Princeton Review (REVU) 10-Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

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 incorporation or organization)	(I.R.S. Employer 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

     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 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 Company had 27,601,268 shares of $0.01 par value common stock outstanding at March 16, 2007.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	3
Item 1. Condensed Consolidated Financial Statements	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Operations	4
Condensed Consolidated Statements of Cash Flows	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosures about Market Risk	17
Item 4. Controls and Procedures	17
PART II. OTHER INFORMATION	18
Item 1. Legal Proceedings	18
Item 1A. Risk Factors	18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3. Defaults Upon Senior Securities	18
Item 4. Submission of Matters to a Vote of Security Holders	19
Item 5. Other Information	19
Item 6. Exhibits	21
SIGNATURES	22
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATIONS
EX-32.1: CERTIFICATION

3

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except per share data)

	September 30,			December 31,
	2006			2005
	(unaudited)			As Restated
ASSETS:
Current assets:
Cash and cash equivalents	$	8,368		$	8,002
Accounts receivable, net of allowance of $1,298 in 2006 and $1,601 in 2005		20,856			22,493
Accounts receivable-related parties		207			1,591
Other receivables, principally related parties		624			813
Inventory		2,861			2,798
Prepaid expenses		1,873			2,229
Other current assets		1,203			1,307
Total current assets		35,992			39,233
Furniture, fixtures, equipment and software development, net		16,512			16,155
Goodwill		31,506			31,506
Investment in affiliates		1,889			1,938
Other intangibles, net		12,174			13,371
Other assets		4,000			3,168
Total assets	$	102,073		$	105,371
LIABILITIES & STOCKHOLDERS’ EQUITY:
Current liabilities:
Line of credit	$	10,000		$	—
Accounts payable		3,265			10,449
Accrued expenses		11,538			10,826
Current maturities of long-term debt		1,264			1,530
Deferred income		20,101			16,548
Total current liabilities		46,168			39,353
Deferred rent		2,559			2,327
Long-term debt		1,945			2,845
Fair value of derivatives and warrants		94			393
Series B-1 Preferred Stock, $0.01 par value; 10,000 shares authorized; 6,000 shares issued and outstanding at September 30, 2006 and 10,000 shares issued and outstanding at December 31, 2005		6,000			10,000
Stockholders’ equity
Preferred stock, $0.01 par value; 4,990,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 27,577,312 and 27,572,172 issued and outstanding at September 30, 2006 and December 31, 2005, respectively		276			276
Additional paid-in capital		116,959			116,279
Accumulated deficit		(71,629	)		(65,823	)
Accumulated other comprehensive loss		(299	)		(279	)
Total stockholders’ equity		45,307			50,453
Total liabilities and stockholders’ equity	$	102,073		$	105,371

See accompanying notes to the condensed consolidated financial statements.

4

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
				As Restated						As Restated
Revenue
Test Preparation Services	$	25,008		$	26,748		$	71,753		$	70,263
K-12 Services		7,330			5,280			24,031			20,322
Admissions Services		3,574			2,767			9,265			7,606
Total revenue		35,912			34,795			105,049			98,191
Cost of revenue
Test Preparation Services		8,372			7,979			23,636			21,441
K-12 Services		5,446			2,841			15,030			9,845
Admissions Services		1,501			1,159			4,288			2,942
Total cost of revenue		15,319			11,979			42,954			34,228
Gross Profit		20,593			22,816			62,095			63,963
Operating expenses		22,833			22,154			66,970			63,489
Income (loss) from operations		(2,240	)		662			(4,875	)		474
Interest income (expense)		(168	)		(44	)		(390	)		(312	)
Other income (expense)		17			942			(78	)		1,485
Equity in the income (loss) of affiliates		—			(71	)		(51	)		(232	)
Income (loss) before income taxes		(2,391	)		1,489			(5,395	)		1,415
(Provision) benefit for income taxes		—			—			—			—
Net income (loss)		(2,391	)		1,489			(5,395	)		1,415
Dividends and accretion on Series B-1 Preferred Stock		(106	)		(640	)		(411	)		(1,899	)
Income (loss) attributed to common stockholders	$	(2,497	)	$	849		$	(5,806	)	$	(483	)
Basic income (loss) per share	$	(0.09	)	$	0.03		$	(0.21	)	$	(0.02	)
Diluted income (loss) per share	$	(0.09	)	$	0.03		$	(0.21	)	$	(0.02	)
Weighted average shares used in computing loss per share
Basic income (loss) per share		27,575			27,571			27,574			27,570
Diluted income (loss) per share		27,575			28,733			27,574			27,570

See accompanying notes to the condensed consolidated financial statements.

5

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)

	Nine Months Ended September 30,
	2006			2005
				As restated
Cash flows provided by (used for) operating activities:
Net income (loss)	$	(5,806	)	$	(483	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,748			1,304
Amortization		5,317			4,237
Bad debt expense		1,002			326
Write-off of deferred financing costs		—			117
Write-off of inventory		280			42
Deferred rent		231			707
Stock based compensation		660			—
Other, net		718			1,451
Net change in operating assets and liabilities:
Accounts receivable		2,207			989
Inventory		(343	)		(1,819	)
Prepaid expenses		356			151
Other assets		(1,648	)		(942	)
Accounts payable and accrued expenses		(6,473	)		(3,247	)
Deferred income		3,553			(1,654	)
Net cash provided by (used for) operating activities		1,802			1,179
Cash provided by (used for) investing activities:
Purchases of furniture, fixtures, equipment and software development		(5,178	)		(5,407	)
Additions to capitalized K-12 content, capitalized course costs		(1,046	)		(3,945	)
Payment of related party loan		491			—
Payment of note receivable		266			—
Payment of loan receivable		250			250
Landlord construction contribution		—			892
Net cash provided by (used for) investing activities		(5,217	)		(8,210	)
Cash flows provided by (used for) financing activities:
Redemption of Series B-1 Preferred Stock		(4,377	)		—
Proceeds (payments) from revolving credit facility		10,000			(2,000	)
Notes issued in connection with sale of rights to franchisees		—			(703	)
Payment of credit facility deferred financing costs		(284	)		—
Capital lease payments		(606	)		(527	)
Dividends on Series B-1 Preferred Stock		(411	)		(386	)
Notes payable related to acquisitions		(561	)		(1,078	)
Proceeds from exercise of options		20			15
Net cash provided by (used for) financing activities		3,781			(4,679	)
Net decrease in cash and cash equivalents		366			(11,710	)
Cash and cash equivalents, beginning of period		8,002			19,197
Cash and cash equivalents, end of period	$	8,368		$	7,487

See accompanying notes to the condensed consolidated financial statements.

6

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Basis of Presentation

     The accompanying unaudited interim consolidated financial statements include the accounts of The Princeton Review, Inc. and its wholly-owned subsidiaries, The Princeton Review Canada Inc. and Princeton Review Operations L.L.C., as well as the Company’s national advertising fund (together, the “Company”).

     The following unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures reflect all adjustments, consisting only of normal recurring accruals, that are, in the opinion of management, necessary for a fair presentation of the interim financial statements and are adequate to make the information not misleading. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2005 included in the Company’s Annual Report on Form 10-K/A, as filed with the Securities and Exchange Commission. The results of operations for the three-month and nine-month periods ended September 30, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Products and Services

     The following table summarizes the Company’s revenue and cost of revenue for the three-month and nine-month periods ended September 30, 2006 and 2005:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
			(in thousands)
Revenue
Services	$	31,743	$	30,061	$	89,590	$	83,658
Products		2,272		1,987		9,362		7,552
Other		1,897		2,747		6,097		6,981
Total revenue	$	35,912	$	34,795	$	105,049	$	98,191
Cost of Revenue
Services	$	13,924	$	11,017	$	38,241	$	30,817
Products		1,368		818		4,365		2,977
Other		27		144		348		434
Total cost of revenue	$	15,319	$	11,979	$	42,954	$	34,228

     Services revenue includes course fees, professional development, subscription fees and marketing services fees. Products revenue includes sales of workbooks, test booklets and printed tests, sales of course material to independently owned franchisees and fees from a publisher for manuscripts delivered. Other revenue includes royalties from independently owned franchisees and royalties and marketing fees received from publishers.

Stock-Based Compensation

     Prior to January 1, 2006, the Company accounted for the issuance of stock options under the recognition and measurement provisions of Accounting Principles Board (“APB”) No. 25,Accounting for Stock Issued to Employees, and related interpretations, as permitted by FASB Statement No. 123,Accounting for Stock-Based Compensation. No stock-based employee compensation cost was recognized in the Statement of Operations for the three and nine months ended September 30, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provision of FASB Statement No. 123(R),Share-Based Payment, using the modified-prospective transition method. Under that transition method, compensation cost recognized for the three and nine months ended September 30, 2006 includes: (a) compensation cost of all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost of all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of Statement 123(R). Results of prior periods have not been restated.

7

     As a result of adopting Statement 123(R) on January 1, 2006, the Company’s loss before taxes and net loss for the three and nine months ended September 30, 2006, is $360,000 and $660,000 greater than if it had continued to account for share-based compensation under APB 25. Basic and diluted loss per share for the three and nine months ended September 30, 2006 are $0.01 and $0.02 greater than if the Company had continued to account for share-based compensation under APB 25.

     Prior to the adoption of Statement 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. Because of the Company’s historical net losses, and the uncertainty as to the realizability of its tax benefits, no tax benefits have been recorded.

     The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of Statement 123(R) to options granted under the Company’s stock option plan for the three and nine months ended September 30, 2005. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing formula and amortized to expense over the options’ vesting periods.

	Three Months			Nine Months
	Ended			Ended
	September 30, 2005			September 30, 2005
	(In thousands, except per share amounts)
	As restated
Income (loss) attributed to common stockholders, as reported	$	849		$	(483	)
Total stock-based employee compensation expense determined under fair-value based method for all awards		(468	)		(1,423	)
Pro forma net income (loss) attributed to common stockholders	$	381		$	(1,906	)
Net income (loss) per share:
Basic and diluted, as reported	$	0.03		$	(0.02	)
Basic and diluted, pro forma	$	0.01		$	(0.07	)

Adoption of New Accounting Pronouncements

     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 a correction of errors made in fiscal years beginning after December 15, 2005 and does not have a significant impact on the Company’s consolidated financial statements.

     Other recently issued accounting pronouncements include the following:

• Financial Accounting Standards Board (“FASB”) Staff Position FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period”(October 2005);

• FASB Staff Position FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (November 2005);

• FASB Staff Position FIN 45-3, “Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners” (November 2005); and,

• FASB SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (February 2006).

• FASB FIN 48,“Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109” (June 2006).

     The Company does not expect these pronouncements to have a significant impact on its consolidated financial statements.

Use of Estimates

     The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) 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, fair value of assets and liabilities and money back guarantees. Actual results could differ from those estimated.

8

Reclassifications

     Certain balances have been reclassified to conform to the current quarter’s presentation.

2. Restatement of Prior Year 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 5 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.

     We have determined that these embedded derivatives and the warrant require different accounting treatment and disclosures from that previously used in our SEC filings. Accordingly, the Company has restated its financial statements to separately account for the embedded derivatives and the purchase warrant based on the following analysis:

Embedded Derivatives

     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 a 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.

9

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 derivatives 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 for the three and nine months ended September 30, 2005 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 of ranging from 25%–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 two years at September 30, 2006.

     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 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 assumption 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 of ranging from 25%–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
Three Months ended September 30, 2005(in thousands, except per share data)	Reported			As Restated
Other income (expense)	$	921		$	942
Net income		1,471			1,489
Dividends and accretion on Series B-1 Preferred Stock		(206	)		(640	)
Income attributable to common stockholders		1,265			849
Income (loss) per common share – basic	$	0.05		$	0.03
Income (loss) per common share – diluted	$	0.04		$	0.03

	As Previously
Nine Months ended September 30, 2005(in thousands, except per share data)	Reported			As Restated
Other income (expense)	$	925		$	1,485
Net income		856			1,415
Dividends and accretion on Series B-1 Preferred Stock		(599	)		(1,899	)
Net loss attributable to common stockholders		257			(483	)
Income (loss) per common share – basic	$	0.01		$	(0.02	)
Income (loss) per common share – diluted	$	0.01		$	(0.02	)

10

	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
Nine Months ended September 30, 2005(in thousands)	Reported		As Restated
Cash flow from operating activities:
Net income	$	856	$	(483	)
Other, net		114		1,451

     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-l 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-l 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. Stock-Based Compensation

Stock Incentive Plan

     The Company’s 2000 Stock Incentive Plan (as amended and restated on March 24, 2003) (“the Plan”), which is shareholder-approved, initially permitted grants of incentive stock options, non-qualified stock options, restricted stock and deferred stock to eligible participants for up to 2,538,000 shares of common stock, as adjusted. On various dates, beginning in September 2000 through September 2006, an additional 2,675,744 shares were authorized. The Company believes that such awards better align the interest of its employees with those of its shareholders.

     The compensation cost charged against income for all plans was $360,000 and $660,000 for the three and nine months ended September 30, 2006. Due to the Company’s historical net losses, and the uncertainty as to the realizability of its tax benefits, no income tax benefit has been recognized in the statement of operations for this share-based compensation arrangement.

Stock Options

     Options granted under the 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 Plan generally vest quarterly over two to four years. As of September 30, 2006, there were approximately 975,132 shares available for grant.

     The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model that uses assumptions noted in the following table. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock, and other factors. The Company uses historical data to estimate option exercise and forfeiture within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The key assumptions used to value the options are as follows:

	Nine Months Ended September 30,
	2006			2005
Assumptions
Expected volatility		42	%		56	%
Risk-free rate		5.00	%		4.50	%
Expected dividends		0	%		0	%
Expected term (in years)		5.0			5.0

     A summary of option activity under the Plan as of September 30, 2006, and changes during the period then ended are presented below:

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						Weighted-
						Average		Aggregate
				Weighted-		Remaining		Intrinsic
	Options			Average		Contractual		Value
	Outstanding			Exercise Price		Term		($ 000)
Outstanding at January 1, 2006		3,298,494		$	7.00
Granted at Market		133,320		$	6.00
Exercised		(5,140	)	$	2.87
Forfeited		(82,820	)	$	7.51
Outstanding at September 30, 2006		3,343,854		$	6.95		5.78	$	550
Exercisable at September 30, 2006		2,869,830		$	7.05		5.32	$	544

     The weighted average fair value of options granted during the nine months ended September 30, 2006 was $2.87. The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $3,700.

     As of September 30, 2006, there was $2.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 4.0 years. The total fair value of shares vested during the three and nine months ended September 30, 2006 was $120,000 and $360,000 respectively.

     As discussed in our Amendment No. 1 to the 2005 Annual Report on Form 10-K/A our 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. The effect of this acceleration was to reduce stock-based compensation expense that would otherwise have been reported in future statements of operations by approximately $1.6 million.

Performance Stock Awards

     In May 2006, the Board of Directors approved the granting of Performance-Based Deferred Stock awards under the Plan. Awards were made to selected executives and other key employees. Vesting of the awards is based on a progressive scale (“threshold,” “target,” and “maximum”), contingent upon meeting company-wide performance goals related to earnings per share and return on asset targets in the two year performance period ending December 31, 2007.

     The value of each Performance-Based Deferred Stock award was estimated on the date of grant and assumes that performance goals will be achieved at targeted amounts. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed. The expected term for Performance-Based Deferred Stock awards under the Plan is two years.

     At September 30, 2006, 90,100 Performance-Based Deferred Stock awards were issued and outstanding. As of September 30, 2006, there was $390,000 of unrecognized compensation cost related to the Performance-Based Deferred Stock award; that cost is expect to be recognized over a period of 1.6 years.

Restricted Stock Awards

     In May 2006, the Board of Directors approved the granting of Restricted Stock awards under the Plan. Awards were made to selected key employees whose vesting is contingent upon retention at the end of the two year period ending May 5, 2008. At the end of the vesting period the Restricted Stock shall vest and the restrictions shall terminate.

     The value of each Restricted Stock award was estimated on the date of grant and assumes that the employee will remain with the Company. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed. The expected term for the Restricted Stock award is two years.

     At September 30, 2006, 63,030 shares of Restricted Stock were awarded and outstanding. As of September 30, 2006, there was $261,000 of unrecognized compensation cost related to the Restricted Stock awards; that cost is expected to be recognized over a period of 1.6 years.

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4. Line of Credit

     In February 2005, the Company repaid the entire outstanding balance and terminated the three-year revolving credit facility the Company had entered into in May of 2004 with Commerce Bank, N.A. 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.

Credit Agreement

     On April 10, 2006, the Company entered into a Credit Agreement (the “Credit Agreement”), among the Company, Princeton Review Operations, L.L.C., a wholly owned subsidiary of the Company (“Operations”), Golub Capital CP Funding, LLC and such other lenders who become signatory from time to time, and Golub Capital Incorporated (“Golub”), as Administrative Agent.

     The Credit Agreement provides for a revolving credit facility with a term of five years and a maximum aggregate principal amount of $6.0 million (the “Credit Facility”). Operations is a guarantor of the Company’s obligations under the Credit Agreement. As of the date of execution, Golub Capital CP Funding is the only lender party to the Credit Agreement.

     Outstanding amounts under the Credit Facility bear interest at rates based on either (A) 350 basis points over the London Interbank Offered Rate (“LIBOR”) or (B) 145 basis points over the greater of the prime rate and the Federal Funds Rate plus 50 basis points, at the election of the Company.

     The Company’s borrowings under the Credit Facility are secured by a first priority lien on all of the Company’s and Operations’ assets. In addition, the Company pledged all of its equity interests in its subsidiaries, and all other equity investments held by the Company to Golub as security for the Credit Facility.

     The Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, limits on the Company’s ability to make investments and incur indebtedness and liens, maintenance of a minimum level of EBITDA of the Company’s Test Preparation Services Division, and maintenance of a minimum net worth. The Credit Agreement contains customary events of default for facilities of this type (with customary grace periods and materiality thresholds, as applicable) and provides that, upon the occurrence and continuation of an event of default, the interest rate on all outstanding obligations will be increased and payment of all outstanding loans may be accelerated and/or the lenders’ commitments may be terminated.

     On May 25, 2006, the Company entered into an amendment to the Credit Agreement (the “First Amendment”). The First Amendment increased the amount available to the Company under the Credit Facility from a maximum of $6.0 million to $10.0 million for the purpose of financing the redemption of certain shares of Preferred Stock held by Fletcher International, Ltd. and to fund the Company’s working capital needs.

     The First Amendment increased the annual interest rate of the Credit Facility. Outstanding amounts under the Credit Facility bear interest at rates based on either (A) 195 basis point over the greater of the prime rate and the Federal Funds Rate plus 50 basis points (up from the prior 145 basis points) or (B) 400 basis points over LIBOR (up from the prior 350 basis points), at the Company’s election and in accordance with the terms of the Credit Agreement.

     On November 3, 2006, the Company entered into an amendment to the Credit Agreement (the “Second Amendment”). The Second Amendment increased the amount available to the Company under the Credit Facility from a maximum of $10.0 million to $15.0 million for a period not to exceed sixty (60) days from the Effective Date to fund the Company’s working capital needs. After sixty (60) days from the Effective Date, the amount by which outstanding amounts under the Credit Facility exceed $10.0 million must be repaid, or converted into a term loan. The term of the Credit Facility remains unchanged at five years from the date of the original Credit Agreement. The Company drew down the full additional $5.0 million under the Credit Facility on November 3, 2006.

     Under the Second Amendment, outstanding amounts under the Credit Facility up to $10.0 million bear the same annual interest rate as under the Credit Agreement prior to the Second Amendment. Outstanding amounts under the Credit Facility in excess of $10.0 million bear the following annual interest rates: either (A) 400 basis points over the greater of the prime rate and the

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Federal Funds Rate plus 50 basis points or (B) 500 basis points over LIBOR, at the Company’s election and in accordance with the terms of the Credit Agreement.

     In addition to increasing the amount available to the Company under the Credit Facility, the Lenders waived any events of default that may have resulted from the Company’s decision to restate its financial statements to correct its accounting for the Preferred Stock.

     The line of credit continues to be secured by a first priority lien on all of the Company’s and Operation’s assets, as well as by a pledge by the Company of its equity interests in Operations and The Princeton Review Canada, Inc. The Second Amendment did not materially alter the existing covenants contained in the Credit Agreement. (See Note 10).

5. 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% (6.5% at September 30, 2006), 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 September 30, 2006 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 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 September 30, 2006 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.

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     For the three and nine months ended September 30, 2006, dividends of approximately $106,000 and $411,000 were paid to the Series B-1 Preferred Stockholder. For the three and nine Months ended September 30, 2005, dividends of approximately $135,000 and $386,000 were paid to the Series B-1 Preferred Stockholder.

     Redemptions

     On May 1, 2006 the Company received a notice from Fletcher pursuant to which Fletcher elected to redeem 2,000 shares of the Company’s Series B-1 Preferred Stock. In accordance with the terms and conditions of the Agreement, dated as of May 28, 2004, pursuant to which the Company issued the Series B-1 Preferred Stock to Fletcher, the Company redeemed such shares in cash, rather than common stock on May 31 2006. Pursuant to the agreement, a premium of $190,000 was paid at the time of the redemption.

     On May 3, 2006, the Company received a second notice from Fletcher pursuant to which Fletcher elected to redeem an additional 2,000 shares of Series B-1 Preferred Stock. The Company also redeemed such shares in cash, rather than common stock on June 2, 2006. Pursuant to the agreement, a premium of $187,000 was paid at the time of the redemption.

6. Segment Information

     The Company’s operations are aggregated into four reportable segments. The operating segments reported below are the segments of the Company for which separate financial information is available and for which operating income is evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.

     The following segment results include the allocation of certain information technology costs, accounting services, executive management costs, legal department costs, office facilities expenses, human resources expenses and other shared services, which prior to January 1, 2006 were almost fully allocated out to the divisions on a broadly defined consumption basis. Beginning January 1, 2006, the Company refined its allocation methodology, which resulted in lower allocations to the divisions and more retained in unallocated corporate costs. The purpose was to have the divisional costs more in line with equivalent bought-in third party services. In addition, the Company reclassified certain commissions from cost of revenue to operating expenses. The prior periods have been restated to reflect these changes. The impact of these changes was an increase in segment operating income of $ 1.8 million and $5.3 million for Test Preparations Services, $1.0 million and $2.9 million for K-12 Services and $917,000 and $2.5 million for Admissions Services for the three and nine months ended September 30, 2005, respectively. The Corporate segment operating loss increased by $3.8 million and $10.7 million for the three and nine months ended September 30, 2005, respectively.

     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 K-12 Services division earns fees from assessment, intervention materials sales and professional development services it renders to K-12 schools and from its content development work. The Admissions Services division earns revenue from subscription, transaction and marketing fees from higher education institutions, counseling services and from selling advertising and sponsorships. Additionally, each division earns royalties and other fees from sales of its books published by Random House. (See Note 10).

     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 for 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 (loss) as an indicator of the Company’s operating performance, or as an alternative to any other measure of performance calculated in conformity with GAAP.

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	Three Months Ended September 30, 2006
	(in thousands)
	Test
	Preparation		K-12			Admissions
	Services		Services			Services			Corporate			Total
Revenue	$	25,008	$	7,330		$	3,574		$	—		$	35,912
Operating expense (including depreciation and amortization)		11,178		4,641			2,106			4,908			22,833
Operating income (loss)		5,458		(2,756	)		(34	)		(4,908	)		(2,240	)
Depreciation and amortization		421		994			487			503			2,405
Other income (expense)		—		—			—			17			17
Segment EBITDA	$	5,879	$	(1,763	)	$	453		$	(4,387	)	$	182
Expenditures for long lived assets	$	236	$	1,973		$	238		$	645		$	3,092

	Three Months Ended September 30, 2005
	(in thousands)
	Test
	Preparation		K-12			Admissions
	Services		Services			Services			Corporate			Total
Revenue	$	26,748	$	5,280		$	2,767		$	—		$	34,795
Operating expense (including depreciation and amortization)		10,959		3,707			2,123			5,365			22,154
Operating income (loss)		7,810		(1,268	)		(515	)		(5,365	)		662
Depreciation and amortization		440		700			466			316			1,922
Other income (expense) (as restated)		—		990			(39	)		(80	)		871
Segment EBITDA	$	8,250	$	422		$	(88	)	$	(5,129	)	$	3,455
Expenditures for long lived assets	$	424	$	294		$	279		$	462		$	1,459

													��
	Nine Months Ended September 30, 2006
	(in thousands)
	Test
	Preparation		K-12			Admissions
	Services		Services			Services			Corporate			Total
Revenue	$	71,753	$	24,031		$	9,265		$	—		$	105,049
Operating expense (including depreciation and amortization)		34,482		13,492			6,100			12,896			66,970
Operating income (loss)		13,635		(4,491	)		(1,123	)		(12,896	)		(4,875	)
Depreciation and amortization		1,531		2,732			1,461			1,342			7,066
Other income (expense)		—		—			—			(129	)		(129	)
Segment EBITDA	$	15,166	$	(1,759	)	$	338		$	(11,683	)	$	2,062
Expenditures for long lived assets	$	641	$	3,043		$	463		$	2,076		$	6,223

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	Nine Months Ended September 30, 2005
	(in thousands)
	Test
	Preparation		K-12			Admissions
	Services		Services			Services			Corporate			Total
Revenue	$	70,263	$	20,322		$	7,606		$	—		$	98,191
Operating expense (including depreciation and amortization)		30,360		11,823			6,330			14,976			63,489
Operating income (loss)		18,460		(1,346	)		(1,664	)		(14,976	)		474
Depreciation and amortization		1,351		1,979			1,288			921			5,539
Other income (expense) (as restated)		—		990			(39	)		302			1,253
Segment EBITDA	$	19,811	$	1,623		$	(415	)	$	(13,753	)	$	7,266
Expenditures for long lived assets	$	672	$	5,353		$	1,294		$	2,033		$	9,352

Reconciliation of operating income (loss) to net income (loss) (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Total income (loss) from reportable segments	$	(2,240	)	$	662		$	(4,875	)	$	474
Unallocated amounts:
Interest income (expense)		(168	)		(44	)		(390	)		(312	)
Other income (expense)		17			942			(78	)		1,485
Equity in loss of affiliate		—			(71	)		(51	)		(232	)
Net income (loss)	$	(2,391	)	$	1,489		$	(5,395	)	$	1,415

7. 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) attributed 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 and dividends related to convertible securities are added back to net income (loss) attributed to common stockholders. The calculation of diluted net income (loss) per share excludes potential common shares if the effect is antidilutive. During the periods presented in which the Company reported a net loss, shares of convertible securities and stock options that would be dilutive were excluded because to include them would have been antidilutive.

     For the three and nine months ended September 30, 2006 and 2005, 27,574,450 and 27,569,764 and 27,573,317 and 27,569,764 common shares were used in the computations of net loss per share, respectively. Excluded from the computation of diluted net loss per common share because of their antidilutive effect were 1,068,773 and 1,447,592 shares of common stock issuable upon conversion of Series B-1 Preferred Stock and 175,927 and 166,534 stock options for the three and nine months ended September 30, 2006, respectively and 1,007,303 and 1,007,303 shares of common stock issuable upon conversion of Series B-1 Preferred Stock and 112,578 and 117,962 stock options for the three and nine months ended September 30, 2005, respectively.

8. Comprehensive Income (Loss)

     The components of comprehensive (loss) for the three and nine-months ended September 30, 2006 and 2005 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	(in thousands)
				As Restated						As Restated
Net income (loss) attributable to common stockholders	$	(2,497	)	$	849		$	(5,806	)	$	(483	)
Foreign currency translation adjustment		5			(16	)		(20	)		(39	)
Total comprehensive income (loss)	$	(2,492	)	$	833		$	(5,826	)	$	(522	)

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9. Restructuring

     In April 2006, the Company announced and commenced implementation of a restructuring program. The Company completed among other things, a streamlining of its software development groups and a reduction in staff in some administrative functions. The restructuring charge recorded during the second quarter of 2006 was approximately $827,000 and consisted primarily of severance-related payments. Approximately $677,000 has been paid out and the remaining $150,000 will be paid over the next six months.

10. Subsequent Events

Disposition of a Business

     On February 16, 2007, the Company completed its sale of certain assets of the Company’s Admissions Services Division to Embark Corp., a Delaware corporation. Pursuant to an Asset Purchase Agreement, the Company sold to Embark Corp. the assets related to providing electronic application and prospect management tools to schools and higher education institution customers (the “Admissions Tech Business”). The purchase price consisted of $7,000,000, subject to customary closing adjustments. Additionally, the Company will be entitled to an earn-out of up to an additional $1.25 million based upon certain achievements of the Admissions Tech Business in 2007. The Company expects to record a gain on the sale of these assets in the range of $2 million to $4 million.

Amendment to Credit Facility

     On February 16, 2007, the Company entered into a further amendment of its Credit Agreement with Golub (the “Third Amendment”). Under the terms of the Second Amendment, the amount of the Credit Facility was temporarily increased by $5.0 million (from an aggregate total of $10.0 million to $15.0 million) and such increased amount had to be either repaid by the Company or converted into a term loan on March 3, 2007. In lieu of this obligation to repay this amount or convert this amount into a term loan on such, date, the Third Amendment requires the Company to (i) repay to Golub $3.0 million from the proceeds of the sale of the Admissions Tech Business and (ii) set the amount of the Credit Facility at $12.0 million. This $3 million payment was made by the Company on February 19, 2007.

     The term of the Credit Facility remains unchanged at five years from the date of the original Credit Agreement. However, the Third Amendment increased the annual interest rate of the Credit Facility. Outstanding amounts under the Credit Facility up to $10,0 million bear interest at rates based on either (A) 300 basis points (up from 195 basis points) over the greater of (x) the prime rate and (y) the Federal Funds Rate plus 50 basis points or (B) 400 basis points over the London Interbank Offered Rate (“LIBOR”) (the same rate as previously in effect), at the Company’s election and in accordance with the terms of the Credit Agreement. Outstanding amounts under the Credit Facility in excess of $10.0 million (or the borrowing base amount, if lower) bear the following annual interest rates: either (A) 400 basis points over the greater of (x) the prime rate and (y) the Federal Funds Rate of 50 basis points or (B) 500 basis points over the LIBOR rate, at the Company’s election and in accordance with the terms of the Credit Agreement.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     All statements in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 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 demand for our products and services; our ability to compete effectively and adjust to rapidly changing market dynamics; the timing of revenue recognition from significant contracts with schools and school districts; market acceptance of our newer products and services; continued federal and state focus on assessment and remediation in K-12 education; and the other factors described under the caption “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2005 filed with the SEC. 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.

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 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 franchisees, which provide classroom-based courses under the Princeton Review brand. Since 2004, this division has also been providing Supplemental Educational Services (“SES”) programs to students in public school districts. This division has historically accounted for the majority of our overall revenue and accounted for approximately 68.0% of our overall revenue in the first nine months of 2006.

     The K-12 Services division provides a number of services to K-12 schools and school districts, including assessment, professional development and intervention materials (workbooks and related products). As a result of the increased emphasis on accountability and the measurement of student performance in public schools, this division continues to see growing demand by the public school market for its products and services as evidenced by the number of new contracts and the continued growth in sales prospects.

     Until February, 2007, the Admissions Services division derived most of its revenue from the sale of web-based admissions and related application management products and marketing services to educational institutions (“Higher Education Services”). Additionally, this division has seen growth in revenue from its counseling services business. In February, 2007, we sold our web-based admissions and application management business for $7.0 million in cash and a potential earn-out of up to $1.25 million. The remaining businesses operated by our Admissions Services division (higher education marketing, counseling, and admissions-related publications) are expected to be integrated into our two other divisions over the next several months.

     In the first quarter of 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R),Share-Based Payment.The resulting financial impact from this adoption is described in Notes 1 and 3 to the condensed consolidated financial statements.

     In April 2006, the Company announced and commenced implementation of a restructuring program. The Company completed among other things, a streamlining of its software development groups and a reduction in staff in some administrative functions. The restructuring charge recorded during the second quarter of 2006 was approximately $827,000 and consisted primarily of severance-related payments.

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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 rights are required to be recorded as liabilities at fair value, and adjusted to their fair values in subsequent periods. Accordingly, we are restated our financial statement to reflect this accounting treatment.

     As a result of the restatement, a gain on derivative instruments was recorded for the three and nine months ended September 30, 2005 of $17,000 and $560,000, respectively. The restatement increased the reported net loss attributable to common stockholders by $0.01 for the year ended December 31, 2006 and 2005, respectively.

     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” under Notes to Consolidated Financial Statements included in Part I “Financial Information” of this Form 10-Q.

Results of Operations

Comparison of Three Months Ended September 30, 2006 and 2005

     Revenue

     For the three months ended September 30, 2006, total revenue increased by $1.1 million, or 3.2%, from $34.8 million in 2005 to $35.9 million in 2006.

     Test Preparation Services revenue decreased by $1.7 million, or 6.5%, from $26.7 million in 2005 to $25.0 million in 2006. This decrease is due to lower retail high school course revenue, primarily related to the SAT student enrollment, which has decreased by $1.3 million. Retail LSAT revenue decreased by $417,000 compared to prior year. Institutional revenue decreased $572,000, offset by higher tutoring revenue of $566,000.

     K-12 Services revenue increased by $2.0 million, or 38.8%, from $5.3 million in 2005 to $7.3 million in 2006. This increase is primarily related to an increase in assessment services revenue of $2.1 million. Professional development revenue declined by $293,000 and intervention revenue remained flat.

     Admissions Services revenue increased by $806,000, or 29.1%, from $2.8 million in 2005 to $3.6 million in 2006. This increase is due to an increase in higher education technology revenue of approximately $486,000 and higher marketing revenue of approximately $630,000. Partially offsetting this is a reduction of $335,000 in counseling revenue.

     Cost of Revenue

     For the three months ended September 30, 2006, total cost of revenue increased by $3.3 million, or 27.9%, from $12.0 million in 2005 to $15.3 million in 2006.

     Test Preparation Services cost of revenue increased by $392,000, or 4.9%, from $8.0 million in 2005 to $8.4 million in 2006. This increase is due to an increase in total teacher pay of approximately $140,000 and $186,000 in higher institutional cost of revenue. Gross margin declined from 70% to 67% primarily due to retail revenue reduction representing a 1.2% decline, higher course guarantee expense representing a 0.7% decline, a $300,000 SES revenue adjustment representing a 0.5% decline and site rent increase representing a 0.3% decline.

     K-12 Services cost of revenue increased by $2.6 million, or 91.7%, from $2.8 million in 2005 to $5.4 million in 2006. Assessment costs increased by $2.3 million, intervention costs increased by $614,000 and professional development costs were lower by $514,000. Gross margin declined from 46.2% to 25.7%. The decline in gross margin is primarily related to the timing of revenue recognition for the Philadelphia Extended Day contract, with respect to which approximately $1.4 million of revenue will be recognized during the fourth quarter. This has a negative margin impact of approximately 12 %. Additional gross margin decline is due to start up and printing related costs for services and products which we will deliver during the fourth quarter. For the third quarter this has a negative margin impact of approximately 4% and 2%, respectively, and the higher mix of assessment services revenue contributed another 2% in margin decline.

     Admissions Services cost of revenue increased by $343,000, or 29.6%, from $1.1 million in 2005 to $1.5 million in 2006 due to normal volume increases. Gross margin remained relatively flat year over year.

     Operating Expenses

     For the three months ended September 30, 2006, operating expenses increased by $679,000, or 3.1%, from $22.1 million in 2005 to $22.8 million in 2006.

• Test Preparation Services operating expenses increased by $218,000, or 2.0%, from $10.9 million in 2005 to $11.2 million in 2006. This increase is primarily related to higher SES professional fees.

• K-12 Services increased by $935,000, or 25.2%, from $3.7 million in 2005 to $4.6 million in 2006. This increase is related to higher salaries and related expenses of $675,000 and higher third party professional fees of approximately 184,000 related to software maintenance and support.

• Admissions Services remained flat at $2.1 million.

• Corporate operating expense decreased by $457,000, or 8.5%, from $5.4 million in 2005 to $4.9 million in 2006 due to lower professional fees of approximately $467,000.

     Other Income (Expense)

     For the three months ended September 30, 2006, other income decreased by $925,000 from $942,000 in 2005 to $17,000 in 2006. During the third quarter of 2005, we sold the right to sell SES services to four of our independent franchisees for approximately $1.0 million.

Comparison of Nine Months Ended September 30, 2006 and 2005

     Revenue

     For the Nine Months ended September 30, 2006, total revenue increased by $6.8 million, or 7.0%, from $98.2 million in 2005 to $105.0 million in 2006.

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     Test Preparation Services revenue increased by $1.5 million, or 2.1%, from $70.3 million in 2005 to $71.7 million in 2006. Retail course revenue decreased by $2.5 million driven by lower SAT course revenue. Tutoring increased by $623,000 and institutional sales increased by $3.3 million inclusive of a $2.4 million SES increase.

     K-12 Services revenue increased by $3.7 million, or 18.3%, from $20.3 million in 2005 to $24.0 million in 2006. Assessment services revenue increased by $3.8 million, intervention revenue increased by $491,000 and book sales increased by $1.4 million. Professional development decreased by $1.2 million.

     Admissions Services revenue increased by $1.6 million or 21.8%, from $7.6 million in 2005 to $9.3 million in 2006. Higher education technology revenue increased by $681,000, counseling increased by $612,000 and higher education marketing services increased by $468,000.

     Cost of Revenue.

     For the nine months ended September 30, 2006, total cost of revenue increased by $8.7 million, or 25.4%, from $34.2 million in 2005 to $42.9 million in 2006.

     Test Preparation Services cost of revenue increased by $2.2 million, or 10.2%, from $21.4 million in 2005 to $23.6 million in 2006. This increase is due to an increase in site rent of $403,000, $176,000 in course guarantee expense, $295,000 in administrative pay and higher institutional costs of $1.0 million. Gross margin declined by 2.3 % from 69.4% to 67.1%, due to year to date SES mix, representing approximately a 1 % decline, retail revenue shortfall representing approximately a 0.7 % reduction and an increase in site rent representing approximately a 0.3% decrease.

     K-12 Services cost of revenue increased by $5.2 million, or approximately 52.7%, from $9.8 million in 2005 to $15.0 million in 2006. Gross margin declined by 14.1%, from 51.6% to 37.5%. Of this decrease, 3.4% is due to the timing of revenue recognition related to the Philadelphia Extended Day contract. Third quarter start up costs for contracts to deliver services during the fourth quarter drove a year-to-date margin decline of 1% with the remaining margin decline due to the year over year change in product mix related to higher assessment services revenue.

     Admissions Services cost of revenue increased by $1.3 million, or 45.8%, from $2.9 million in 2005 to $4.3 million in 2006. Gross margin declined by 7.6%, from 61.3% to 53.7% primarily due to lower margins related to higher educational services revenue.

     Operating Expenses

     For the nine months ended September 30, 2006, operating expenses increased by $3.5 million, or 5.5%, from $63.5 million in 2005 to $67.0 million in 2006.

• Test Preparation Services increased by $4.1 million, or 13.6%, from $30.4 million in 2005 to $34.5 million in 2006. Salaries and related costs increased by approximately $2.0 million as a result of the timing of the hiring of new employees, part time support costs, bonus payments and commissions. Bad debt expense increased approximately $432,000 primarily related to the write-off of a large institutional contract. Professional fees increased by $811,000, due primarily to SES related legal fees and third party SES commissions. Corporate allocations increased approximately $950,000 related to technology, legal and facility charges. A restructuring charge of approximately $237,000 was also recorded. Depreciation increased by $180,000 over prior year.

• K-12 Services increased by $1.7 million, or 14.1%, from $11.8 million in 2005 to $13.5 million in 2006. Salaries and related costs increased by approximately $1.5 million related to 2005 second half new hires, and part time employees. Restructuring costs of approximately $150,000 were also recorded.

• Admissions Services decreased by $230,000, or 3.6%, from $6.3 million in 2005 to $6.1 million in 2006. This decrease is primarily the result of a reduction in salary and related costs of approximately $140,000 and lower professional fees of $83,000. Restructuring costs of approximately $40,000 were recorded.

• Corporate decreased by $2.1 million, or 13.9%, from $15.0 million in 2005 to $12.9 million in 2006. Professional service fees decreased by $2.1 million, salaries and related expense decreased by $567,000 and restructuring costs of approximately $397,000 were recorded. Depreciation increased by $420,000.

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     Other Income (Expense)

     For the nine months ended September 30, 2006, other income decreased by $1.6 million from income of $1.5 million in 2005 to an expense of $78,000 in 2006. The change resulted from sale of SES rights in 2005 for approximately $1.0 million, the premium paid to Fletcher International, Ltd. of approximately $377,000 related to the redemption of 4,000 shares of the Company’s Series B-1 Preferred Stock and lower income of approximately $261,000 from the change in the fair value of derivatives and warrant.

     Income Taxes

     The estimated effective tax rate used in 2006 and 2005 would have been approximately 40%. During the first nine months of 2006 we continued to record a valuation allowance against the increase in our deferred tax asset. If we achieve profitability, any tax provision recorded as a result of these pre-tax profits will be offset by a reversal of the tax valuation allowance previously recorded, which reversal would be for the same amount as the provision.

Liquidity and Capital Resources

     Our primary sources of liquidity are cash and cash equivalents on hand, collections from customers and the credit facility described below. At September 30, 2006, we had $8.4 million of cash and cash equivalents compared to $8.0 million at December 31, 2005. The $0.4 million increase in cash from the December 31, 2005 balance is primarily attributed to cash provided by operations of $1.8 million and $3.8 million from financing activities, offset by expenditures related to investing activities of $5.2 million (primarily $5.2 million in fixed assets and software development and $1.0 million in capitalized content) offset by payments received on various notes.

     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 schools and school districts and post-secondary institutions, 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 the first nine months of 2006, cash provided by operating activities was $1.8 million, consisting primarily of $7.1 million of depreciation and amortization, increases in accounts receivable of $2.2 million, $3.6 million in deferred income and $1.0 million in bad debt expense, offset by a reduction of $6.5 million in accounts payable and accrued expenses. During the first nine months of 2005, cash provided by operating activities resulted from $5.5 million of depreciation and amortization offset by an increase in inventory, primarily related to SideStreets, a reduction in accounts payable and accrued expenses of $3.2 million and a decrease in deferred income of approximately $1.7 million.

     During the first nine months of 2006, we used $5.2 million in cash for investing activities as compared to $8.2 million used during the comparable period in 2005 as part of a planned reduction in capital spending in 2006. In 2006, additions to internally developed software make up most of the balance. In 2005, investments in furniture, fixtures, equipment, software and content make up most of the balance.

     Financing cash flows consist primarily of transactions related to our debt and equity structure. There were financing additions of approximately $3.8 million in the first nine months of 2006 compared to a net usage of $4.0 million during the comparable period in 2005. During the second quarter, we borrowed $10 million under a new credit facility. Of this amount, $4.4 million was used to redeem 4,000 shares of Series B-1 Preferred Stock. The remaining amount borrowed under the credit facility will be used for working capital purposes. For a description of our credit facility, see Note 4 to our condensed consolidated financial statements included in this Form 10-Q. During the first nine months of 2005, we repaid approximately $2.0 million of the indebtedness we had borrowed under a previously existing credit facility.

     In November 2006, we amended our credit agreement, which increased the amount available to $15 million to further fund our working capital needs.

     We believe that our cash balances, together with cash generated from operations, should be sufficient to meet our normal operating requirements for at least the next 12 months. Our future capital requirements will depend on a number of factors, including market acceptance of our products and services and the resources we devote to developing, marketing, selling and supporting these products and services.

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 revenue grows, we expect this revenue will be concentrated in the fourth and first quarters, or to more closely reflect the after school programs’ greatest activity during the school year. The electronic application revenue recorded in our Admissions Services division is highest in the first and fourth quarters, corresponding with the

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busiest times of the year for submission of applications to academic institutions. Our K-12 Services division may also experience seasonal fluctuations in revenue, which is dependent on the school year, and it is expected that the revenue from new school sales during the year will be recognized primarily in the fourth quarter and the first quarter of the following year.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

     Included in our cash and cash equivalents are short-term money market funds. The fair value of these money market funds 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. Our Series B-1 Preferred Stock requires the payment of quarterly dividends at the greater of 5% or 1.5% above 90-day LIBOR. During the nine months ended September 30, 2006, we paid dividends on the Series B-1 Preferred Stock in an aggregate amount of $411,000 at the rate of 6.7% per year. A 100 basis point increase in the dividend rate would have resulted in a $62,000 increase in dividends paid during this period. Borrowings under our credit facility, entered into on April 10, 2006, bear interest at rates based on either 400 basis points over the LIBOR rate or 195 basis points over the greater of the prime rate and the Federal Funds Rate, plus 50 basis points, at our election. During the nine months ended September 30, 2006, we paid interest on borrowings under our credit facility in an aggregate amount of $388,000 at a weighted average interest rate of 9.2%. A 100 basis point increase in the interest rate would have resulted in a $41,800 increase in interest paid during this period.

     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.

Item 4. Controls and Procedures

          We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act, (“Disclosure Controls”) as of the end of the period covered by this Quarterly Report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

Scope of the Controls Evaluation

          The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the controls 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 evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the 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.

Conclusions

          As described in Item 9A of the Company’s Amendment No. 1 to its 2005 Annual Report on Form 10-K/A, filed on March 23, 2007 (“Form 10-K/A”), management identified a material weakness in internal control over financial reporting which existed as of December 31, 2005. This material weakness was identified in the area of derivative financial instruments in response to a comment letter from the SEC. As a result of this material weakness, a restatement of our consolidated financial results for the quarterly and year-to-date periods ended September 30, 2005 was necessary. Accordingly, our CEO and CFO concluded that our Disclosure Controls were not effective as of the end of the period covered by this Quarterly 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.

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     Changes in Internal Control over Financial Reporting

     During the period covered by this Report, we have continued to implement a new accounting and financial reporting system. Extensive training sessions have been held with all employees who are impacted by the new system with an emphasis on the systems increased functionality along with controls related to processing in all areas. The Company has also reviewed and documented controls around the new system.

     Except as described above, there has been no other change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On September 10, 2003, CollegeNET, Inc. filed suit in Federal District Court in Oregon, alleging that The Princeton Review infringed a patent owned by CollegeNET, U.S. Patent No. 6,460,042 (“the ‘042 Patent”), related to the processing of on-line applications. CollegeNET never served The Princeton Review and no discovery was ever conducted. However, apparently based on adverse rulings in related lawsuits concerning the same ‘042 Patent (the “Related Litigation”), CollegeNET dismissed the 2003 case against The Princeton Review without prejudice on January 9, 2004.

On August 2, 2005, the Court of Appeals for the Federal Circuit issued an opinion favorable to CollegeNET in its appeal from the adverse rulings in the Related Litigation.

The next day, on August 3, 2005, CollegeNET again filed suit against The Princeton Review alleging infringement of the same ‘042 Patent that was the subject of the earlier action. On November 21, 2005, CollegeNET filed an amended complaint, which added a second patent, U.S. Patent No. 6,910,045 (“the ‘045 Patent”), to the lawsuit. The Princeton Review was served with the amended complaint on November 22, 2005, and filed its answer and counterclaims on January 13, 2006, which was later amended on February 24, 2006. On March 20, 2006 filed its Reply to The Princeton Review’s Counterclaims. CollegeNET seeks injunctive relief and unspecified monetary damages.

The Princeton Review filed a request with the United Stated Patent and Trademark Office (“PTO”) for ex parte reexamination of CollegeNET’s ‘042 Patent on September 1, 2005. The Princeton Review filed another request with the PTO for ex parte reexamination of CollegeNET’s ‘045 Patent on December 12, 2005. The PTO granted The Princeton Review’s requests and ordered reexamination of all claims of the CollegeNET ‘042 patent on October 31, 2005 and ordered reexamination of all claims of the ‘045 Patent on January 27, 2006.

On March 29, 2006, the court granted The Princeton Review’s motion to stay all proceedings in the lawsuit pending completion of the PTO’s reexaminations of the CollegeNET patents. On November 9, 2006, the PTO issued a Non-Final Office Action rejecting all 44 claims of the ‘042 Patent. On January 9, 2007, CollegeNet filed a response to the Non-Final Office Action with the PTO. Because this proceeding is at a relatively preliminary stage, we are unable to predict its outcome with any degree of certainty. However, The Princeton Review believes that it has meritorious defenses to CollegeNET’s claims and intends to vigorously defend.

Item 1A. Risk Factors

     There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2005.

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

     Not applicable.

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Item 3. Defaults Upon Senior Securities

     Not applicable.

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

     None

Item 5. Other Information

     Not applicable.

Item 6. Exhibits

Exhibit
Number		Description
10.48	—	Amendment to Employment Agreement, dated September 25, 2006, between The Princeton Review, Inc. and Andrew Bonnani (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-32469), filed with the Securities and Exchange Commission on September 27, 2006).
31.1	—	Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	—	Certification 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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SIGNATURES

Pursuant to the requirements 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.

THE PRINCETON REVIEW, INC.
By:	/s/ STEPHEN MELVIN
	Stephen Melvin
	Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial and Accounting Officer)

March 23, 2007

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