43	)%		(22,132	)	(161	)%		0		0	%
	$	—		0	%	$	(16,707	)	(122	)%	$	(3,156	)	42	%

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11. Employee Benefits and Contracts

Retirement Plan

     The Company has a defined contribution plan (the “Plan”) under Section 401(k) of the Internal Revenue Code, which provides that eligible employees may make contributions subject to Internal Revenue Code limitations. Employees become eligible to participate in the Plan on the first day of the quarter following the beginning of their full-time employment, but company matching contributions do not begin until one year after full-time employment. Under the provisions of the Plan, contributions made by the Company are discretionary and are determined annually by the trustees of the Plan. The Company’s contributions to the Plan for the years ended December 31, 2005, 2004 and 2003 were $342,000, $230,000, and $200,000, respectively.

Stock Incentive Plan

     On April 1, 2000, the Company adopted its 2000 Stock Incentive Plan (the “Stock Incentive Plan”) providing for the authorization and issuance of up to 2,538,000 shares of common stock, as adjusted. On various date, beginning in June 2000 and extending through December 2005, an additional 2,675,744 shares were authorized. The Stock Incentive Plan provides for the granting of incentive stock options, non-qualified stock options, restricted stock and deferred stock to eligible participants. Options granted under the Stock Incentive Plan are for periods not to exceed ten years. Other than for options to purchase 133,445 shares granted in 2000 to certain employees which were vested immediately, options outstanding under the Stock Incentive Plan generally vest quarterly over two to four years. As of December 31, 2005, there were approximately 703,000 shares available for grant.

     A summary of the activity of the Stock Incentive Plan is as follows:

				Weighted-
				Average
	Options			Exercise Price
Outstanding at December 31, 2002		2,413,362		$	7.32
Granted at Market		429,236		$	4.63
Forfeited		(170,330	)	$	7.79
Exercised		(124,205	)	$	4.69
Outstanding at December 31, 2003		2,548,063		$	6.96
Granted at Market		1,098,473		$	7.48
Forfeited		(167,107	)	$	7.60
Exercised		(120,926	)	$	6.19
Outstanding at December 31, 2004		3,358,503		$	7.13
Granted at Market		224,900		$	5.77
Forfeited		(282,503	)	$	7.57
Exercised		(2,406	)	$	4.96
Outstanding at December 31, 2005		3,298,494		$	7.00
Exercisable at December 31, 2003		1,790,513		$	6.84
Exercisable at December 31, 2004		2,134,059		$	6.99
Exercisable at December 31, 2005		2,461,129		$	7.02

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     Stock options outstanding at December 31, 2005 are summarized as follows:

	Options Outstanding						Options Exercisable
			Weighted-
			Average		Weighted-				Weighted-
Exercise	Options		Remaining		Average		Options		Average
Price	Outstanding		Contractual Life		Exercise Price		Exercisable		Exercise Price
$1.73–$2.29		99,904		4.25	$	1.86		99,904	$	1.86
$2.30–$7.31		1,100,715		8.04	$	6.01		556,714	$	5.51
$7.31–$7.39		984,467		4.25	$	7.39		984,467	$	7.39
$7.45–$8.30		900,414		7.22	$	7.79		617,829	$	7.82
$8.31 –$11.00		212,994		5.43	$	9.39		202,215	$	9.44
		3,298,494		6.40	$	7.00		2,461,129	$	7.02

          During 2001, the Company granted 116,500 stock options to non-employee advisors and, using the fair value method, recorded expense of approximately $98,000, and $151,000 for the years ended December 31, 2004 and 2003, respectively. Prior to 2005, these options were fully vested; therefore no expense was recorded in 2005.

12. Related Parties

Publisher

          Random House, Inc., a holder of 1,515,353 shares of the Company’s common stock at December 31, 2005, is also the publisher and distributor of substantially all of the Company’s books. For the years ended December 31, 2005, 2004 and 2003, the Company earned $3.3 million, $3.7 million and $3.6 million respectively, of book and publication income from Random House, Inc. Total receivables at December 31, 2005 and 2004 included $2.5 million and $2.8 million, respectively, due from Random House, Inc. for royalties, book advances, copy editing and marketing fees.

Loans to Officers

          As of December 31, 2005 the Company had a loan to one executive officer in the amount of $625,000, while in 2004 the Company had loans to two executive officers of approximately $1.3 million. No loans were made to executive officers after February 2002, although interest continues to accrue. Such amounts and accrued interest are included in “Other Current Assets” and “Other assets” at December 31, 2005 and December 31, 2004. Both loans are payable in four consecutive, equal annual installments with the first payment to be made on the earlier of the fourth anniversary of the loan or 60 days after termination of employment, accrue interest at 7.3% per year and. These loans are secured by shares of the Company’s common stock owned by each of these individuals. At December 31, 2005, the loan was secured by 178,316 shares of the Company’s common stock. At December 31, 2004 the loans were secured by 299,066 shares of the Company’s common stock.

13. Acquisitions

          On July 11, 2003, the Company acquired a 77% interest in Princeton Review of North Carolina, Inc. and the remaining 23% was acquired on November 13, 2003. The total purchase price including both transactions was approximately $1,138,000, including imputed interest. The purchase price exceeded the fair value of the net assets acquired resulting in goodwill of approximately $938,000. Princeton Review of North Carolina, Inc. provided test preparation courses in North Carolina under the Princeton Review name through a franchise agreement with the Company. This acquisition has been accounted for as a purchase and has been included in the Company’s operations from the date of the purchase.

          Approximately $170,000 of the purchase price was paid in cash at the time of closings. The remaining approximately $968,000 of the purchase price was paid by delivery to the sellers of subordinated promissory notes (see Note 6).

          The pro forma effect of the purchase of the Princeton Review of North Carolina, Inc. is not presented in 2003 because its results are not significant.

14. Segment Reporting

          The operating segments reported below are the segments of the Company for which separate financial information is available and for which operating results as measured by EBITDA are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies (see Note 1).

          The following segment results include the allocation of certain information technology costs, accounting services, executive management costs, office facilities expenses, human resources expenses and other shared services which are

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allocated based on consumption. Corporate consists of unallocated administrative support functions. The Company operates its business through three divisions. The majority of the Company’s revenue is earned by the Test Preparation Services division, which sells a range of services including test preparation, tutoring and academic counseling. Test Preparation Services derives its revenue from Company operated locations and from royalties from and product sales to independently owned franchises. The Admissions Services division earns revenue from subscription, transaction and marketing fees from higher education institutions and from selling advertising and sponsorships. The K-12 Services division earns fees from assessment, remediation and professional development services it renders to K-12 schools and from its content development work. Additionally, each division earns royalties and other fees from sales of its books published by Random House.

          The segment results include EBITDA for the periods indicated. As used in this report, EBITDA means earnings before interest, income taxes, depreciation and amortization. The Company believes that EBITDA, a non-GAAP financial measure, represents a useful measure of evaluating its financial performance because it reflects earnings trends without the impact of certain non-cash and non-operations-related charges or income. The Company’s management uses EBITDA to measure the operating profits or losses of the business. Analysts, investors and rating agencies frequently use EBITDA in the evaluation of companies, but the Company’s presentation of EBITDA is not necessarily comparable to other similarly titled measures of other companies because of potential inconsistencies in the method of calculation. EBITDA is not intended as an alternative to net income as an indicator of the Company’s operating performance, nor as an alternative to any other measure of performance calculated in conformity with GAAP.

	Year Ended December 31, 2005
	(In thousands)
	Test
	Preparation					Admissions
	Services		K-12 Services			Services			Corporate			Total
Revenue	$	87,310	$	31,931		$	11,252		$	—		$	130,493
Operating expenses (including depreciation and amortization)	$	48,458	$	19,143		$	11,473		$	6,071		$	85,144
Segment operating income (loss)		10,708		(4,049	)		(4,836	)		(6,071	)		(4,248	)
Depreciation & amortization		1,853		2,853			1,725			1,251			7,682
Other (as restated)		—		1,191			(39	)		1,268			2,420
Segment EBITDA	$	12,561	$	(5	)	$	(3,150	)	$	(3,552	)	$	5,854
Total segment assets	$	50,355	$	26,870		$	13,972		$	14,174		$	105,371
Segment goodwill	$	31,006	$	—		$	500		$	—		$	31,506
Expenditures for long lived assets	$	1,275	$	8,268		$	1,636		$	3,142		$	14,322

	Year Ended December 31, 2004
	(In thousands)
	Test
	Preparation					Admissions
	Services		K-12 Services			Services			Corporate			Total
Revenue	$	74,744	$	27,957		$	11,084		$	—		$	113,785
Operating expenses (including depreciation and amortization)	$	42,858	$	17,526		$	21,813		$	4,383		$	86,580
Segment operating income (loss)		8,301		(3,349	)		(14,017	)		(4,383	)		(13,448	)
Depreciation & amortization		1,804		2,161			1,898			1,139			7,002
Other (as restated)		—		—			(67	)		1,088			1,021
Segment EBITDA	$	10,105	$	(1,188	)	$	(12,186	)	$	(2,156	)	$	(5,425	)
Total segment assets	$	37,419	$	21,867		$	17,532		$	30,823		$	107,641
Segment goodwill	$	31,011	$	—		$	500		$	—		$	31,511
Expenditures for long lived assets	$	2,551	$	3,385		$	427		$	2,639		$	9,002

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	Year Ended December 31, 2003
	(In thousands)
	Test
	Preparation					Admissions
	Services		K-12 Services			Services			Corporate			Total
Revenue	$	71,719	$	21,525		$	11,218		$	—		$	104,462
Operating expenses (including depreciation and amortization)	$	39,123	$	13,986		$	10,822		$	1,703		$	65,634
Segment operating income (loss)		11,787		(789	)		(2,440	)		(1,703	)		6,855
Depreciation & amortization		1,522		1,594			1,760			1,161			6,037
Other		—		—			(32	)		—			(32	)
Segment EBITDA	$	13,309	$	805		$	(712	)	$	(542	)	$	12,860
Total segment assets	$	41,798	$	20,189		$	29,728		$	29,982		$	121,697
Segment goodwill	$	30,881	$	—		$	8,699		$	—		$	39,580
Expenditures for long lived assets	$	2,103	$	2,644		$	1,249		$	1,493		$	7,489

Reconciliation of operating income (loss) to net income (loss)

	Years Ended December 31,
	2005			2004			2003
	(in thousands)
	As restated			As restated
Total income (loss) for reportable segments	$	(4,248	)	$	(13,448	)	$	6,855
Unallocated amounts:
Interest expense, net		(354	)		(361	)		(607	)
Other income		2,420			1,021			1,217
(Provision) benefit for income taxes		—			(16,707	)		(3,156	)
Net income (loss)	$	(2,182	)	$	(29,495	)	$	4,309

15. Quarterly Results of Operations (Unaudited)

          The following table presents unaudited statement of operations data for each of the eight quarters in the two-year period ended December 31, 2005. This information has been derived from the Company’s historical consolidated financial statements and should be read in conjunction with the Company’s historical consolidated financial statements and related notes appearing in this Annual Report on Form 10-K.

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	Quarter Ended
	Mar. 31,			June 30,			Sept. 30,		Dec. 31,			Mar. 31,			June 30,		Sept. 30,			Dec. 31,
	2005			2005			2005		2005			2004			2004		2004			2004
	(in thousands, except per share data)
	As Restated			As Restated			As Restated		As Restated						As Restated		As Restated			As Restated
Revenue
Test Preparation Services	$	22,885		$	20,630		$	26,748	$	17,047		$	18,830		$	18,163	$	24,185		$	13,566
K-12 Services		7,919			7,122			5,281		11,610			6,283			7,697		2,752			11,225
Admissions Services		2,794			2,045			2,767		3,646			2,834			2,587		2,665			2,998
Total revenue		33,598			29,797			34,796		32,302			27,947			28,447		29,602			27,789
Cost of revenue
Test Preparation Services		7,037			6,452			8,007		6,648			5,820			5,313		7,316			5,135
K-12 Services		4,245			3,183			2,934		6,476			3,664			3,005		2,711			4,304
Admissions Services		861			1,080			1,283		1,391			596			557		1,161			1,071
Total cost of revenue		12,143			10,715			12,224		14,515			10,080			8,875		11,188			10,510
Gross profit		21,455			19,082			22,572		17,787			17,867			19,572		18,414			17,279
Operating expenses
Selling, general and administrative		21,265			19,460			21,910		22,509			19,003			18,600		19,161			21,617
Impairment of investment		—			—			—		—			—			—		—			8,199
Total operating expenses		21,265			19,460			21,910		22,509			19,003			18,600		19,161			29,816
Income (loss) from operations		190			(378	)		662		(4,722	)		(1,136	)		972		(747	)		(12,537	)
Net income (loss) attributed to common shareholders	$	(194	)	$	(1,137	)	$	849	$	(4,146	)	$	(706	)	$	118	$	(1,141	)	$	(29,205	)
Basic income (loss) per share (1)	$	(0.01	)	$	(0.03	)	$	0.03	$	(0.16	)	$	(0.03	)	$	0.01	$	(0.03	)	$	(1.07	)
Diluted income (loss) per share	$	(0.01	)	$	(0.03	)	$	0.03	$	(0.16	)	$	(0.03	)	$	0.01	$	(0.03	)	$	(1.07	)
Weighted average shares used in computing net income (loss) per share
Basic		27,570			27,570			27,571		27,570			27,391			27,430		27,497			27,559
Diluted		27,570			27,570			28,733		27,570			27,391			28,014		27,497			27,559

(1) The sum of quarterly earnings (loss) per share does not equal the annual loss per share due to changes in average shares outstanfing.

16. Earnings (Loss) Per Share

          The following table sets forth the denominators used in computing basic and diluted earnings (loss) per common share for the periods indicated:

	Year Ended December 31,
	2005		2004		2003
	(in thousands)
Weighted Average common shares outstanding
Basic		27,570		27,468		27,306
Net effect of dilutive stock options-based on the treasury stock method		—		—		152
Other		—		—		9
Diluted		27,570		27,468		27,467

          For the year ended December 31, 2005 and 2004, the following were excluded from the computation of diluted earnings per common share because of their antidilutive effect.

	Year Ended December 31,
	2005		2004
	(in thousands)
Net effect of dilutive stock options-based on the treasury stock method		132		230
Net effect of convertible preferred stock-based on the if converted method		1,007		578
Other		9		9
		1,148		817

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Schedule II

Valuation and Qualifying Accounts

For the years ended December 31, 2005, 2004 and 2003

	Balance at		Additions		Deductions			Balance at
	Beginning of		Charged to		From			End of
	Period		Expense		Allowance(1)			Period
	(in thousands)
Allowance for Doubtful Accounts
Year Ended December 31, 2005	$	1,290	$	1,328	$	(1,017	)	$	1,601
Year Ended December 31, 2004	$	302	$	1,521	$	(533	)	$	1,290
Year Ended December 31, 2003	$	527	$	380	$	(605	)	$	302
Valuation allowance for deferred tax assets
Year Ended December 31, 2005	$	22,132	$	1,520		—		$	23,652
Year Ended December 31, 2004		—	$	22,132		—		$	22,132
Year Ended December 31, 2003		—		—		—			—

(1) Consists primarily of amounts written off during the period.

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     None.

Item 9A. Controls and Procedures

          Disclosure Controls and Procedures

     We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”), as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) as of December 31, 2005. The evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), and included a review of the controls’ objectives, design and operating effectiveness with respect to the information generated for use in this Annual Report. In the course of the evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of Disclosure Controls evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of controls can be reported in our Quarterly Reports on Form 10-Q and in our Annual Reports on Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by other personnel in our accounting, finance and legal functions. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and to modify them on an ongoing basis as necessary.

     A control system can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. 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, have been detected. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

     Based upon the evaluation of our Disclosure Controls, and in light of the material weakness described below under “Management’s Report on Internal Control over Financial Reporting (as revised),” our CEO and CFO concluded that our Disclosure Controls were not effective, as of the end of the period covered by this Annual Report, in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

          Management’s Report on Internal Control over Financial Reporting (as revised)

     Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

     The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006, management concluded that our internal control over financial reporting was effective as of December 31, 2005. Subsequently, management identified the following material weakness in internal control over financial reporting, which existed as of December 31, 2005. In response to a comment letter from the Securities and Exchange Commission relating to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, management determined that its controls over the accounting for certain embedded derivatives contained within the Preferred Stock and a related warrant, issued on June 4, 2004, were ineffective. This material weakness is attributed to inadequate training and technical expertise with respect to the application of Statement of Financial Accounting Standards No. 133,

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     “Accounting for Derivative Instruments and Hedging Activities”, as amended, and related accounting guidance, as well as insufficient documentation of policies and procedures.

     As a result of this material weakness, a restatement of the Company’s consolidated financial results for 2005 and 2004 and the quarterly periods for 2006, 2005 and the second and third quarters of 2004 was necessary. Management has revised its earlier assessment and has now concluded that our internal control over financial reporting was not effective as of December 31, 2005. Management’s revised assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.

     Changes in Internal Control over Financial Reporting

     As described in Item 9A of the Company’s Amendment to the Annual Report on Form 10-K/A for the year ended December 31, 2004, dated May 2, 2005, the Company’s management assessed the effectiveness of the Company’s internal control over financial reporting and identified three material weaknesses in internal control over financial reporting as of December 31, 2004. These material weaknesses were identified in the areas of capitalized software development costs, the financial statement close process and revenue recognition. During the period covered by this report, including the most recent quarter, the Company continued its remediation efforts which included the following:

• reorganized the accounting and finance department, with the focus on simplifying our business workflow processes;

• hired more qualified and experienced accounting personnel to perform the month-end review and closing processes as well as provide additional oversight and supervision within the accounting department;

• established written policies and procedures along with control matrices to ensure that account reconciliation and amounts recorded, as well as the review of these areas, are substantiated by detailed and contemporaneous documentary support and that reconciling items are investigated, resolved and recorded in a timely manner; and

• established programs providing ongoing training and professional education and development plans for the accounting department and improving internal communications procedures through the Company.

     As a result of these efforts, the previously identified material weaknesses in internal control over financial reporting have been remediated as of December 31, 2005. We are continuing to actively assess and evaluate our most critical business and accounting processes to identify further enhancements and improvement opportunities.

     Other than the remedial actions described above, management believes that no change in internal control over financial reporting occurred during 2005 that materially affected, or is reasonable likely to materially affect, such internal control over financial reporting.

     As for the material weakness identified at December 31, 2005, management has implemented the following remedial actions:

• Improving training, education and accounting review designed to ensure that all relevant employees involved in future derivatives transactions understand and apply the appropriate accounting in compliance with SFAS 133, as amended, and related accounting guidance; and

• Establishing written policies and procedures along with control matrices to support and ensure proper reporting of future derivatives and hedging activities; and

• Retesting our internal financial controls with respect to derivative accounting and hedging activity affected by the restatement to ensure continued compliance with SFAS 133.

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             Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
The Princeton Review, Inc.

     We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting (as revised), that The Princeton Review, Inc. (the “Company”) did not maintain effective internal control over financial reporting as of December 31, 2005, because of the effect of the Company’s material weakness relating to its internal controls over the accounting for certain embedded derivatives contained within its Convertible, Redeemable Series B-1 Preferred Stock and a related warrant, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our report dated March 13, 2006, we expressed an unqualified opinion on management’s previous assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005 and an unqualified opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria. Management has subsequently determined that a deficiency in controls relating to the accounting for certain embedded derivatives contained within its Convertible, Redeemable Series B-1 Preferred Stock and a related warrant existed as of the previous assessment date, and has further concluded that such deficiency represented a material weakness as of December 31, 2005. As a result, management has revised its assessment, as presented in the accompanying Management’s Report on Internal Control over Financial Reporting (as revised), to conclude that the Company’s internal control over financial reporting was not effective as of December 31, 2005. Accordingly, our present opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, as expressed herein, is different from that expressed in our previous report.

     A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment. The Company identified a material weakness related to its internal controls over the accounting for certain embedded derivatives contained within its Convertible, Redeemable Series B-1 Preferred Stock and a related warrant, which is primarily attributed to inadequate training and technical expertise with respect to the relevant generally accepted accounting principles and insufficient documentation of policies and procedures

     The material weakness resulted in the restatement of the Company’s consolidated financial statements as of December 31, 2005 and 2004, and for each of the two years in the period ended December 31, 2005. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2005 consolidated financial statements and this report does not affect our report dated March 13, 2006, except for Note 2, as to which the date is March 22, 2007, on those consolidated financial statements (as restated).

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     In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO control criteria. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2005, based on the COSO control criteria.

/s/ ERNST & YOUNG LLP

New York, New York
March 13, 2006, except for the effects of the
material weakness described in the sixth paragraph above,
as to which the date is March 22, 2007

Item 9B. Other Information

None

PART III

Item 10. Directors and Executive Officers of the Registrant

Executive Officers

          The following table sets forth information with respect to our executive officers as of March 10, 2006.

Name	Age		Position
John S. Katzman		46	Chairman and Chief Executive Officer
Mark Chernis		39	President, Chief Operating Officer
Andrew Bonanni		40	Chief Financial Officer and Treasurer
Kevin A. Howell		47	Executive Vice President, General Manager K-12 Services Division
Margot Lebenberg		38	Executive Vice President, General Counsel and Secretary
Stephen Quattrociocchi		43	Executive Vice President, Test Preparation Services Division
Young J. Shin		39	Executive Vice President, General Manager Admissions Services Division

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     John S. Katzman,Chairman and Chief Executive Officer, founded our company in 1981. Mr. Katzman has served as our Chief Executive Officer and director since our formation. Mr. Katzman served as our President from 1981 until August 2000. Mr. Katzman is the brother of Richard Katzman, one of the other members of the board of directors. Mr. Katzman received a BA from Princeton University.

     Mark Chernis,President, Chief Operating Officer and Secretary, joined us in 1984. Mr. Chernis has served as Chief Operating Officer and Secretary since 1995 and became President in August 2000. From 1989 to 1995, Mr. Chernis served as our Vice President, Operations. From 1984 to 1989, Mr. Chernis served as a systems analyst. Mr. Chernis received a BA from Vassar College.

     Andrew J. Bonanni,Chief Financial Officer and Treasurer joined us in September 2005. From 2002 to 2005, he served as Senior Vice President & Chief Financial Officer of Bowne Business Solutions where he was responsible for overseeing all financial and IT management functions and presided over several key acquisitions and strategic joint ventures. From 2001 to 2002, Mr. Bonanni was Managing Vice President, Worldwide Business Planning & Corporate Reporting for Gartner, Inc. He began his career in 1992 with Xerox, where he held a series of finance and strategy positions with increasing responsibilities. Mr. Bonanni received a B.S. in Finance and Marketing from Le Moyne College and a M.B.A. in Accounting from Rochester Institute of Technology.

     Kevin A. Howell, Executive Vice President, General Manager K-12 Services Division, joined us in October 2005. From 2001 to 2005, Mr. Howell was with the National Education Association’s (NEA) Portal Company, where he served as interim CEO for a subsidiary providing online training for K-12 educators. From 1995 to 2000, Mr. Howell worked for McGraw Hill, rising to the position of Senior Vice President, Technology and New Media. He began his career with Digital Equipment Corporation, where he held various managerial positions of increasing responsibility. He received a B.A. in Economics from Vassar College.

     Margot Lebenberg, Executive Vice President, General Counsel and Secretary, joined us in June 2004. From 2003 to 2004, Ms. Lebenberg served as the Executive Vice President and General Counsel and Secretary for SoundView Technology Group, Inc., a research driven securities firm, through its sale to Charles Schwab. From 2001 to 2003, she served as Vice President and Assistant General Counsel of Cantor Fitzgerald, a leading financial services provider, and its subsidiary eSpeed, Inc., a leader in developing and deploying electronic trading. From 1996 to 2000, she served as Senior Vice President, General Counsel and Secretary of SOURCECORP, Incorporated (formerly known as F.Y.I. Incorporated), a business process outsourcing and consulting firm, in Dallas, Texas. Ms. Lebenberg began her career at Morgan, Lewis & Bockius LLP in New York and founded and served as President of Living Mountain Capital LLC, a business advisory consulting firm specializing in corporate development, strategic alliances and restructurings. Ms. Lebenberg received her JD from Fordham University School of Law and her BA from SUNY Binghamton.

     Stephen Quattrociocchi,Executive Vice President, Test Preparation Services Division, joined us in 1988. Since 1997, he has served as Executive Vice President of our Test Preparation Services division. From 1991 to 1997, Mr. Quattrociocchi served as Vice President of Course Operations. Mr. Quattrociocchi received a BS from the Massachusetts Institute of Technology and an MBA from the Wharton School.

     Young J. Shin,Executive Vice President, General Manager Admissions Services Division, joined us in February 2003. From October 2002 to February 2003, Mr. Shin served as the Chief Executive Officer of eduAdvisors, LLC, an education marketing company. In 1995, Mr. Shin co-founded Embark.com, Inc., a provider of online college and graduate school information and application services, the assets of which we acquired in October 2001. Mr. Shin served as Embark’s Chairman of the Board from 1995 until February 2003, as Embark’s Chief Technology Officer from 2000 to 2001 and its President and Chief Executive Officer from 1995 to 2000. From 1991 to 1994, Mr. Shin was a Technical Specialist and Consulting Practice Manager at Seer Technologies, Inc. a computer aided software company. Mr. Shin received a BS from Massachusetts Institute of Technology and a BS from Massachusetts Institute of Technology’s Sloan School of Management.

     The information required by this Item 10, other than information with respect to our executive officers, which is contained above, is incorporated by reference from our definitive proxy statement for our 2006 annual meeting of stockholders, scheduled to be held on June 15, 2006.

Item 11. Executive Compensation

     The information required by this Item 11 is incorporated by reference from our definitive proxy statement for our 2006 annual meeting of stockholders, scheduled to be held on June 15, 2006.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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     Information required by this Item 12 is incorporated by reference from our definitive proxy statement for our 2006 annual meeting of stockholders, scheduled to be held on June 15, 2006.

Item 13. Certain Relationships and Related Transactions

     The information required by this Item 13 is incorporated by reference from our definitive proxy statement for our 2006 annual meeting of stockholders, scheduled to be held on June 15, 2006.

Item 14. Principal Accountant Fees and Services

     The information required by this Item 14 is incorporated by reference from our definitive proxy statement for our 2006 annual meeting of stockholders, scheduled to be held on June 15, 2006.

PART IV

Item 15. Exhibits and Financial Statement Schedules

     (a) The following documents are filed as part of this Report:

     1. Financial Statements—See Index to Consolidated Financial Statements and Financial Statement Schedule at Item 8 on page 40 of this Annual Report on Form 10-K.

     2. Financial Statement Schedules—See Index to Consolidated Financial Statements and Financial Statement Schedule at Item 8 on page 40 of this Annual Report on Form 10-K. All other schedules are omitted because they are not applicable or not required.

     3. Exhibits—The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K:

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Exhibit
Number		Description
2.1	—	Conversion and Contribution Agreement, dated as of March 31, 2000, by and among The Princeton Review, Inc., the Non-Voting Members of Princeton Review Publishing L.L.C., John S. Katzman and TPR Holdings, Inc. (1)
2.2	—	RH Contribution Agreement, dated as of March 31, 2000, by and among Random House TPR, Inc., Random House, Inc., The Princeton Review, Inc., John S. Katzman, and TPR Holdings, Inc. (1)
2.3	—	TPR Contribution Agreement, dated as of March 31, 2000, by and among The Princeton Review, Inc., each of the persons listed on Schedule I attached to the agreement and TPR Holdings, Inc. (1)
2.4	—	Option Agreement, dated as of May 30, 2000, by and among Princeton Review Operations, L.L.C., Princeton Review of Boston, Inc. and Princeton Review of New Jersey, Inc. (1)
2.5	—	Option Agreement Amendment, dated as of December 14, 2000, by and between Princeton Review Operations, L.L.C., Princeton Review of Boston, Inc. and Princeton Review of New Jersey, Inc. (1)
2.6	—	Option Agreement, dated as of October 18, 2000, by and among Princeton Review Operations, L.L.C., T.S.T.S., Inc., Robert O. Case and Kevin D. Campbell. (1)
2.7	—	Option Agreement, dated as of December 15, 2000, by and between Princeton Review Operations, L.L.C. and The Princeton Review Peninsula, Inc. (1)
2.8	—	Asset Purchase Agreement, dated as of January 18, 2001, by and among Princeton Review Boston, Inc., Princeton Review New Jersey, Inc., Robert L. Cohen, Matthew Rosenthal, Princeton Review Operations, L.L.C., and Princeton Review Management, L.L.C. (1)
2.9	—	Closing Agreement, dated as of March 2, 2001, by and among Princeton Review of Boston, Inc., Princeton Review of New Jersey, Inc., Robert L. Cohen, Matthew Rosenthal, Princeton Review Operations, L.L.C. and Princeton Review Management, L.L.C. (incorporated herein by reference to Exhibit 2.8.1 to our Registration Statement on Form S-1 (File No. 333-43874) which was declared effective on June 18, 2001 (the “Form S-1”)).
2.10	—	Promissory Note, dated as of March 2, 2001, made by Princeton Review Operations, L.L.C. in favor of Princeton Review of Boston, Inc., in the principal amount of $3,125,000 (incorporated herein by reference to Exhibit 2.9 to our Form S-1).
2.11	—	Promissory Note, dated as of March 2, 2001, made by Princeton Review Operations, L.L.C. in favor of Princeton Review of Boston, Inc., in the principal amount of $500,000 (incorporated herein by reference to Exhibit 2.10 to our Form S-1).
2.12	—	Asset Purchase Agreement, dated as of March 6, 2001, by and among The Princeton Review Peninsula, Inc., the Hirsch Living Trust, Pamela N. Hirsch, Myles E. Hirsch, Frederick Sliter, Princeton Review Operations, L.L.C. and Princeton Review Management, L.L.C. (incorporated herein by reference to Exhibit 2.11 to our Form S-1).
2.13	—	Asset Purchase Agreement, dated June 18, 2001, among Princeton Review Operations, L.L.C., Princeton Review Management, L.L.C., T.S.T.S., Inc., Robert O. Case and Kevin D. Campbell (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 000-32469), filed with the Securities and Exchange Commission on August 8, 2001 (the “2001 Second Quarter Form 10-Q”)).
2.14	—	Subordinated Promissory Note, dated June 18, 2001, made by Princeton Review Operations, L.L.C. in favor of T.S.T.S., Inc., in the principal amount of $1,475,000 (incorporated herein by reference to Exhibit 10.2 to our 2001 Second Quarter Form 10-Q).
2.15	—	Asset Purchase Agreement, dated as of October 1, 2001, by and among The Princeton Review, Inc., Princeton Review Publishing, L.L.C. and Embark.com, Inc. (incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K (File No. 000-32469), filed with the Securities and Exchange Commission on October 9, 2001 (the “Form 8-K”)).
3.1	—	Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1.2 to our Form S-1).
3.2	—	Amended and Restated By-laws (incorporated herein by reference to Exhibit 3.3.1 to our Form S-1).
4.1	—	Form of Specimen Common Stock Certificate (1).
4.2	—	Certificate of Designation of Series B-1 Cumulative Convertible Preferred Stock of The Princeton Review, Inc. (incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K (File No. 000-32469), filed with the Securities and Exchange Commission on June 9, 2004)

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Exhibit
Number		Description
10.1	—	Stockholders Agreement, dated as of April 1, 2000, by and among The Princeton Review, Inc., and its stockholders (1).
10.2	—	Stock Purchase Agreement, dated April 18, 2000, by and among The Princeton Review, Inc., SG Capital Partners LLC, Olympus Growth Fund III, L.P. and Olympus Executive Fund, L.P. (1).
10.3	—	Joinder Agreement, dated April 18, 2000, to the Stockholders Agreement dated April 1, 2000, among stockholders of The Princeton Review, Inc. (1).
10.4	—	Investor Rights Agreement, dated April 18, 2000, by and among The Princeton Review, Inc., SG Capital Partners LLC, Olympus Growth Fund III, L.P. and Olympus Executive Fund, L.P. (1).
10.5	—	The Princeton Review, Inc. 2000 Stock Incentive Plan, March 2000 (1).
10.6	—	Amendment to The Princeton Review, Inc. 2000 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.5.1 to our Form S-1).
10.7	—	Form of Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.6 to our Form S-1).
10.8	—	Software Purchase Agreement, dated as of June 23, 1998, by and between Learning Company Properties and Princeton Review Publishing, L.L.C. (incorporated herein by reference to Exhibit 10.10 to our Form S-1).
10.9	—	The Princeton Review Executive Compensation Policy Statement, as amended (incorporated by reference to Exhibit 10.12 of our Annual Report on Form 10-K for the year ended December 31, 2001).
10.10	—	Office Lease, dated as of April 23, 1992, as amended, by and between The Princeton Review, Inc. and 2316 Broadway Realty Co. (incorporated herein by reference to Exhibit 10.12 to our Form S-1).
10.11	—	Amendment to Office Lease, dated December 9, 1993 (incorporated herein by reference to Exhibit 10.13 to our Form S-1).
10.12	—	Second Amendment to Office Lease, dated February 6, 1995 (incorporated herein by reference to Exhibit 10.14 to our Form S-1).
10.13	—	Third Amendment to Office Lease, dated April 2, 1996 (incorporated herein by reference to Exhibit 10.15 to our Form S-1).
10.14	—	Fourth Amendment to Office Lease, dated July 10, 1998 (incorporated herein by reference to Exhibit 10.16 to our Form S-1).
10.15	—	Employment Agreement, dated as of April 11, 2002, by and between The Princeton Review, Inc. and John Katzman (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file No. 000-32469), filed with the Securities and Exchange Commission on May 14, 2002 (the “2002 First Quarter Form 10-Q”).
10.16	—	Employment Agreement, dated as of April 10, 2002, by and between The Princeton Review, Inc. and Mark Chernis (incorporated by reference to Exhibit 10.2 to our 2002 First Quarter Form 10-Q).
10.17	—	Employment Agreement, dated as of April 10, 2002, by and between The Princeton Review, Inc. and Steve Quattrociocchi (incorporated by reference to Exhibit 10.3 to our 2002 First Quarter Form 10-Q).
10.18	—	Employment Agreement, dated as of April 10, 2002, by and between The Princeton Review, Inc. and Bruce Task (incorporated by reference to Exhibit 10.4 to our 2002 First Quarter Form 10-Q).
10.19	—	Employment Agreement, dated as of October 15, 2001, by and between The Princeton Review, Inc. and Stephen Melvin (incorporated by reference to Exhibit 10.61 of our Annual Report on Form 10-K for the year ended December 31, 2001).
10.20	—	Office Lease by and between The Rector, Church-Wardens and Vestrymen of Trinity Church in the City of New York, as Landlord, and Princeton Review Publishing, L.L.C., as Tenant (incorporated herein by reference to Exhibit 10.35 to our Form S-1).
10.21	—	Agreement, dated September 1, 1998, by and between The Educational and Professional Publishing Group, a unit of the McGraw-Hill Companies, Inc., and Princeton Review Publishing, L.L.C. (incorporated herein by reference to Exhibit 10.36 to our Form S-1).(2)
10.22	—	Franchise Agreement, dated as of July 1, 1986, by and between The Princeton Review Management Corp. and Lloyd Eric Cotsen (Lecomp Company, Inc.) (incorporated herein by reference to Exhibit 10.39 to our Form S-1).
10.23	—	Franchise Agreement, dated as of September 13, 1986, by and between The Princeton Review Management Corp. and Robert Case, Richard McDugald and Kevin Campbell (Test Services, Inc.) (incorporated herein by reference to Exhibit 10.40 to our Form S-1).

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Exhibit
Number		Description
10.24	—	Addendum to the Franchise Agreement, dated as of May 31, 1995, by and between The Princeton Review Management Corp. and the persons and entities listed on the Franchisee Joinders (incorporated herein by reference to Exhibit 10.41 to our Form S-1).
10.25	—	Formation Agreement, dated as of May 31, 1995, by and among The Princeton Review Publishing Company, L.L.C., The Princeton Review Publishing Co., Inc., the Princeton Review Management Corp. and the independent franchisees (incorporated herein by reference to Exhibit 10.42 to our Form S-1).
10.26	—	Distance Learning Waiver, dated as of June 21, 2000, by and between Princeton Review Management, L.L.C. and Lecomp, Inc. (incorporated herein by reference to Exhibit 10.44 to our Form S-1).
10.27	—	Pledge and Security Agreement, dated as of September 19, 2000, by and between Steven Hodas and The Princeton Review, Inc. (incorporated herein by reference to Exhibit 10.45 to our Form S-1)
10.28	—	Promissory Note, dated as of September 19, 2000, made by Steven Hodas in favor of The Princeton Review, Inc. (incorporated herein by reference to Exhibit 10.46 to our Form S-1).
10.29	—	Non-Recourse Promissory Note, dated August 15, 2001, made by Bruce Task in favor of The Princeton Review, Inc. (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 000-32469) for the third quarter of 2001, filed with the Securities and Exchange Commission on November 13, 2001 (the “2001 Third Quarter Form 10-Q”)).
10.30	—	Pledge and Security Agreement, dated as of August 15, 2001, by and between Bruce Task and The Princeton Review, Inc. (incorporated herein by reference to Exhibit 10.2 to our 2001 Third Quarter Form 10-Q).
10.31	—	Non-Recourse Promissory Note, dated November 27, 2001, made by Mark Chernis in favor of The Princeton Review, Inc. (incorporated by reference to Exhibit 10.53 of our Annual Report on Form 10-K for the year ended December 31, 2001).
10.32	—	Pledge and Security Agreement, dated as of November 27, 2001, by and between Mark Chernis and The Princeton Review, Inc. (incorporated by reference to Exhibit 10.54 of our Annual Report on Form 10-K for the year ended December 31, 2001).
10.33	—	Non-Recourse Promissory Note, dated March 7, 2002, made by Mark Chernis in favor of The Princeton Review, Inc. (incorporated by reference to Exhibit 10.55 of our Annual Report on Form 10-K for the year ended December 31, 2001).
10.34	—	Agreement, dated as of May 28, 2004, by and between The Princeton Review, Inc. and Fletcher International, Ltd. (incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K (File No. 000-32469), filed with the Securities and Exchange Commission on June 9, 2004).
10.35	—	Lease, dated as of August 1, 2004, by and between The Rector, Church-Wardens and Vestrymen of Trinity Church in the City of New York, as Landlord and The Princeton Review, Inc., as Tenant. (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 000-32469) for the third quarter of 2004, filed with the Securities and Exchange Commission on November 9, 2004).
10.36	—	Amendment to Employment Agreement, dated September 12, 2005, between The Princeton Review, Inc. and Stephen Melvin (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 0000-32469) for the third quarter of 2005, filed with the Securities and Exchange Commission on November 9, 2006).
10.37	—	Employment Agreement, dated September 9, 2005, between The Princeton Review, Inc. and Andrew Bonanni (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q (File No. 0000-32469) for the third quarter of 2005, filed with the Securities and Exchange Commission on November 9, 2006).
10.38	—	Office Lease Extension, dated November 18, 2005, as amended, by and between The Princeton Review, Inc. and 2315 Broadway Realty Co.(*)
21.1	—	Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 21.1 of our Annual Report on Form 10-K for the year ended December 31, 2004)
23.1	—	Consent of Ernst & Young LLP.(**)
24.1	—	Powers of Attorney(*)
31.1	—	Certification of CEO Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(**)
31.2	—	Certification of CFO Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(**)
32.1	—	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(**)

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(1)	Incorporated herein by reference to the exhibit with the same number to our Registration Statement on Form S-1 (File No. 333-43874), which was declared effective on June 18, 2001.
(2)	Confidential portions of this document are omitted pursuant to a request for confidential treatment that has been granted by the Commission, and have been filed separately with the Commission.
(*)	Previously filed with original Annual Report on Form 10-K.
(**)	Filed herewith.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 23, 2007.

The Princeton Review, Inc.
By:	/s/Stephen Melvin
	Stephen Melvin
	Chief Financial Officer and
	Treasurer

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