**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.  20549**

**FORM 10-K**
|            | **(Mark One)** |
|------------|----------------|
|       |
| **x**      | ** **     | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |           |   |
|       |           | **For the fiscal year ended December  31, 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 0-17840** |

 

**NEW HORIZONS WORLDWIDE, INC.**(Exact name of Registrant as specified in its charter)

| **Delaware**                                                   | ** ** | **22-2941704**                        |
|----------------------------------------------------------------|------------|---------------------------------------|
| (State of other  jurisdiction of                               |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                                |       |                                  |
|                                                           |       |                                  |
| **1900 S.  State College Blvd., Suite 650, Anaheim, CA 92806** |
| (Address of  principal executive offices)                      |

 

Registrant’stelephone number, including area code:             **(714) 940-8000**

Securitiesregistered pursuant to Section 12(b) of the Act:   **None**

Securitiesregistered pursuant to Section 12(g) of the Act:   **Common Stock, No Par Value**

Indicate by checkmark if registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

Yes o  No x.

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.

Yes o  No x.

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes o  No x.

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule12b-2 of the ExchangeAct.
| Large Accelerated Filer o |   | Accelerated Filer o |   | Non-accelerated Filer x. |
|---------------------------|--------|---------------------|--------|--------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined by Rule 12b-2 of the Act)

Yes o  No x.

The aggregate value of voting common stock of the registrant held bynon-affiliates was approximately $6,984,622 (based upon the closing price of$0.80 per share of the of the registrant’s common stock on the OTC “Pink Sheets”as of June 30, 2006). For purposes of making this calculation, the registranthas defined affiliates as including all executive officers, directors andbeneficial owners of more then 10% of the common stock of the registrant.

The number of shares of the registrant’s common stock outstanding as ofJune 15, 2007 was 10,770,353.

**DOCUMENTS INCORPORATED BYREFERENCE**

None

 

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**NEW HORIZONS WORLDWIDE, INC.INDEX TO ANNUAL REPORTON FORM 10K**
| PART I    |
|-----------|
|      |   |   |   |   |
|      |   | Information  About Forward Looking Statements |   |   |
|      |   |   |   |   |
| Item  1.  |   | Business |   |   |
|      |   |   |   |   |
| Item  1A. |   | Risk  Factors |   |   |
|      |   |   |   |   |
| Item 1B.  |   | Unresolved  Staff Comments |   |   |
|      |   |   |   |   |
| Item  2.  |   | Properties |   |   |
|      |   |   |   |   |
| Item 3.   |   | Legal Proceedings |   |   |
|      |   |   |   |   |
| Item 4.   |   | Submission  of Matters to a Vote of Security Holders |   |   |
|      |   |   |   |   |
| PART II   |
|      |   |   |   |   |
| Item 5.   |   | Market for  Registrant’s Common Equity, Related Stockholder |   |   |
|      |   | Matters and  Issuer Purchases of Equity Securities |   |   |
|      |   |   |   |   |
| Item 6.   |   | Selected  Financial Data |   |   |
|      |   |   |   |   |
| Item 7.   |   | Management’s  Discussion and Analysis of |   |   |
|      |   | Financial  Condition and Results of Operations |   |   |
|      |   |   |   |   |
| Item 7A.  |   | Quantitative  and Qualitative Disclosures About Market Risk |   |   |
|      |   |   |   |   |
| Item 8.   |   | Financial  Statements and Supplementary Data |   |   |
|      |   |   |   |   |
| Item 9.   |   | Changes in  and Disagreements with Accountants |   |   |
|      |   | on  Accounting and Financial Disclosure |   |   |
|      |   |   |   |   |
| Item 9A.  |   | Controls and  Procedures |   |   |
|      |   |   |   |   |
| PART III  |
|      |   |   |   |   |
| Item 10.  |   | Directors,  Executive Officers and Corporate Governance |   |   |
|      |   |   |   |   |
| Item 11.  |   | Executive  Compensation |   |   |
|      |   |   |   |   |
| Item 12.  |   | Security  Ownership of Certain Beneficial Owners |   |   |
|      |   | and Management  and Related Stockholder Matters |   |   |
|      |   |   |   |   |
| Item 13.  |   | Certain  Relationships and Related Transactions, and Director |   |   |
|      |   | Independence |   |   |
|      |   |   |   |   |
| Item 14.  |   | Principal  Accountant Fees and Services |   |   |

 

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| PART IV        |
|----------------|
|           |   |   |   |   |
| Item 15.       |   | Exhibits  and Financial Statement Schedules |   |   |
|           |   |   |
| Signatures     |   |   |
|           |   |   |
| Exhibit Index  |   |   |
|           |   |   |
| Certifications |   |   |

 

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**InformationAbout Forward-Looking Statements**

This Annual Report onForm 10-K contains “forward-looking statements”, within the meaning of thePrivate Securities Reform Act of 1995, which involve risks anduncertainties.  Any statements aboutexpectations, beliefs, plans, objectives, assumptions, future events orperformance are not historical facts and are forward-looking statements.  These statements are often, but not always,preceded by words or phrases such as “may,” “should,” “could,” “predict,” “potential,”“believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “estimate,”“intend,” “plan,” “projection,” “would,” “outlook” and other similarexpressions.  The forward-lookingstatements in this report are based upon beliefs, assumptions and expectationsof the Company’s management as to the Company’s future operations and economicperformance, taking into account the information currently available. Forward-lookingstatements in this report relate to the Company’s discussion of the InformationTechnology Education and Training Market for example.  These statements are not statements ofhistorical fact.  The Company’s actualresults may differ significantly from the results discussed in theforward-looking statements.  Readersshould not place undue reliance on these forward-looking statements.  Further, any forward-looking statement speaksonly as of the date on which it is made, and the Company undertakes noobligation to update any forward-looking statement or statements to reflectevents or circumstances after the date on which such statement is made or toreflect the occurrence of unanticipated events. Forward-looking involve certain factors including risks anduncertainties, that may cause actual results to differ materially from thosecontained in any forward-looking statements. These factors include but are not limited to other risks anduncertainties under the heading as discussed in Item 1A “Risk Factors,”  and other risks and uncertainties detailedfrom time to time in our pubic announcements and SEC filings.

**PART I**

**Item 1.****                       Business**

**General**

New Horizons Worldwide,Inc. and its various wholly-owned subsidiaries (the “Company” or “New Horizons”)own and franchise computer training centers.

The Company wasincorporated in Delaware on December 15, 1988, and its principal executiveoffices are located 1900 S. State College Blvd, Suite 650, Anaheim, California92806.  The Company maintains a websiteat http://www.newhorizons.com.  On thiswebsite, or through links on the “Investor Relations” section of this website,the Company makes available free of charge its annual reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K, and anyamendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d)of the Securities Exchange Act of 1934. Such material is made available through the Company’s website as soon asreasonably practicable after the Company electronically files or furnishes thematerial with the SEC.

The Company’s commonstock trades on the Pink Sheets under the symbol “NEWH.PK.”

The Company operates andfranchises computer-training centers. The Company has two reporting units: company-owned training centers andfranchising operations, both of which operate principally within theinformation technology (“IT”) training industry.  As of December 31, 2006, the company-ownedlocations reporting unit operated 6 wholly-owned computer training centerswithin the continental United States and generates revenue through the sale anddelivery of personal computing (“PC”) applications, technical software trainingcourses, business skills, healthcare information management and Englishlanguage courses.  The franchisingoperations reporting unit earns revenue through the sale of New Horizons masterand unit franchises within the United States and abroad, on-going royalties inreturn for providing franchises with systems of instruction, sales, andmanagement concepts concerning computer training, and the sale of coursewarematerials and e-learning products.  Thefranchising operations reporting unit has places of business in Anaheim,California; Leiden, The Netherlands; and Singapore.

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**IndustryOverview**

The IT training industryis highly fragmented.  The market isserved by in-house training departments; hardware and software firms that havecreated IT training products and deliver follow-up support and training;consulting firms/systems integrators; value-added resellers; and independenttraining providers, such as New Horizons.

Independent trainingproviders include those that deliver classroom-based instruction ande-learning.  In addition, the consumermarket is served by accredited academic institutions, both non-profit and forprofit.

*CustomerBase*

For twenty-five years,New Horizons global network of training centers has followed abusiness-to-business sales strategy to secure millions of customers in thesmall to medium business, large business, enterprise business, and governmentmarket segments. The Company has also developed and implemented strategies toexpand its customer base to individual consumers.

Each market segment hasdistinctly different characteristics. Consumers or non-employer sponsored individuals need general businessskills, computer application skills, technical certifications and vendorspecific skills to obtain employment in the IT industry.  Small, medium and large businesses need ITsolutions to solve specific business problems. Government agencies and enterprise customers also require IT solutionsthat are aligned with organizational needs, as well as logistical support inthe coordination of delivery of IT training in multiple locations using avariety of training modalities.

In order to effectivelysell into the consumer, small, medium and large business, government agenciesand enterprise customers segments, the Company has developed a specific salesforce for each segment consisting of seasoned professionals trained tounderstand the diverse and complex training requirements of their respectivecustomer base.  Each distinct sales forcehas gone through a tailored training program to ensure sales personnel have thenecessary skills to generate leads, identify customer needs and recommendsolutions for the specific market segment to which they are assigned.

Comprehensive researchwas completed by the Company in 2006 to gain a better understanding of thespending trends of the Company’s top customers. Using a structured process, theCompany collected information through comprehensive buyer interviews providinginsight into their buying criteria and buying processes. Top customers werealso surveyed to understand the perceptions they have of the Company and thevalue associated with the Company’s brand. Company franchise owners at different levels of maturity, all customersin various markets around the world, vendors and partners were also surveyed.The following key findings were concluded from this research:

·                  customers have committed substantialdollars towards training;

·                  customer training spending isaccelerating;

·                  customer service is a key componentto selecting a training vendor; and

·                  customersrequire customization, post-class support, predictable class schedules and atraining vendor with whom it is easy to interact.

**The Information TechnologyEducation and Training Market**

The Company believesseveral developments will positively impact the technology training market,including:

·                  General economicgrowth which will continue to have a positive and gradual impact on ITspending;

·                  Labormarket for skilled IT personnel will remain tightly competitive.

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·                  Rapid andcomplex technological changes in software operating systems, new softwaredevelopment, and technical training are driving the need for unique IT skillsets.

·                  Growth in ITspending across Asia/Pacific as well as parts of Latin America and Europe,Middle East and Africa (“EMEA”), where the Company has a strong presence, willbenefit from offshore IT services and infrastructure support.

·                  IT departmentswill look to gain further value from their existing IT investments.  Training is seen as a  the best way to improve the efficiency andeffectiveness of an IT department.

·                  E-learning willgradually continue to gather additional support and spending at the expense ofthe classroom-based training market.  NewHorizons believes that downward pressure on pricing, if any, will be offset inlarge part by economies and efficiencies that reduce delivery costs.

·                  Continueddevelopment of the Internet and web services architecture will necessitateexpanded IT training.

·                  Continuedgrowth in spending on IT security.

**New Horizons Business Model**

The business model of theCompany centers on selling franchises, providing continuous support offranchised locations and operating company-owned training centers.  The Company has created two reporting unitsto devote attention to these activities, franchise operations and company-ownedtraining centers.  The goal of each NewHorizons training center, whether company-owned or franchised, is to providepractical and innovative training solutions that help companies maximize thevalue of their IT investments and help individuals maximize their IT relatedcareer pursuits.

During the second half of2006, New Horizons initiated a comprehensive strategy planning phase. Duringthis phase, the Company took an in-depth look at its own strengths, weaknesses,opportunities and competitive threats. In order to identify critical issuesfacing New Horizons over the next five years. This allowed the Company toestablish specific goals and objectives as well as identify opportunities forthe Company’s brand and the strategies necessary to achieve the most successfuloutcome.  The Company’s core strengthsare as follows:

*Delivery Modalities*

The Company offers a mixof teaching approaches to match the accelerated pace of learning required of ITprofessionals as well as the accelerated business value required from clients’IT investments.

The Company startedtraining in 1982 with traditional classroom training and continues to offer oneof the industry’s largest number of technical training and desktop applicationscourses.  The Company also providese-learning solutions through self-paced Online ANYTIME web-based andcomputer-based training and Online LIVE, an instructor-facilitated trainingdelivered live over the internet.  TheCompany also offers customized training solutions which can be offered at acompany-owned location, franchise or on-site at the customer’s place ofbusiness.

The Company has expandedits learning offerings to include Mentored Learning, a revolutionary approachto learning that incorporates tools, technologies and a mentor in the educationand training process. It is a premium training solution incorporatingone-on-one instruction, hands-on lab exercises, multi-sensory tools, individuallearning paths and flexible scheduling.

Mentored Learningrepresents one of the fastest growing areas of opportunity for the Company. Anumber of the Company’s learning centers have built a strong and profitablebusiness around Mentored Learning . The Company has built a comprehensive modelfor the proper implementation of this learning method that has provensuccessful. A core initiative of the Company is to replicate this model in allcenters worldwide over the next 6 to 18 months.

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*Curriculum*

The Company’s size andscope provide it with the means to select, develop and deploy the high quality,practical content. The Company offers over 2,000 **courses foroffice productivity, information technology and business skills.** The Company also provides customized trainingfor customers’ proprietary software applications and can tailor curriculum tomeet specific customer needs. As customer needs evolve, the Company has addedto its course offerings.  In addition totraditional IT training courses, the Company has developed course offerings inhealth information management and English as a second language.  Furthermore, the Company has continued todevelop additional IT product offerings and certification programs, mostnotably its Network Security Expert programs.

Many of the industry’smajor software vendors do not offer training, but support their productsthrough independent training companies using a system of standards andperformance criteria. The Company is closely aligned with the IT industry inorder to support ever-changing software programs, all of which require usertraining.  Our partnerships include:Microsoft, Cisco, Citrix, Novell, Adobe, CompTIA, EC Council, SCP, ISC2,Element K, Thomson, Netg/Skillsoft, Prometric and Vue.

The Company holds thedesignation of largest training network for many of our technical andcertification vendor partner programs and is the largest training network of:

·      MicrosoftCertified Partner for Learning Solutions and Gold Certified Partner forLearning Solutions;

·      ElementK Cisco Sponsored Organization;

·      SecurityCertified Professional Authorized Training Partners;

·      CitrixAuthorized Learning Centers;

·      ECCouncil Authorized Training Partner;

·      ISC2Authorized Education Providers;

·      AuthorizedPrometric Testing Centers; and

·      Centersproviding CompTIA certification training.

Furthermore, New Horizonsis one of the world’s largest providers of vendor-neutral CompTIA certificationtraining and also offers subject-specific content that covers a multitude ofsoftware vendors.

In addition to multiplelearning options, Mentored Learning, certified instructors, broad curriculumand numerous delivery locations, the Company’s training centers are designed toprovide their customers immediate and practical value.  The Company training centers feature: (i)product offerings including technical tracks, clubs and boot-camps that allowcustomers to attend a series of classes for a discounted price; (ii) skillsassessment for standard software; (iii) flexible scheduling, including eveningand weekend classes; (iv) professional certification training; (v) theEnterprise Learning Solutions program which coordinates anational/international referral system and a delivery network of training formajor clients who have training requirements in multiple locations; and (vi)post-class resources that  assess,reinforce, support and validate the transfer of knowledge and skill to the job.

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*Locations*

New Horizons hasthe ability to deliver IT training throughout the world via its company-ownedand franchised training centers. As of December 31, 2006, the Company owned andoperated 6 training centers, all within the continental United States. The NewHorizons franchise network consists of 285 centers in 56 countries making NewHorizons the largest independent IT training company in the world per the 2006industry report from IDC, a global provider of market intelligence and researchin the information technology market.

The Company’s globalfootprint enables it to meet the needs of international and multi-nationalclients. It also has the critical mass, experience and resources to deliver asuccessful training program to a geographically dispersed audience.

**Franchising Operations BusinessModel**

New Horizons operates aglobal network of independent franchises that provide IT training and relatedservices to their customers.  The Companyinitially offered franchises for sale in 1991 and sold its first franchisein   1992.  The Company had 201 franchises plus satellitelocations operating at the end of 2006 of which 93 were in North America and108 were abroad.  New Horizonsfranchisees are given a “limited exclusive” license and are franchised toparticipate in and use the Company’s business model and sales system. Theterritory is a “limited exclusive” territory in that New Horizons agrees not toown or franchise any other New Horizons training centers within the same area,provided the franchisee operates in compliance with the terms of its franchiseagreement.

North America

*InitialFranchise Fees*

Afranchisee in the United States and Canada is charged an initial franchise feeand pay ongoing monthly royalties, which become effective at a specified periodof time shortly after the center begins operation.  The initial franchise fee is based on thesize of the territory granted, as defined in the respective franchiseagreement. In the United States and Canada, the size of a territory, andresulting initial franchise fee, is measured by the estimated number ofpersonal computers (“PCs”) within the territory as follows:
| Type   | ** ** | **# of PC’s** | ** ** | **Initial Franchise Fee** | ** ** |
|--------|------------|------------------------------|------------|-------------------------------------|------------|
| Type 1 |       | 500,000  or more             |       | $                                   | 75,000     |   |
| Type 2 |       | 250,000  to 499,999          |       | $                                   | 60,000     |   |
| Type 3 |       | 100,000  to 249,999          |       | $                                   | 40,000     |   |
| Type 4 |       | under 100,000                |       | $                                   | 20,000     |   |

 

Effective April 2007, theinitial franchise fee is based on the territory’s population, not the number ofpersonal computers.

Entrepreneurs convertingan existing training center to a New Horizons center receive a 25% reduction inthe initial fee as a conversion allowance.

The initial franchise feeis payable upon execution of the respective franchise agreement and is notrefundable under any circumstances.

*Royalties*

In addition to theinitial franchise fee, franchisees typically pay the following fees to theCompany:

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·                  a monthly continuing royalty fee,equal to the greater of a defined percentage of monthly gross revenuesaveraging 5%, or a minimum flat fee; and

·                  amonthly marketing and advertising fee equal to 1% of monthly gross revenues.

*Franchise Agreement*

Franchise agreementsgovern the relationship between the Company and its franchisees.  Franchisees are granted territories in whichto operate computer training facilities for a defined period of time.  The territory and the geographic boundariesof a territory are determined by United States Postal Service zip codes.  Unless a franchise agreement terminates or isamended by mutual agreement, a territory is not altered.  Franchisees are expected to market theirbusiness exclusively to customers located within the defined territory.

Each franchise agreementhas an initial term of ten years and is renewable in five-year increments.  The franchise is exclusive for instructor-ledtraining within the specific defined territory and is subject to a number oflimitations and conditions placed on the franchise.  These limitations and conditions include, butare not limited to: (i) staffing requirements, including a general manager anda minimum number of salespeople (“Account Executives”) based on the territorytype; (ii) a minimum number of classrooms depending on the territory type;(iii) full-time and continuous operations; (iv) a pre-defined minimum requiredcurriculum; (v) computer equipment and system requirements; (vi) signage anddisplay material requirements; (vii) minimum insurance requirements; and (viii)record keeping requirements.  NewHorizons reserves the exclusive right to deliver New Horizons branded e-learningwithin all territories on behalf of the franchise network.  New Horizons and its franchisees have revenuesharing arrangements for sales of New Horizons e-learning offerings sold in afranchisee’s territory.  In addition,there are certain restrictions on the franchisees’ rights to transfer thefranchise license.  New Horizons alsomaintains a “right of first refusal” if a transfer effects a change of controlof the franchise.  The agreement alsocontains default and termination remedies.

The franchise agreementincludes non-competition restrictions which prohibit franchisees for one yearafter termination from: (i) competing with New Horizons during the term of thefranchise agreement and for one year after termination of the franchise withina 25 mile radius of any New Horizons center; (ii) diverting or attempting todivert any customer or business of the franchise business to any competitor;(iii) performing any act that is injurious or prejudicial to the goodwillassociated with New Horizons service marks or operating system; and (iv)soliciting any person who is at that time employed by the New Horizons or anyof its affiliated corporations to leave his or her employment.

Franchisees generallyhave six months from the date of the execution of the franchise agreement toopen a center and to commence operations.

International

*Initial Franchise Fees*

Initial franchisee feesand territories for international franchises are market/country specific.  Internationally, the Company has unitfranchises and master franchises.  Masterfranchise agreements provide franchisees with the right to award subfranchisesto other parties within a particular region. The master franchisee pays an initial master franchise fee based uponthe expected number of subfranchises to be sold and the size of the market.

The initial franchise feeis payable upon execution of the franchise agreement and is not refundableunder any circumstances.  Unit franchiseagreements have substantially the same terms as the master franchise agreements.

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*Royalties*

In addition to theinitial franchise fee, international franchisees typically pay the followingfees to New Horizons:

·                  Unit Franchisees – a monthlycontinuing royalty fee, equal to the greater of a defined percentage of monthlygross revenues averaging 5%, or a minimum flat fee.

·                  MasterFranchisees – 40% of royalties received from their unit subfranchises, plusroyalties on their owned centers averaging 5% of monthly gross revenues.

*Master Franchise Agreement*

Master franchiseagreements govern the relationship between the Company and its masterfranchisees.  Upon the execution of amaster franchise agreement, a master franchisee receives a territory, which istypically a country or a region encompassing multiple countries.  The territory is a “limited exclusive”territory in that New Horizons agrees not to own or franchise any other NewHorizons training center, provided the franchisee operates in compliance withthe terms of its respective master franchise agreement.  Unless the master franchise agreementterminates or is amended by mutual agreement, a territory is not altered.  Franchises are expected to market theirbusiness exclusively to customers located within the defined territory.  Under the master franchise agreement, themaster franchisee may license and service a number of third party unitsubfranchises operated by persons other than the master franchisee, asspecified in the master franchise agreement, and own and operate at least oneNew Horizons location under a separate unit franchise agreement.  The master franchisee is responsible for thepre-opening and ongoing support of the subfranchises.  The Company shares in the proceeds of thesubsequent sub-franchises sales with the master franchisee.  Each master franchise agreement runs for aninitial term of ten years and is renewable for one additional ten-yearterm.  The master franchisee is expectedto: (i) grant unit subfranchises in a form of subfranchise agreement asapproved by New Horizons; (ii) perform and enforce against each unitsubfranchise the terms of any unit subfranchise agreement it enters into; (iii)provide the initial training in the New Horizons system to each unitsubfranchise; and (iv) provide ongoing support, consulting and assistance toeach Unit Subfranchise after the initial training.  For these obligations the master franchiseeretains 60% of the initial franchise fees and the ongoing royalties receivedfrom its unit subfranchises.

Franchisees generallyhave six months from the date of the execution of the franchise agreement toopen a center and to commence operations.

*Franchise Support*

In return for the initialfranchise fee and monthly royalty fees, the Company provides franchisees withthe following services, products, and managerial support: (i) two weeks ofinitial franchise training at the Company’s operating headquarters in Anaheim,California, and one week of field training at the franchisee’s location; (ii)franchise and sales system information contained in the Company’s ConfidentialOperations Manual and other training manuals; (iii) ongoing operating supportvia on-site visits from Regional Franchise Support Managers; (iv) access totroubleshooting and business planning assistance; (v) access to the ELS programwhich coordinates a national/international referral system and delivery networkof training for major clients, which have training requirements in multiplelocations; (vi) periodic regional and international meetings and conferences;(vii) advisory councils and monthly communications; (viii) periodic trainingsessions delivered over the Internet for franchise staff; (ix) periodicclassroom training events for franchise staff delivered at the corporateheadquarters in Anaheim and (x) product, program or operational support viatelephone from New Horizons personnel; and (xi) access to Company developed andmaintained Center Management System (“CMS”) business support IT system andother proprietary processes.

*Courseware Sales and Other*

The Company earns revenuefrom the sale of courseware to franchises, administrative fees from themanagement of the ELS program, and application service provider fees and/orlicense fees for the Center Management System software program.

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**Customers**

The Company’s customersare predominantly employer-sponsored individuals from a wide range of publicand private corporations, service organizations and government agencies andmunicipalities seeking to improve and/or maintain the IT skills of theiremployees and consumers who are looking to gain additional skills to grow theircareer or change their career by gaining new IT skills.

The Company has segmentedits customers into the following categories: consumers, small-sized businesses(companies with revenues between $10 and $100 million and 50 –100 employees),medium businesses (companies with revenues between $100 million and $1 billionand 500 – 5,000 employees), enterprise-sized businesses (companies with revenueover $1 billion and over 5,000 employees) and government agencies. Each segmenthas distinctly different selection criteria for training. Consumers primarilyneed certification training for software and operating systems and technologytraining for the advanced technologist to gain employment in the IT industry orgrow his or her IT career. Businesses require technology training for theadvanced technologist as well as certification training but also requiredesktop applications training. Businesses also require training solutions thatare aligned with the businesses’ strategic goals.  These solutions can range from the relativelysimple to very complex. Both consumers and business rate quality of instructorsand content, client service and successful outcomes as the main criteria whenselecting a learning provider. Enterprise and government clients also requiretraining solutions that can be successfully implemented on a global scale

No single customeraccounted for more than 10% of New Horizons revenues in 2006.

**Sales and Marketing**

The Company utilizes a consultative salesmodel in order to fully understand client business and training issues. Thiscollaborative approach with clients allows the sales representative to identifyopportunities for solving these issues through the many training offerings theCompany provides.  This sales model also servesto build relationships with clients, garnering repeat business by not onlyselling training but providing client service throughout the entire trainingproject. According to a client survey conducted in the second half of 2006,client service is a key selection criterion when selecting a training vendor.In order to further penetrate each market segment, the Company will continue toexpand its client service capabilities with strategies, tools, technology,processes and resources that further increase the ease of doing business withthe Company.

The target sales areas for sales andmarketing representatives are primarily local and regional.  Sales opportunities that involve national andinternational accounts, and involve delivery of training at multiple locations,are supported by sales personnel within the Company’s Enterprise LearningSolutions (“ELS”) program.

The ELS program isdesigned to market computer training services to government agencies andcommercial customers that have dispersed domestic and/or internationalfacilities and training needs.  Thisprogram provides New Horizon’s national and international customers with asingle point of contact to the entire New Horizon’s network of training andsupport services.

All sales functions aresupported by a wide breadth of marketing tools including web sites, printedmaterial, email marketing, event marketing tools, public relations and tradeshow support.

**Competition**

The IT training industryis highly competitive, highly fragmented, has low barriers to entry and has nosingle competitor which accounts for a dominant share of the market.  The Company competes with in-house trainingdepartments, independent education and training organizations, computer retailers,computer resellers and others.  Theemergence of technology-based training has segmented the IT training industrybetween entities that offer e-learning products, instructor-led training, orblended solutions like those offered by the Company.

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Periodically, some ofthese competitors offer instruction and course content similar to those offeredby New Horizons at lower prices.  Inaddition, some of these competitors may have greater financial strength andresources than New Horizons. The Company recognizes that the emergence oftechnology-based training, primarily consisting of e-learning andcomputer-based training, is an important and growing competitive development inthe industry.

*In-House Training Departments*

In-house trainingdepartments provide companies with the highest degree of control over thedelivery and content of IT training, allowing for customized instructiontailored to specific needs.  However,according to IDC, the demand for outsourced training is expected to grow asmore companies switch to outside training organizations for their real-timetraining needs and course development, to broaden the range of contentavailable to their employees, and to control overhead costs of in-houseinstructors’ salaries and benefits.

*Independent TrainingOrganizations*

Independent trainingorganizations are generally small and focus on local or regional markets.  The Company competes directly with thesefirms, as well as national and international firms and networks in theinstructor-led training market.  Thelarger national and international firms or networks include Learning Tree,Global Knowledge, Azlan, NIIT, Aptech, Informatics and United Training.  These firms or networks provide similarcurriculum and operate in many of the same markets as New Horizons.

*Technology-Based Training*

In 2001, the Companyintroduced its e-learning product offering with Online LIVE, its synchronousvirtual classroom product (i.e., webinar training), and Online ANYTIME, itsasynchronous self-paced product.  TheCompany’s primary competitors in the e-learning environment include Skillsoft,NETg and Element K.

The Company believes itsfuture success depends on, among other factors, the market’s continuedacceptance of instructor-led training as the preferred delivery method for ITtraining and the Company’s ability to successfully capitalize on the potentialof blended solutions that combine instructor-led training with technology-basedtraining delivery methods.  An offeringthat the Company believes addresses this market need is the Company’sproprietary Mentored Learning Program. The combination of the Company’s market presence, the depth and breadthof its course offerings, its ability to provide multiple delivery options, itscentralized control of contracting with and delivery to national orinternational customers, its status as the world’s largest network of GoldMicrosoft Partners for Learning Solutions, and its organized and disciplinedsales system distinguishes the Company from its competitors.

**Employees**

As of December 31, 2006,the Company employed a total of 359 individuals in its corporate operations andcompany-owned facilities.  Of theseemployees, 73 are instructors, 88 are account executives and 198 areadministrative and executive personnel. New Horizons also utilizes the services of outside contract instructorsto teach certain primarily technical certification programs that requirecertified instructors with specialized skills.

None of New Horizons’semployees are represented by  labororganizations or covered by collective bargaining agreements.  New Horizons has not experienced workstoppages and considers relations with its employees to be good.

**Regulations**

The offer and sale offranchises and business opportunities are subject to regulation by the UnitedStates Federal Trade Commission, as well as many state and foreign jurisdictionregulation.  Numerous state laws alsoregulate

9

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the ongoing relationshipsbetween franchisors and franchisees, including the termination, transfer, andrenewal of franchise rights.

The failure to complywith these laws could adversely affect the Company’s operations.

**Insurance**

The Company maintainsliability insurance in amounts it believes to be adequate based on the natureof its business.

While the Companybelieves that it operates its business safely and prudently, there can be noassurance that liabilities incurred with respect to a particular claim will becovered by insurance or, if covered, that the dollar amount of such liabilitieswill not exceed coverage limits.

**Trademarks**

The Company has trademarkregistrations for the trademark “*New Horizons”*and for other trademarks incorporating the words “*New Horizons”*,including *“New Horizons Classroom Learning”, “New HorizonsOnline Live Learning”, “New Horizons Online Anytime Learning”*, and *“New Horizons Integrated Learning.”*  Additionally, the Company has pendingtrademark applications for *“Mentored Learning”*,*“Online Live”* and *“LearningPort”.*   The Company believesthat the New Horizons**name andtrademarks are important to its business. The Company is not aware of any pending or threatened claims ofinfringement or challenges to the Company’s right to use the New Horizons nameand trademarks in its business.  However,the Company has been previously advised that it cannot register the trademark “*New Horizons*” in certain foreign countries.  The Company believes that the inability toregister certain of its trademarks in certain foreign countries will not have amaterial adverse effect on its financial condition or results of operations.

**Item  1A.****           RiskFactors**

The following is adiscussion of certain significant risk factors that could potentiallynegatively impact our financial condition, performance and prospects.  In addition to the other informationcontained in this report, the reader should carefully consider the followingfactors in evaluating the Company.

**Risks Related to our Business andOperations**

**Failure to raise additional capital to fund futureoperations could harm our business and results of operations.**

We may be unable to raise additional capital in thefuture to meet our liquidity needs and finance our operations and futuregrowth.  We do not believe our cash andcash equivalents and our cash flow will be sufficient to meet our cashrequirements for the next twelve months. As a result, we need to raiseadditional capital or sell certain of our assets.  The sale of additional equity would result inadditional dilution to existing stockholders. Further, we may be unable to raise any such capital on acceptable terms,or at all.  Failure to raise additionalfunds may adversely affect our ability to achieve its intended businessobjectives.  The consolidated financialstatements do not include any adjustments relating to the recoverability andclassification of recorded assets or the amount or classification ofliabilities or any other adjustments that might be necessary should we beunable to continue as a going concern.

**We may not be able to achieve profitability in thefuture.**

We have incurred significant losses in 2004, 2005 and2006 and we may be unable to achieve profitability in the future.  Future revenues and profits, if any, willdepend upon various factors, including continued market acceptance of ourproducts and services.  Since 2002, wehave experienced a significant decrease in revenues.  In addition, we continue to incur significantfixed costs, including expenses for facility leases, instructors, sales

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and marketing, product development, andpersonnel.  We cannot assure ourshareholders that our business will not continue to decline or when or ifperformance will improve.  We haveexperienced recurring losses, has an accumulated deficit and negative workingcapital.  Essentially all of our assetsare encumbered and we are not able to meet some short term obligations in atimely manner.  These factors raisesubstantial doubt as to our ability to continue as a going concern.

**Fluctuations in our quarterly results mayadversely affect the implementation of our business strategy.**

Our revenues and profitability may fluctuate as aresult of many factors, including the size, timing, and product mix of ordersand the training spending patterns of our customers.  The timing of our revenues is difficult toforecast because our sales cycle is relatively long and our services areaffected by the financial conditions and management decisions of our clients,as well as general economic conditions.

We follow specific and detailed guidelines indetermining the proper amount of revenue to be recorded; however, certainjudgments such as the timing of the delivery of training to customers, affectour revenue recognition policy.  Revenueresults are difficult to predict, and any shortfall in revenue or delay inrecognizing revenue could cause our operating results to vary significantlyfrom quarter to quarter.

**Competition in our industry is intense and couldadversely affect our performance.**

Our industry is intensely competitive, rapidlyevolving, and subject to technological change. Demand for particular courseware products, systems hardware, andservices may be adversely affected by the increasing number of competitiveproducts from which a prospective customer may choose.  We compete primarily against otherorganizations offering educational and training software and services.  Our competitors include several largecompanies with substantially greater financial, technical, and marketingresources than ours such as comprehensive curriculum software publishers,companies providing single-title retail products, Internet content and serviceproviders, and computer hardware companies. Existing competitors may broaden their product lines and potentialcompetitors may enter the market and/or increase their focus on e-learning,resulting in greater competition for us. Increased competition in our industry could result in price reductions,reduced operating margins, or loss of market share, which could seriously harmour business, cash flows, and operating results.

**Failure to retain our key executives or attractand retain qualified technical personnel could harm our business and operatingresults.**

The loss of one or more of our executive officers orother key personnel could inhibit the development of our business and,accordingly, harm our business and operating results. Our future successdepends in large part on the continued service of our key technical, marketing,and sales personnel and on our ability to continue to attract, motivate, andretain highly qualified employees.  Ourkey employees may terminate their employment with us at any time.  There is competition within the industry forsuch employees and the process of locating key technical and managementpersonnel with suitable skills may be difficult and expensive.

**Our future success will depend on our ability toadapt to technological changes and meet evolving industry standards.**

We may encounter difficulties responding totechnological changes that could delay our introduction of products andservices or other existing products and services.  Our industry is characterized by rapidtechnological change and obsolescence, frequent product introduction andevolving industry standards.  Our futuresuccess will depend, to a significant extent, on our ability to enhance ourexisting products, develop and introduce new products and training methods,satisfy an expanded range of customer needs, and achieve marketacceptance.  We may not have sufficientresources to make the necessary investments to develop and implement thetechnological advances required to maintain our competitive position.

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**Unless we maintain a strong brand identity, ourbusiness may not grow and our financial results may be adversely impacted.**

We believe that maintaining and enhancing the value ofthe New Horizons brand is critical to attracting customers.  Our success in maintaining brand awarenesswill depend on our ability to continuously provide technology educationalprograms which students value.  We cannotguarantee that we will be successful in maintaining our brand equity.  In addition, to attract and retain customersand to promote and maintain the New Horizons brand, we have spent and may needto continue spending significant resources on a brand-enhancement strategy,which includes promotional programs and efforts by our field sales team andmarketing staffs.  Incremental revenuesfrom these activities may be insufficient to offset associated costs.

**Misuse or misappropriation of our proprietaryrights could adversely affect our results of operations.**

Our success depends in part on our intellectualproperty rights to the products and services that we develop.  We rely primarily on a combination ofstatutory and common law copyright, trademark and trade secret laws, customerlicensing agreements, employee and third-party nondisclosure agreements, andother methods to protect our proprietary rights.  Although we believe our products and serviceshave been independently developed and that none of our products or servicesinfringes on the rights of others, third parties may assert infringement claimsagainst us in the future.  We may berequired to modify our products, services or technologies or obtain a licenseto permit our continued use of those rights. We may not be able to do so in a timely manner or upon reasonable termsand conditions.  Failure to do so couldharm our business and operating results.

**Failure to achieve and maintaineffective internal control over financial reporting could have a materialadverse effect on our business, operating results and stock price.**

We have identifiedsignificant weaknesses in our internal controls relating to company levelcontrols, segregation of duties, revenue recognition processes, and period-endclosing processes.  As a result of theabove mentioned significant weaknesses, there is a significant possibility thatour current and future annual or internal financial statements could containmaterial misstatements.  As a result, ourbusiness and operating results could be harmed, investors and others could loseconfidence in our reported financial information, and the trading price of ourcommon stock could drop significantly.

**The Company issusceptible to business and political risks from international operations thatcould result in reduced revenues or earnings.**

We market our services worldwide.  We operate franchises in many countriesoutside the United States, which are located throughout North and SouthAmerica, Europe, the Middle East and the Asia Pacific region.  We expect to continue franchise expansion inadditional countries.  Expansion of itsexisting international operations and entry into additional countries willrequire management attention and financial resources.  In addition, there are certain risks inherentin conducting business internationally including: exposure to currencyfluctuations, longer payment cycles, greater difficulties in accountsreceivable collection, difficulties in complying with foreign laws, unexpectedchanges in legal or regulatory requirements, difficulties in staffing andmanaging foreign operations, political instability and potentially adverse taxconsequences.  To the extent that we donot manage our  international operationssuccessfully, our business could be adversely affected and its revenues andearnings could be reduced.

**Risks Relating to Ownership of OurCommon Stock**

**The trading price of our common stock may bevolatile and could decline.**

The market price for our common stock is volatile andmay decline in the future for a variety of reasons, 

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including:

·                  quarterlyvariations in our operating results;

·                  realor perceived lack of trading liquidity in the Company’s stock;

·                  aninability to attract coverage by security analysts or changes in earningsestimates by analysts;

·                  announcementsof new contracts or service offerings by us or our competitors;

·                  disputesor other developments concerning proprietary rights, including patents andlitigation matters;

·                  departuresof key personnel;

·                  announcementsby us or our competitors of significant acquisitions, strategic partnerships,joint ventures, or capital commitments; and

·                  general marketconditions.

In addition, the stock market and the Pink Sheets inparticular, have experienced significant price and volume fluctuations thathave affected the market prices of companies in recent years.  These fluctuations may continue to occur anddisproportionately impact the price of our common stock.  In the past, following periods of volatilityin the market price of a company’s securities, securities class-actionlitigation has often been instituted. This type of litigation could result in substantial costs and adiversion of management’s attention and resources, which could materiallyaffect our business, financial condition, cash flows, or results of operations.

**Our charter documents and Delaware law maydiscourage an acquisition of New Horizons that could deprive our stockholdersof opportunities to sell their shares of our common stock at prices higher thanprevailing market prices.**

Provisions of our certificate of incorporation,by-laws, and Delaware law could make it more difficult for a third party toacquire us, even if doing so would be beneficial to our stockholders.  We have issued, and may hereafter issue,shares of preferred stock without stockholder approval and upon such terms asour board of directors have negotiated. Our issuance of preferred stock could have the effect of making it moredifficult for a third party to acquire, or discourage a third party fromacquiring, a majority of our outstanding stock and potentially prevent thepayment of a premium to stockholders in an acquisition.  Our certificate of incorporation and by-lawsprovide that special stockholders meetings may be called only by our board ofdirectors. As such, any third-party takeover not supported by the board ofdirectors could be subject to significant delays and difficulties.  Further, our certificate of incorporationprovides for staggered three-year terms for our directors and for specialvoting and other requirement for business combinations with parties owning 15%or more of our common stock.  Suchprovisions also inhibit takeover efforts of third parties.

**The ability for investors to buyand sell our common stock is severely limited.**

Our common stock wasdelisted by the NASDAQ Global Stock Market on July 22, 2005 for failure tosatisfy a continued listing rule or standard. As a result, the ability of investors to buy and sell our common stockis severely restricted.

**There is only a limited marketfor our Common Stock as a “Penny Stock.”**

A limited public marketcurrently exists for our common stock on the Pink Sheets.  In the future, there can be no assurance thata more active public market for our common stock will ever develop or besustained.  Our common stock is alsosubject to the penny stock rules.  Theterm “penny stock” generally refers to low-priced, speculative securities ofvery small companies.  Before abroker-dealer can sell a penny stock, Securities and Exchange Commission(“SEC”) rules require the broker-dealer to first approve the customer for thetransaction and receive from the customer a written agreement for thetransaction.  The broker-dealer mustfurnish the customer with a document describing the risks of investing in pennystocks.  The broker-dealer must tell thecustomer the current market quotation, if any, for the penny stock and thecompensation the broker-dealer and its broker will receive for the trade.  Finally, the broker-dealer must send monthlyaccount statements showing the market value of each penny stock held in thecustomer’s account.  These requirementsmake penny stocks more difficult to trade.

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Since our Common Stock issubject to the penny stock rules, the market liquidity of our Common Stock maybe adversely affected.

**Item 1B.****              Unresolved StaffComments**

None

**Item 2.****                       Properties**

We lease approximately20,279 square feet of office space in Anaheim, California for our corporateheadquarters under a lease that expires in July 2008.  In addition, we lease facilities for ourinternational operations in Singapore, the Netherlands and for our trainingcenters.

As of December 31, 2006,New Horizons operated training centers at 13 leased facilities in California,Colorado, Indiana, New York, Illinois and Ohio, with leases that expire from2007 to 2014.  The total leased officespace of these centers is approximately 208,000 square feet. The Company is a sublessorin two of the company-owned training centers that were sold in 2006 with totalleased space of approximately 42,000 square feet. One sublease was terminatedin January 2007. The other sublease expires in 2011.

The Company believes thatits facilities are well maintained and are adequate to meet currentrequirements and that suitable substitute space will be available as needed toaccommodate any expansion of operations and for additional training centers oroffices, if necessary.

**Item 3.****                       Legal Proceedings**

(All dollars inthousands)

On February 24, 2006, theCompany reached a settlement in the amount of $850 with a plaintiff who was aformer employee of the Company.  Thesettlement was paid in installments during 2006.  The Company’s insurance carrier contributed$192 to the settlement.  In connectionwith this case, the Company accrued a loss on legal settlement of $658, whichis included within other current liabilities in the Company’s consolidatedbalance sheet as of December 31, 2005.

During the fourth quarter of 2004, the Company agreedto settle a putative class action lawsuit filed by two former employees of theCompany.  The Company settled the matterwith a class comprised of persons employed by the Company as instructors duringthe class period from July 29, 1998 through December 31, 2002.  The Company paid a settlement amount of$1,700 on May 20, 2005 to the class members in consideration of the full andfinal compromise, settlement and dismissal with prejudice of the litigation andall claims that have been or could have been asserted therein, on and subjectto the terms and conditions of a Settlement Agreement entered into on December29, 2004.

On May 10, 2004, theCompany reached a settlement of certain environmental liabilities in the amountof approximately $557 in connection with the sale of its environmentalremediation business in 1996.  Thisamount was paid during the second quarter of 2004.

The Company is involvedin various claims and legal actions arising in the ordinary course ofbusiness.  In the opinion of management,the ultimate disposition of these matters will not have a material adverseeffect on the Company’s consolidated financial position or results ofoperations.  See also Note 13 “Commitmentsand Contingencies” to the Company’s consolidated financial statements.

**Item 4.****                       SubmissionOf Matters To A Vote Of Security Holders**

No matters were submittedto a vote of security holders during the fourth quarter ended December 31,2006.

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**PART II**

**Item 5.        Market For Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

TheCompany’s common stock is traded on the Pink Sheets under the symbol “NEWH.PK.”  The following table sets forth the range ofhigh and low closing quotations per share of common stock from January 1, 2005,through December 31, 2006, as reported on the Pink Sheets.  The quotations below do not reflect theretail mark-up, markdown or commissions and may not represent actual transactions.
| 2007                    | ** ** | ** **              | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
|-------------------------|------------|-------------------------|------------|----------|------------|---------|------------|
| 1st Quarter        |       | (January  1 - March 31) |       | $        | 1.15       |    | $          | 0.80 |   |
| 2nd Quarter (Stub) |       | (April 1 - May 31)      |       | $        | 1.00       |    | $          | 0.84 |   |

 
| 2006             | ** ** | ** **                 | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
|------------------|------------|----------------------------|------------|----------|------------|---------|------------|
| 1st Quarter      |       | (January  1 - March 31)    |       | $        | 0.72       |    | $          | 0.60 |   |
| 2nd Quarter |       | (April  1 - June 30)       |       | $        | 1.01       |    | $          | 0.55 |   |
| 3rd Quarter |       | (July  1 - September 30)   |       | $        | 1.25       |    | $          | 0.75 |   |
| 4th Quarter |       | (October 1 - December  31) |       | $        | 1.15       |    | $          | 0.58 |   |

 
| 2005             | ** ** | ** **                 | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
|------------------|------------|----------------------------|------------|----------|------------|---------|------------|
| 1st Quarter |       | (January  1 - March 31)    |       | $        | 5.52       |    | $          | 3.69 |   |
| 2nd Quarter |       | (April  1 - June 30)       |       | $        | 4.40       |    | $          | 3.16 |   |
| 3rd Quarter |       | (July  1 - September 30)   |       | $        | 4.95       |    | $          | 1.95 |   |
| 4th Quarter |       | (October 1 - December  31) |       | $        | 2.80       |    | $          | 0.70 |   |

 

**Holders**

Asof June 15, 2007, the Company’s common stock was held by 395 holders of record.

**Dividend Policy**

The Companyhas never declared or paid cash dividends on its common stock and has nointention to declare or pay cash dividends in the foreseeable future.  The Company currently intends to retain anyfuture earnings to finance the growth of the Company.

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**Securities Authorized for Issuance Under EquityCompensation Plans**
| **Plan Category**                                      | ** ** | **(a)  Number of  securities to be  issued upon exercise  of outstanding  options, warrants  and rights** | ** ** | **(b)  Weighted-  average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **(c)  Number of  securities remaining  available for  future issuance  under equity  compensation  Plans (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                                                                                                                        | ** ** | ** **                                                                                                     | ** ** | ** **                                                                                                                                                                                                    | ** ** |
| Equity  compensation plans approved by security holders(1)  |       | 2,071,091                                                                                                                                         |       | $                                                                                                              | 3.77       |                                                                                                                                                                                                          | 178,909    |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                            |       | —                                                                                                         |       | —                                                                                                                                                                                                        |       |
| Total                                                       |       | 2,071,091                                                                                                                                         |       | $                                                                                                              | 3.77       |                                                                                                                                                                                                          | 178,909    |   |

 

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(1)  Represents options granted under the Company’sOmnibus Equity Plan.

SeeNote 12 “Stockholders’ Deficit” to the Company’s consolidated financialstatements for additional discussion.

**RecentSales of Unregistered Securities**

(Allnumbers in thousands, except per share data)

The Companybelieves that the transactions described below with respect to the issuance ofoption and restricted stock grants to our employees and directors were exemptfrom the registration requirements of the SEC Securities Act of 1933, (“1933Act”) by reason of section 4(2) thereunder.

·     In August 2006, the Companysold 108,695 shares of common stock at $0.92 per share which represented thePink Sheet’s market price of our common stock on the date of sale.  The sale was made to the Company’s ChiefExecutive Officer per the terms of his employment agreement dated July 5, 2006. See Item 11 to this Annual Report onForm 10-K.

·     In July 2006, the Companyentered into a credit agreement for $4,000 which included the conversion of1,638,398 shares of outstanding Series A preferred stock for 174,693 shares ofSeries B preferred stock along with the issuance of warrants to purchase2,666,667 shares of common stock at $1.50. See Note 12 “Stockholders’ Deficit” to the Company’s consolidatedfinancial statements.

**Item 6.****                       SelectedFinancial Data**

(All numbers inthousands, except per share data)

Thefollowing table presents selected financial data for 2006 along with the fourprevious fiscal years.  The selectedfinancial data has been restated from previous presentations and the effects ofthese adjustments are discussed in notes (A), (B) and (C) below.  The information set forth below should beread together with the financial statements, and related notes, attached tothis report as well as the information included in Item 7 of this report.

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| ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2003** | ** ** | **2002**    | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------|------------|-------------|------------|
| **Fiscal year ended December 31**     | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **(C)**  | ** ** | **(A)/(B)** | ** ** |
| Revenue                                                   |       | $          | 76,680     |       | $          | 106,421    |       | $        | 119,925    |        | $          | 131,396 |   | $ | 131,322 |   |
| Operating loss                                            |       | (2,415     | )          | (6,223     | )          | (22,504    | )          | (1,776   | )          | (52,645     | )          |
| Net loss attributable  to common shareholders             |       | (2,233     | )          | (9,411     | )          | (23,170    | )          | (25,523  | )          | (53,619     | )          |
| Basic loss per share  attributable to common shareholders |       | (0.21      | )          | (0.90      | )          | (2.22      | )          | (2.45    | )          | (5.20       | )          |
| Cash and cash  equivalents                                |       | 795        |       | 3,798      |       | 6,652      |       | 10,850   |       | 5,085       |       |
| Total assets                                              |       | 27,610     |       | 39,253     |       | 48,258     |       | 68,785   |       | 109,307     |       |
| Other current  liabilities                                |       | 15,243     |       | 22,355     |       | 27,272     |       | 12,284   |       | 18,228      |       |
| Stockholders equity (deficit)                             |       | $          | (4,655     | )          | $          | (3,283     | )          | $        | (1,967     | )           | $          | 21,194 |   | $ | 45,947 |   |

 

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(A)         Revenue has beendecreased by $4,381 in 2002 from amounts previously reported in the Company’sAnnual Report on Form 10-K for the Year Ended December 31, 2002, to reflect (i)the proper treatment of revenues on a net basis when the Company acts primarilyas an agent and (ii) the reclassification of the monthly marketing andadvertising fee, which is paid by the Company’s franchisees to network-widepromotions.

(B)         Operatingloss and net loss have been reduced by $342 and $226, respectively, and basicearnings per share has been increased by $0.02 per common share, from amountspreviously reported in the Company’s Annual Report on Form 10-K for the YearEnded December 31, 2002 due to the allocation of deferred rent expense fromfiscal year 2003.

(C)         See Note 2 “Prior PeriodAdjustments” and Note 3 “Supplemental Financial Information (Restated andUnaudited) to the Company’s consolidated financial statements for the yearended December 31, 2005 within our Current Report on Form 8-K dated February20, 2007.

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**Item 7.****                       Management’sDiscussion And Analysis Of Financial Condition And Results Of Operations**

**ResultsOf Operations 2006 Versus 2005**(in thousands)

**Thefollowing table sets forth certain consolidated income statement data as apercentage of net revenues:**
|                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues:                                       |       |     |       |     |       |     |       |
| Franchising                                     |       | 1        | %          | 1        | %          | 2        | %          |
| Royalties                                       |       | 22       | %          | 15       | %          | 12       | %          |
| Courseware sales and other                      |       | 14       | %          | 14       | %          | 14       | %          |
| Total  franchising revenue                      |       | 37       | %          | 30       | %          | 28       | %          |
|                                            |       |     |       |     |       |     |       |
| Company-owned training  center revenues         |       | 63       | %          | 70       | %          | 72       | %          |
| Total revenue                                   |       | 100      | %          | 100      | %          | 100      | %          |
|                                            |       |     |       |     |       |     |       |
| Cost of revenue                                 |       | 54       | %          | 55       | %          | 61       | %          |
| Selling, general  and administrative expenses   |       | 48       | %          | 49       | %          | 50       | %          |
| Impairment of  fixed assets                     |       | 1        | %          | 2        | %          | 2        | %          |
| Impairment of  goodwill                         |       | —   | %          | —   | %          | 6        | %          |
| Operating loss                                  |       | (3       | )%         | (6       | )%         | (19      | )%         |
|                                            |       |     |       |     |       |     |       |
| Other loss                                      |       | (1       | )%         | —   | %          | —   | %          |
| Gain on sale of company-owned  training centers |       | 2        | %          | —   | %          | —   | %          |
| Interest expense                                |       | —   | %          | —   | %          | —   | %          |
| Interest income                                 |       | —   | %          | —   | %          | —   | %          |
| Loss before  income taxes                       |       | (2       | )%         | (6       | )%         | (19      | )%         |
| Provision for  income taxes                     |       | (1       | )%         | (1       | )%         | —   | %          |
| Net loss                                        |       | (3       | )%         | (7       | )%         | (19      | )%         |

 

Balances of less than 1%of revenues are not disclosed in this table.

**Revenues**

Revenues totaled $76,680during the year ended December 31, 2006, a decrease of $29,741, or 28%, from$106,421 in 2005.  The decrease inrevenue is the result of a decrease in company-owned location revenue of$26,327 and a decrease in franchising revenues of $3,414.

*Company-OwnedTraining Centers*

Company-owned trainingcenters earned revenue of $48,717 for the year ended December 31, 2006, adecrease of $26,327, or 35%, from $75,044 in 2005.  The decrease is primarily due to a decreasein the number of company-owned training centers from 14 to 6 at year-end 2006,decreased consumer sales resulting from difficulty in obtaining third partyfinancing solutions, and lower corporate spending on IT training.  The Company has decided to reduce significantlythe number of company-owned training centers and to refocus its resources andmanagerial energies on its franchising operations.  Consumer sales accounted for approximately17% and 21% of company-owned training center sales in 2006 and 2005,respectively, and corporate sales accounted for approximately 83% and 79% ofcompany-owned training center sales in 2006 and 2005, respectively.

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*FranchisingOperations*

Franchising revenuestotaled $27,963 during the year ended December 31, 2006, a decrease of $3,414,or 11%, from $31,377 in 2005.  Thedecrease in franchising revenues resulted primarily from a decline incourseware sales and franchise fees partially offset by an increase inroyalties.

Franchise fees totaled $816during the year ended December 31, 2006, a decrease of $291, or 26%, from$1,107 in 2005.  The decrease isprimarily due to decreased franchise sales in international markets offset byfees from refranchising company-owned training centers during 2006.

Franchise royaltiestotaled $16,696 during the year ended December 31, 2006, an increase of $1,297,or 8%, from $15,399 in 2005.  Theincrease is due to an increase in North American royalties as a result ofrefranchising seven company-owned training centers during 2006 and increasingroyalty rates and minimums required under terms of respective franchiseagreements.  International royalties in2006 were unchanged from 2005.  The NorthAmerican IT training market has remained soft as corporate spending on ITtraining and infrastructure has been weak and available consumer trainingfinancing on acceptable terms has been limited. The number of North America reporting franchise locations increased from83 in 2005 to 93 in 2006, including the seven centers refranchised during2006.  The number of internationalfranchises decreased from 111 reporting locations in 2005 to 108 locationsduring 2006.

Courseware sales andother revenues totaled $10,451 during the year ended December 31, 2006, adecrease of $4,420, or 30%, from $14,871 in 2005.  Courseware sales and other revenues iscomprised primarily of revenues from licensed software training courseware,e-learning and non e-learning products, and other revenues and fees.  The decrease is primarily due to the mid-year2006 loss of the Company’s main licensed software training courseware contract,pricing pressure and commoditization of self-paced asynchronous e-learningproducts, partially offset by growth in synchronous, facilitated virtualclassroom events.

*System-wideRevenues*

System-wide revenues,totaled $363,278 during the year ended December 31, 2006, a decrease of $5,018,or 1%, from $368,296 in 2005.  Thedecrease in system-wide revenues is primarily due to a decrease in North Americansystem-wide revenues offset by increases in international system-wide revenues.  System-wide revenues are defined as therevenues from company-owned training centers and revenues reported to theCompany by its domestic and international franchises.

**Cost ofRevenues**

Cost of revenues totaled$41,841, or 55% of revenue during the year ended December 31, 2006, a decreaseof $16,463, or 28% from $58,304, or 55%, of revenue in 2005.  The decrease is primarily due to the decreasein the number of company-owned training centers during the year from 14 to 6,lower training activity at the company-owned training centers and the Company’scontinued cost reduction efforts including headcount reductions and consolidationof training events.

**Selling, General and Administrative Expenses**

Selling, general and administrative expenses totaled $36,863, or 48% ofrevenue during the year ended December 31, 2006, a decrease of $15,126, or 29%from $51,989, or 49% of revenue in 2005. The decrease is primarily due to the decrease in the number ofcompany-owned training centers during the year from 14 to 6, the Company’s costreduction efforts including reductions in leased space, decreases in salary,employee related expense and in commissions due to lower sales volumes.

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**Impairmentof Fixed Assets**

In 2006, theCompany recorded a non-cash impairment charge of $391 against computer softwareused by the network which is being phased out and replaced with more current software.  This compares to a non-cash impairment chargeof $2,351 incurred during 2005 against fixed assets at the Company’s Chicago,Cleveland and New York City company-owned training centers.   The charges were pursuant to Statement ofFinancial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairmentor Disposal of Long-Lived Assets.”  The2005 non-cash impairment charge is the result of continued operating and cashflow losses arising from these locations and a resulting decrease in theestimated fair value of each company-owned training center.  The estimated fair value of eachcompany-owned training center was determined based on the greater of theestimated discounted cash flows of the company-owned training center or recentsales of comparable training centers within the Company’s franchisenetwork.  Impairment testing wasperformed during 2006 and no further impairment charge was considered necessaryat the company-owned training centers. See also Note 4 “Property and Equipment” to the Company’s consolidatedfinancial statements.

**Impairmentof Goodwill**

Effective January 1, 2002, the Company adopted SFASNo. 142, “Goodwill and Intangible Assets.”  Under SFAS No. 142, goodwill and intangibleassets with indefinite lives are no longer amortized but are tested forimpairment annually or earlier, in the event of an impairment indicator.  Impairment testing was performed for theyears ended December 31, 2006 and 2005 and no impairment charge was recordedfor either year.  See also Note 5 “Goodwill”to the Company’s consolidated financial statements.

**Gain/Loss on Sale of Company-OwnedTraining Centers**

Gain on sale of company-ownedtraining centers totaled $2,120 for the year ended December 31, 2006, anincrease from a $329 loss in 2005.  Theincrease is attributable to gains from the sales of the San Antonio, Charlotte,Memphis, Nashville, Atlanta, Hartford and Albuquerque company-owned training centersin 2006.  See Note 14 “Gain/Loss on Saleof Company-Owned Training Centers” to the Company’s consolidated financialstatements.

**InterestExpense**

Interest expense totaled$304 for the year ended December 31, 2006, an increase of $81 or 36% from $223in 2005.  The increase is primarily dueto a higher average debt balances maintained during the year.

**InvestmentIncome**

Investment income totaled$293 for the year ended December 31, 2006, a decrease of $78 or 21% from $371in 2005.  The decrease is primarily the resultof lower average cash balances during the 2006 compared to 2005.

**IncomeTax Expense**

Provision forincome tax expense totaled $1,019 for the year ended December 31, 2006, anincrease of $169 from $850 in 2005.  Themajority of income tax expense represents foreign source withholding taxes onroyalties remitted to the Company by its international franchisees.  See also Note 6 “Income Taxes” to the Company’sconsolidated financial statements.

**ResultsOf Operations 2005 Versus 2004**(in thousands)

**Revenues**

Revenues totaled $106,421during the year ended December 31, 2005, a decrease of $13,504, or 11%, from$119,925 in 2004.  The decrease inrevenue is the result of a decrease in company-owned location revenue of $11,716and a decrease in franchising revenues of $1,788.

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*Company-Owned Training Centers*

Company-owned trainingcenters earned revenue of $75,044 for the year ended December 31, 2005, adecrease of $11,716, or 14%, from $86,760 in 2004.  The decrease is primarily due to decreased consumersales resulting from difficulty in obtaining third party financing solutionsand lower corporate spending on IT training. Consumer sales accounted for approximately 21% and 34% of company-owned trainingcenters sales in 2005 and 2004, respectively, and corporate sales accounted forapproximately 79% and 66% of company-owned training centers sales in 2005 and2004, respectively.

*FranchisingOperations*

Franchising revenuestotaled $31,377 during the year ended December 31, 2005, a decrease of $1,788,or 5%, from $33,165 in 2004.  Thedecrease in franchising revenues resulted primarily from a decline in franchisefees and courseware sales partially offset by an increase in royalties.

Franchise fees totaled$1,107 during the year ended December 31, 2005, a decrease of $1,024, or 48%,from $2,131 in 2004.  The decrease isprimarily due to decreased franchise sales in both domestic and internationalmarkets.

Franchise royaltiestotaled $15,399 during the year ended December 31, 2005, an increase of $1,003,or 7%, from $14,396 in 2004.  Theincrease is primarily due to an increase in international royalties, offset bya decline in North American royalties. The North American IT training market has remained soft as corporatespending on IT training and infrastructure has been weak, the above mentionedreduction in consumer sales due to the lack of suitable financing alternatives,as well as a reduction in franchise reporting locations from 85 in 2004 to 83in 2005.  The international businessincreased due to franchise growth from 102 reporting locations in 2004 to 111locations during 2005.

Courseware sales andother revenues totaled $14,871 during the year ended December 31, 2005, adecrease of $1,767, or 11%, from $16,638 in 2004.  Courseware sales and other revenues iscomprised primarily of revenues from the sale of licensed software trainingcourseware, e-Learning and non e-Learning products, and other revenues andfees.  The decrease is primarily due topricing pressure and commoditization of self-paced asynchronous e-Learningproducts partially offset by growth in synchronous, facilitated virtualclassroom events.

*System-wideRevenues*

System-wide revenues,comprised of total Company revenue and total non-consolidated franchiserevenue, totaled $368,296 during the year ended December 31, 2005, a decreaseof $16,349, or 4%, from $384,645 in 2004. The decrease in system-wide revenues is primarily due to a decrease inNorth American system-wide revenues offset by increases in international system-widerevenues, as mentioned above. System-wide revenues are defined as the revenues from company-owned trainingcenters and revenues reported to the Company by its domestic and internationalfranchises.

**Cost ofRevenues**

Cost of revenues totaled$58,304, or 55% of revenue during the year ended December 31, 2005, a decreaseof $15,005, or 20% from $73,309, or 61% of revenue in 2004.  The decrease is primarily due to lowertraining activity at the company-owned training centers and the Company’scontinued cost reduction efforts including headcount reductions andconsolidation of training events.

**Selling, General and Administrative Expenses**

Selling, general and administrative expenses totaled $51,989, or 49%,of revenue during the year ended December 31, 2005, a decrease of $5,947, or10%, from $57,934, or 48% of revenue in 2004. The decrease is primarily due to the Company’s

21

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cost reduction efforts in addition to decreases in salary, employeerelated expense and commissions due to lower sales.

**Impairmentof Fixed Assets**

During 2005, theCompany recorded a non-cash impairment charge of $2,351 against fixed assets atthe Company’s Chicago, Cleveland and New York City company-owned trainingcenters.   The charges were pursuant toSFAS No. 144.  The non-cash impairmentcharge was the result of continued operating and cash flow losses arising fromthese locations and a resulting decrease in the estimated fair value of eachcompany-owned training centers.  Theestimated fair value of each company-owned training centers was determinedbased on the greater of the estimated discounted cash flows of thecompany-owned training centers or recent sales of comparable locations withinthe Company’s franchise network.  Seealso Note 4 “Property and Equipment” to the Company’s consolidated financialstatements.

During 2004, theCompany recorded a non-cash impairment charge of $1,868, of which $1,468 wasagainst fixed assets at the Company’s Anaheim, Charlotte, Chicago, Cleveland,Memphis, Los Angeles and Sacramento company-owned training centers.  Another $400 of fixed assets was impaired atthe Company’s corporate location in Anaheim.

**Impairmentof Goodwill**

An impairmentindicator identified during the third quarter of 2004, resulted in the Company recordinga pretax impairment charge of $6,960 during the third quarter of 2004.  Impairment testing was performed for the yearended December 31, 2005 and no further impairment charge was recorded.  See also Note 5 “Goodwill” to the Company’sconsolidated financial statements.

**Loss on Sale of Company-Owned TrainingCenters**

Loss on sale of company-ownedtraining centers totaled $329 for the year ended December 31, 2005, an increaseof $329 or 100% from $0 in 2004.  Theincrease is due to the sale of the Sacramento company-owned training center in2005.

**InterestExpense**

Interest expense totaled$223 for the year ended December 31, 2005, a decrease of $124 or 36% from $347in 2004.  The decrease is primarily dueto lower average debt balances maintained during the year.

**InvestmentIncome**

Investment income totaled$371 for the year ended December 31, 2005, a decrease of $111 or 23% from $482in 2004.  The decrease is primarily theresult of lower average cash balances during 2005 compared to 2004.

**IncomeTax Expense**

Provision forincome tax expense totaled $850 for the year ended December 31, 2005, adecrease of $86 from $936 in 2004. The majority of income tax expenserepresents foreign source withholding taxes on royalties remitted to theCompany by its international franchisees. See also Note 6 “Income Taxes” to the Company’s consolidated financialstatements.

**CriticalAccounting Policies and Management’s Estimates**

The Company prepares its financial statements inconformity with accounting principles generally accepted in the United Statesof America.  Preparation of financialstatements requires management to make estimates and

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assumptions that affect the reported amounts of assetsand liabilities at the date of the financial statements and revenues andexpenses during the reporting period. The following critical accounting policies include: (a) accountingestimates made by management that were highly uncertain at the time ofestimation, and (b) accounting estimates in which there were a range ofpotential reasonable estimates the Company could have used in the currentperiod and changes in these estimates are reasonably likely to occur fromperiod to period.  On an ongoing basis,management evaluates its estimates and judgments in these areas based on itshistorical experience and other relevant factors.  The Company’s estimates as of the date of thefinancial statements reflect its best judgment giving consideration to allcurrently available facts and circumstances. As such, these estimates may require adjustment in the future, asadditional facts become known or as circumstances change.  Changes in these estimates could potentially havea material impact on the Company’s financial position or results of operations.

*RevenueRecognition*

The Company earns revenuethrough its franchising operations and from the delivery of instructor-led ande-learning training courses by its company-owned training center.

The Company recognizesrevenues from its company-owned training center operations for trainingvouchers, club memberships, and technical certification tracks.  Revenue is recognized based on estimates ofthe time period required to deliver training to customers over the serviceperiod.  These estimates differ from thestraight-line method.  Combined, theseproducts comprise a material amount of the Company’s consolidatedrevenues.  Management has determined thathistorical student attendance rates are the best estimate of how the Companywill deliver training and recognize revenue to customers in the future.

The Company performshistorical student attendance analyses on a quarterly basis.  In these analyses, the Company reviewsapproximately 15% of the sales transactions for its products, selectedrandomly, to determine the number of courses delivered under each arrangementand the time period between each course date and the invoice date.  Based on this data, the Company is able todetermine the historical rates at which customers have attended class for eachproduct type.  In order to providecustomers with adequate time to take courses, the Company allows a period ofone-year from the date of sale before performing student attendanceanalyses.  Historical student attendancedata from the past eight quarterly analyses, or two years of trailing data, arecombined to determine the estimates used in revenue recognition.

Due to the use ofestimated delivery rates rather than actual delivery, revenue recognition fortraining vouchers, technical tracks and programs, and club arrangements basedon estimated delivery rates could differ materially from that of actual coursedelivery.  Additionally, the Company’sestimates based on historical student attendance patterns may not accuratelyforecast future attendance patterns.  Generally, the student attendance analyses indicate a greaterpercentage of attendance in the earlier months and the last month of the timeperiods associated with training vouchers, club memberships, and technicalcertification programs.  Thus, a greaterpercentage of revenues are recognized in these time periods than if astraight-line method were applied.

The continual revision ofestimated student attendance rates results in cumulative adjustments to revenuerecognized for sales transactions consummated in prior periods.

Upon completion of thehistorical student attendance analyses in the fourth quarter of 2006, theCompany adjusted its revenue recognition rates and recorded a decrease indeferred revenue and a increase in revenue of $1,109.  Upon completion of the historical studentattendance analyses in the fourth quarter of 2005, the Company adjusted itsrevenue recognition rates and recorded a decrease in deferred revenue and aincrease in revenue of $381.  For thetwelve months ended December 31, 2004, the Company recorded a decrease indeferred revenue and a increase in revenue of $854.

Although the Companybelieves its current revenue recognition rates are consistent with currentstudent attendance patterns, no assurance can be given that such rates will notchange in the future.

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*DeferredCosts*

The Company defers thosedirect and incremental costs associated with the sale of products and servicesfor which revenue is deferred.  Directand incremental costs associated with the sale of products and services forwhich revenue is deferred include commissions paid to sales persons andtechnology and hosting costs associated with the Company’s e-learning products.  Deferred costs are charged to earnings at thesame rate that the associated product revenues are recorded to earnings.  At December 31, 2006 and 2005, the Company’sdeferred costs totaled $582 and $2,516, respectively, and is reported in prepaidexpenses in the accompanying Consolidated Balance Sheet.

*AccountsReceivable*

Accounts receivable areshown net of allowances for doubtful accounts. The Company records an allowancefor bad debts based on the age of individual invoices. For the company-ownedtraining centers, the percentage applied reflects each center’s historicalexperience of bad debts and mix of business. At December 31, 2006 and 2005, theCompany’s allowance for doubtful accounts was $1,697 and $2,917, respectively*.*

*Deferred Tax Asset*

In preparing theconsolidated financial statements the Company is required to estimate itsincome taxes for federal and state purposes. This process involves estimating the actual current taxes together withassessing temporary differences resulting from differing treatment of items,such as deferred revenue or the allowance for doubtful accounts, for tax andaccounting purposes.  These differencesresult in deferred tax assets and liabilities, which are included within theconsolidated balance sheets.  The Companymust then assess the likelihood that its deferred tax assets will be recoveredfrom future taxable income and, to the extent it believes that recovery is notlikely, must establish a valuation allowance. To the extent a valuation allowance is established or this allowance isincreased in a period, an expense must be included within the tax provision inthe consolidated statements of operations.

The Companyregularly analyzes the future recovery of its deferred tax assets based on itsbest estimates of future taxable income. In the recovery analysis, recent cumulative losses are provided greaterweight than estimated future profitability. As a result, in the absence of significant positive evidence indicatingfuture taxable income is imminent, there is a presumption that a valuationallowance is required during periods of recent cumulative losses.  The Company performed an analysis of thedeferred income tax assets and liabilities for the years ended December 31,2006, 2005 and 2004 and determined that the additional net deferred tax asset generatedin those years of $629, $2,681 and $7,907, respectively, required an equalvaluation allowance, which brought the total valuation allowance at December31, 2006, 2005 and 2004 to $34,848, $34,219 and $30,548, respectively.  See also Note 6 “Income Taxes” to the Company’sconsolidated financial statements.

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*Accountingfor Goodwill*

The goodwillbalances attributable to the Company’s franchising and company-owned locationsreporting units are tested for impairment annually as of December 31 of eachyear and on an interim basis in the event of an impairment indicator.  The Company utilizes an outside valuationconsultant in determining the fair value of its reporting units.  The consultant utilizes both the incomeapproach and the market approach in determining fair value.  The consultant’s fair value estimates usingthe income approach utilize the Company’s best estimates of future operatingperformance.

The Companyengaged an outside consultant to perform the annual goodwill impairment testingas of December 31, 2006 and 2005.  Seealso Note 5 “Goodwill” to the Company’s consolidated financial statements.

**LiquidityAnd Capital Resources**

The Company’s cash andcash equivalents was $795 as of December 31, 2006 compared to $3,798 as ofDecember 31, 2005.  The decrease isprimarily due to (i) net operating losses sustained by the Company for the yearended December 31, 2006, (ii) capital expenditures, and (iii) principalpayments on the Company’s credit facility with Wells Fargo Bank (“Wells Fargo”),all offset by $4,000 of cash received from a secured loan agreement.  The outstanding amount related to the WellsFargo debt was paid in full during 2006.

Cash used by operationswas $7,018 for the year ended December 31, 2006, $618 above the 2005 levelprimarily due to net operating losses partially offset by non-cash charges fordepreciation, amortization, impairment and gain on sale of assets.  During 2006, the Company spent $520 on capitalequipment.  The Company has no materialcommitments to purchase property and equipment in 2007.  See also Note 6 “Property and Equipment” tothe Company’s consolidated financial statements.  The Company made principal payments of $980during 2006 on its credit facility with Wells Fargo and reduced its debt toWells Fargo to $0 at December 31, 2006. See also Note 3 “Debt” and Note 16 “Subsequent Events” to the Company’sconsolidated financial statements for additional discussion.

***Off-BalanceSheet Arrangements and Contractual Obligations***

The Company’s off-balancesheet arrangements and contractual obligations consist principally of variousbuilding and equipment operating leases.

The Company has $1,501 inrestricted cash comprised of the following. The Company has deposited $751 with state agencies to guaranteeperformance in various states in respect to providing training toconsumers.  In the event the Company wereto abandon training in a state, the state agency could draw against thedeposits to satisfy undelivered training obligations.  In addition, the Company has deposited $750with landlords and banks to comply with contractual obligations.

The Company’s contractual obligations as of December 31, 2006 are shownbelow.

Payments due by period:
| **Contractual   Obligations** | ** ** | **Total** | ** ** | **Less then 1 year** | ** ** | **1-3 year** | ** ** | **3-5 year** | ** ** | **More then 5  years** | ** ** |
|------------------------------------|------------|-----------|------------|-------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------------|------------|
| Long-term debt                     |       | $         | 4,000      |                                | $          | —            |       | $                 | 4,000      |                             | $          | — |   | $ | — |   |
| Capital leases                     |       | 285       |       | 109                                 |       | 124               |       | 52                |       | —                           |       |
| Operating leases -  building       |       | 20,300    |       | 7,032                               |       | 10,865            |       | 7,528             |       | 4,875                            |       |
| Operating leases – equipment  |       | 472       |       | 219                                 |       | 215               |       | 38                |       | —                           |       |
| Total                              |       | $         | 35,057     |                                | $          | 7,360             |       | $                 | 15,204     |                             | $          | 7,618 |   | $ | 4,875 |   |

 

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Asdescribed in Note 16 “Subsequent Events” of the accompanying consolidatedfinancial statements, the Company sold its Chicago and Cleveland company-owned trainingcenters on March 31, 2007, as well as its Anaheim company-owned training centeron May 30, 2007.  In addition, theCompany has letters of intent to sell its New York City company-owned trainingcenter which it expects will close prior to the end of 2007. From time to time,the Company may evaluate other acquisition or divestiture opportunities thatappear to fit within its overall business strategy.

During 2006, the Company raised approximately $4,000through the issuance of debt to support continuing operations and liquidityneeds (See Note 3 to the consolidated financial statements).  The Company was in default of certainreporting covenants relating to the debt issuance at December 31, 2006.  The lenders have waived all defaults throughthe filing of this Annual Report on Form 10-K. The Company believes its cash and cash equivalents and cash flows willnot be sufficient to meet cash requirements for the next twelve months. TheCompany may need to sell additional equity, refinance the credit facility withcertain lenders, or sell certain assets. The sale of additional equity would resultin additional dilution to existing stockholders. Further, the Company may beunable to raise any such capital, on acceptable terms, or at all. Failure toraise additional funds may adversely affect the Company’s ability to achieveits intended business objectives. The consolidated financial statements do notinclude any adjustments relating to the recoverability and classification ofrecorded assets or the amount or classification of liabilities or any otheradjustments that might be necessary should the Company be unable to continue asa going concern. See also Note 16 “Subsequent Events” to the Company’sconsolidated financial statements for additional discussion.

The Company has experienced recurring losses, has anaccumulated deficit and negative working capital and essentially all of itsassets are encumbered.  The extent of theCompany’s needs for additional liquidity will depend in part on its futureoperating performance, which is itself dependent on a number of factors, manyof which the Company cannot control. These factors include prevailing economicconditions, availability of other sources of liquidity, and financial,business, regulatory and other factors affecting the Company’s business andoperations. Although the Company believes its strategic, operational andfinancial plans will be successful, there can be no assurance that the Companywill successfully implement these plans. If the Company is not successful inimplementing these plans, there could be a material adverse impact on the Company’sfinancial position and results of operations. Management cannot assure theCompany’s shareholders that business will not continue to decline or when or ifperformance will improve.

**Item 7A.****           Quantitative AndQualitative Disclosures About Market Risk**

The Company is exposed tomarket risk related to changes in interest rates.  A discussion of the Company’s accountingpolicies for financial instruments and further disclosures relating tofinancial instruments are included in the notes to the Company’s consolidatedfinancial statements.  The Companymonitors the risks associated with interest rates and financial instrumentpositions and does not believe these risks will result in a material adverseaffect on the Company’s financial position or results of its operations.

As of December 31, 2006,the Company did not consider there to be any significant interest rate riskrelated to its $4,000 term loan. See additional discussion in Note 3 “Debt” tothe Company’s consolidated financial statements.

As of December 31, 2005,the Company’s primary interest rate risk exposure results from floating ratedebt on its credit agreement with Wells Fargo Bank.  The outstanding amount related to this debtwas paid in full during 2006.

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The Company’s riskexposure to fluctuations in foreign currency exchange rates is not material.

**Item 8.****                       FinancialStatements And Supplementary Data**

Page F-1 to F-32 is thereport of our independent registered public accounting firm, Squar, Milner,Peterson, Miranda & Williamson, LLP, and the Consolidated Financial Statements of the Company along withapplicable notes and the supplementary financial information specified by Item302 of Regulation S-K.

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#### REPORTOF INDEPENDENT REGISTEREDPUBLICACCOUNTING FIRM

To the Board of Directorsand StockholdersNew Horizons Worldwide, Inc. and SubsidiariesAnaheim, California

We have auditedthe consolidated balance sheets of New Horizons Worldwide, Inc. and Subsidiaries(the “Company”), as of December 31, 2006 and 2005 and the related consolidatedstatements of operations, stockholders’ deficit and cash flows for each of theyears in the three year period ended December 31, 2006. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of New Horizons Worldwide, Inc.and Subsidiaries as of December 31, 2006 and 2005, and the consolidated resultsof their operations and their cash flows for each of the years in the threeyear period ended December 31, 2006, in conformity with accounting principlesgenerally accepted in the United States of America.

As discussed in Note 1 tothe financial statements, in 2006, the Company changed its method of accountingfor stock-based compensation to conform to Financial Accounting Standards BoardStatement No. 123(R), *Share-Based Payment*.
| /s/SQUAR, MILNER, PETERSON, MIRANDA &  WILLIAMSON, LLP |   |
|------------------------------------------------------------|--------|
| Newport Beach, California                                  |
| May 2, 2007                                                |

 

F-1

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NEWHORIZONS WORLDWIDE, INC. AND SUBSIDIARIES

ConsolidatedBalance Sheets

December 31, 2006 and2005

(Dollars inthousands, except per share data)
| ** **                                                                                                                                                                                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Assets                                                                                                                                                                                                                                 |       |     |       |     |       |
| Current assets:                                                                                                                                                                                                                        |       |     |       |     |       |
| Cash and cash  equivalents                                                                                                                                                                                                             |       | $        | 795        |     | $          | 3,798 |   |
| Accounts  receivable, net                                                                                                                                                                                                              |       | 7,661    |       | 13,828   |       |
| Inventories, net                                                                                                                                                                                                                       |       | 229      |       | 538      |       |
| Prepaid expenses                                                                                                                                                                                                                       |       | 1,316    |       | 3,953    |       |
| Refundable  income taxes                                                                                                                                                                                                               |       | 391      |       | 793      |       |
| Other current  assets                                                                                                                                                                                                                  |       | 145      |       | 223      |       |
| Total current  assets                                                                                                                                                                                                                  |       | 10,537   |       | 23,133   |       |
|                                                                                                                                                                                                                                   |       |     |       |     |       |
| Property and equipment,  net                                                                                                                                                                                                           |       | 3,008    |       | 3,366    |       |
| Restricted cash                                                                                                                                                                                                                        |       | 1,501    |       | 854      |       |
| Goodwill, net                                                                                                                                                                                                                          |       | 11,408   |       | 11,408   |       |
| Other assets                                                                                                                                                                                                                           |       | 1,156    |       | 492      |       |
| Total assets                                                                                                                                                                                                                           |       | $        | 27,610     |     | $          | 39,253 |   |
|                                                                                                                                                                                                                                   |       |     |       |     |       |
| Liabilities and  stockholders’ deficit                                                                                                                                                                                            |       |     |       |     |       |
| Current liabilities:                                                                                                                                                                                                                   |       |     |       |     |       |
| Accounts payable                                                                                                                                                                                                                       |       | $        | 3,808      |     | $          | 4,303 |   |
| Current portion  of long-term debt                                                                                                                                                                                                     |       | —   |       | 980      |       |
| Deferred revenue                                                                                                                                                                                                                       |       | 7,299    |       | 12,163   |       |
| Other current  liabilities                                                                                                                                                                                                             |       | 15,243   |       | 22,355   |       |
| Total current  liabilities                                                                                                                                                                                                             |       | 26,350   |       | 39,801   |       |
|                                                                                                                                                                                                                                   |       |     |       |     |       |
| Long-term debt,  excluding current portion                                                                                                                                                                                             |       | 4,000    |       | —   |       |
| Deferred rent                                                                                                                                                                                                                          |       | 1,559    |       | 2,464    |       |
| Other long-term  liabilities                                                                                                                                                                                                           |       | 356      |       | 271      |       |
| Total  liabilities                                                                                                                                                                                                                     |       | 32,265   |       | 42,536   |       |
|                                                                                                                                                                                                                                   |       |     |       |     |       |
| Commitments and  contingencies                                                                                                                                                                                                         |       | —   |       | —   |       |
|                                                                                                                                                                                                                                   |       |     |       |     |       |
| Stockholders’ deficit:                                                                                                                                                                                                            |       |     |       |     |       |
| Convertible  preferred stock Series B, $.01 stated value, 200,000 shares authorized,   174,693 shares issued and outstanding at December 31, 2006. Liquidation  preference of $37.50 per share                                         |       | 17       |       | —   |       |
| Convertible  preferred stock Series A, $.01 stated value, 1,638,398 shares authorized, issued  and outstanding at December 31, 2005. No shares issued and outstanding at  December 31, 2006. Liquidation preference of $3.95 per share |       | —   |       | 16       |       |
| Common  stock, $.01 par value, 20,000,000 shares authorized; 10,745,353 and  10,636,658 shares issued; 10,560,353 and 10,451,658 shares outstanding at  December 31, 2006 and 2005, respectively                                       |       | 107      |       | 106      |       |
| Additional  paid-in capital                                                                                                                                                                                                            |       | 54,164   |       | 53,809   |       |
| Accumulated  deficit                                                                                                                                                                                                                   |       | (57,645  | )          | (55,616  | )          |
| Note from  officer and director                                                                                                                                                                                                        |       | —   |       | (300     | )          |
| Treasury stock  at cost - 185,000 shares at December 31, 2006 and 2005                                                                                                                                                                 |       | (1,298   | )          | (1,298   | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                      |       | (4,655   | )          | (3,283   | )          |
| Total liabilities and  stockholders’ deficit                                                                                                                                                                                      |       | $        | 27,610     |     | $          | 39,253 |   |

 

See accompanyingnotes to consolidated financial statements.

 

F-2

----

NEW HORIZONS WORLDWIDE,INC. AND SUBSIDIARIES

ConsolidatedStatements of Operations

Years ended December 31,2006, 2005, and 2004

(Dollars inthousands, except per share data)
| ** **                                                      | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenues                                                        |       |       |       |       |       |       |       |
| Franchising                                                     |       |       |       |       |       |       |       |
| Franchise fees                                                  |       | $          | 816        |       | $          | 1,107      |       | $ | 2,131 |   |
| Royalties                                                       |       | 16,696     |       | 15,399     |       | 14,396     |       |
| Courseware sales  and other                                     |       | 10,451     |       | 14,871     |       | 16,638     |       |
| Total  franchising revenues                                     |       | 27,963     |       | 31,377     |       | 33,165     |       |
|                                                            |       |       |       |       |       |       |       |
| Company-owned training  center revenues                         |       | 48,717     |       | 75,044     |       | 86,760     |       |
| Total revenues                                                  |       | 76,680     |       | 106,421    |       | 119,925    |       |
|                                                            |       |       |       |       |       |       |       |
| Cost of revenues                                                |       | 41,841     |       | 58,304     |       | 73,309     |       |
| Selling, general and  administrative expenses                   |       | 36,863     |       | 51,989     |       | 57,934     |       |
| Loss on legal  settlement                                       |       | —     |       | —     |       | 2,358      |       |
| Impairment of property  and equipment                           |       | 391        |       | 2,351      |       | 1,868      |       |
| Impairment of goodwill                                          |       | —     |       | —     |       | 6,960      |       |
| Operating loss                                                  |       | (2,415     | )          | (6,223     | )          | (22,504    | )          |
|                                                            |       |       |       |       |       |       |       |
| Other income/(loss)                                             |       | (704       | )          | (26        | )          | 135        |       |
| Gain/(loss) on sale of company-owned  training centers          |       | 2,120      |       | (329       | )          | —     |       |
| Interest expense                                                |       | (304       | )          | (223       | )          | (347       | )          |
| Investment income                                               |       | 293        |       | 371        |       | 482        |       |
|                                                            |       |       |       |       |       |       |       |
| Loss before income tax  provision                               |       | (1,010     | )          | (6,430     | )          | (22,234    | )          |
| Income tax provision                                            |       | (1,019     | )          | (850       | )          | (936       | )          |
| Net loss                                                        |       | (2,029     | )          | (7,280     | )          | (23,170    | )          |
| Dividends on preferred  stock                                   |       | (204       | )          | (2,131     | )          | —     |       |
| Net loss attributable  to common stockholders                   |       | $          | (2,233     | )          | $          | (9,411     | )          | $ | (23,170 | ) |
|                                                            |       |       |       |       |       |       |       |
| Weighted average number  of common shares outstanding - Basic   |       | 10,678,349 |       | 10,451,226 |       | 10,451,226 |       |
|                                                            |       |       |       |       |       |       |       |
| Weighted average number  of common shares outstanding - Diluted |       | 10,678,349 |       | 10,451,226 |       | 10,451,226 |       |
|                                                            |       |       |       |       |       |       |       |
| Basic and diluted loss  per common share                        |       |       |       |       |       |       |       |
| Net loss per  share attributable to common stockholders         |       | $          | (0.21      | )          | $          | (0.90      | )          | $ | (2.22 | ) |

 

See accompanyingnotes to consolidated financial statements.

F-3

----

NEWHORIZONS WORLDWIDE, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Yearsended December 31, 2006, 2005, and 2004

(Dollars in thousands)
| ** **                                                                                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                                           |       |     |       |     |       |     |       |
| Net loss                                                                                                         |       | $        | (2,029     | )        | $          | (7,280   | )          | $ | (23,170 | ) |
| Adjustments to  reconcile net loss to net cash and cash equivalents (used in) provided by  operating activities: |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                                   |       | 1,726    |       | 2,713    |       | 6,220    |       |
| (Gain) loss on  sale of company-owned training centers                                                           |       | (2,120   | )          | 329      |       | —   |       |
| Stock-based  compensation                                                                                        |       | 86       |       | —   |       | —   |       |
| Impairment of  goodwill                                                                                          |       | —   |       | —   |       | 6,960    |       |
| Impairment of  property and equipment                                                                            |       | 391      |       | 2,351    |       | 1,868    |       |
| Provision for  losses on doubtful accounts                                                                       |       | 850      |       | 2,596    |       | 3,015    |       |
| Cash (used in) provided  from the change in:                                                                     |       |     |       |     |       |     |       |
| Restricted cash                                                                                                  |       | (647     | )          | (854     | )          | —   |       |
| Accounts  receivable                                                                                             |       | 2,295    |       | (2,592   | )          | (3,557   | )          |
| Inventories                                                                                                      |       | (34      | )          | 309      |       | 436      |       |
| Prepaid expenses  and other assets                                                                               |       | 1,340    |       | 1,280    |       | 2,945    |       |
| Refundable  income taxes                                                                                         |       | 402      |       | 183      |       | (976     | )          |
| Accounts payable                                                                                                 |       | (153     | )          | 2,206    |       | (2,170   | )          |
| Deferred revenue                                                                                                 |       | (3,790   | )          | (1,953   | )          | (5,622   | )          |
| Other  liabilities                                                                                               |       | (4,430   | )          | (5,385   | )          | 15,430   |       |
| Deferred rent                                                                                                    |       | (905     | )          | (303     | )          | 151      |       |
| Net cash (used  in) provided by operating activities                                                             |       | (7,018   | )          | (6,400   | )          | 1,530    |       |
|                                                                                                             |       |     |       |     |       |     |       |
| Cash flows from  investing activities:                                                                           |       |     |       |     |       |     |       |
| Additions to  property and equipment                                                                             |       | (520     | )          | (276     | )          | (2,205   | )          |
| Proceeds from sale  of property and equipment                                                                    |       | 12       |       | 75       |       | —   |       |
| Proceeds from  sale of training centers                                                                          |       | 1,447    |       | —   |       | —   |       |
| Proceeds from  cash surrender value of life insurance                                                            |       | —   |       | 748      |       | 612      |       |
| Net cash (used  in) provided by investing activities                                                             |       | 939      |       | 547      |       | (1,593   | )          |
|                                                                                                             |       |     |       |     |       |     |       |
| Cash flows from  financing activities:                                                                           |       |     |       |     |       |     |       |
| Proceeds from  exercise of stock options                                                                         |       | —   |       | —   |       | 9        |       |
| Proceeds from  issuance of common stock to officer                                                               |       | 100      |       | —   |       | —   |       |
| Proceeds from  issuance of Series A preferred stock                                                              |       | —   |       | 5,440    |       | —   |       |
| Proceeds from  issuance of debt                                                                                  |       | 4,000    |       | —   |       | —   |       |
| Costs from  issuance of debt                                                                                     |       | (13      | )          | —   |       | —   |       |
| Principal  payments on capital leases                                                                            |       | (31      | )          | —   |       | —   |       |
| Principal  payments on debt obligations                                                                          |       | (980     | )          | (2,441   | )          | (4,144   | )          |
| Net cash (used  in) provided by financing activities                                                             |       | 3,076    |       | 2,999    |       | (4,135   | )          |
|                                                                                                             |       |     |       |     |       |     |       |
| Net decrease in cash  and cash equivalents                                                                       |       | (3,003   | )          | (2,854   | )          | (4,198   | )          |
|                                                                                                             |       |     |       |     |       |     |       |
| Cash and cash  equivalents at beginning of period                                                                |       | 3,798    |       | 6,652    |       | 10,850   |       |
| Cash and cash  equivalents at end of period                                                                      |       | $        | 795        |     | $          | 3,798    |       | $ | 6,652 |   |
|                                                                                                             |       |     |       |     |       |     |       |
| Supplemental disclosure  of cash flow information                                                                |       |     |       |     |       |     |       |
| Cash paid for:                                                                                                   |       |     |       |     |       |     |       |
| Interest                                                                                                         |       | $        | 335        |     | $          | 213      |       | $ | 335 |   |
| Income taxes                                                                                                     |       | $        | 100        |     | $          | 107      |       | $ | 175 |   |
|                                                                                                             |       |     |       |     |       |     |       |
| Noncash investing and  financing activites:                                                                      |       |     |       |     |       |     |       |
| Income tax  benefit from the exercise of stock options                                                           |       | $        | —     |     | $          | —   |       | $ | 1 |   |
| Stock dividends  and deemed dividends on Series A preferred stock                                                |       | $        | 204        |     | $          | 2,131    |       | $ | — |   |
| Purchase of  software                                                                                            |       | $        | 1,725      |     | $          | —   |       | $ | — |   |
| Capital lease  obligations incurred                                                                              |       | $        | 447        |     | $          | —   |       | $ | — |   |
| Forgiveness of officer  note                                                                                     |       | $        | 300        |     | $          | —   |       | $ | — |   |

 

F-4

----

NEW HORIZONS WORDWIDE,INC. AND SUBSIDIARIES

ConsolidatedStatements of Stockholders’ Deficit

Years ending December 31,2006, 2005, and 2004

(Dollars inthousands, except shares data)
| ** **                                                             | ** ** | **Convertible**                             | ** ** | **Convertible**                             | ** ** | ** **            | ** ** | **Additional** | ** ** | ** ** | ** ** | ** **          | ** ** | ** **   | ** ** | **Total**                    | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|----------------|------------|------------|------------|---------------------|------------|--------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | **Preferred Stock Series B** | ** ** | **Preferred Stock Series A** | ** ** | **Common Stock** | ** ** | **paid-in**    | ** ** | ** ** | ** ** | **Notes from** | ** ** | **Treasury** | ** ** | **stockholders'**            | ** ** |
| ** **                                                             | ** ** | **Shares**                                  | ** ** | **Amount**                                  | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Shares** | ** ** | **Amount**          | ** ** | **capital**  | ** ** | **Accumulated Deficit** | ** ** | **officer and director** | ** ** | **stock** | ** ** | **equity (deficit)** | ** ** |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Balance at January 1,  2004                                            |       | —                                      |       | $                                           | —     |                  | —     |           | $          | —     |       | 10,635,158          |       | 106          |       | $                            | 48,563     |   | $ | (25,166 | ) | $ | (1,011 | ) | $ | (1,298 | ) | 21,194 |   |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Issuance  of common stock from exercise of stock options               |       | —                                      |       | —                                      |       | —                |       | —         |       | 1,500      |       | —              |       | 8            |       | —                       |       | — |   | — |   | 8 |   |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Income  tax benefit from the exercise of stock options                 |       | —                                      |       | —                                      |       | —                |       | —         |       | —     |       | —              |       | 1            |       | —                       |       | — |   | — |   | 1 |   |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Net loss                                                               |       | —                                      |       | —                                      |       | —                |       | —         |       | —     |       | —              |       | —       |       | (23,170                      | )          | — |   | — |   | (23,170 | ) |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Balance at December 31,  2004                                          |       | $                                           | —     |                                        | $          | —                |       | $              | —     |       | $          | —              |       | 10,636,658   |       | $                            | 106        |   | $ | 48,572 |   | $ | (48,336 | ) | $ | (1,011 | ) | $ | (1,298 | ) | $ | (1,967 | ) |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Issuance  of Series A preferred stock, net of offering costs           |       | —                                      |       | —                                      |       | 1,600,000             |       | 16             |       | —     |       | —              |       | 5,424        |       | —                       |       | — |   | — |   | 5,440 |   |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Beneficial  conversion feature on issuance of Series A preferred stock |       | —                                      |       | —                                      |       | —                |       | —         |       | —     |       | —              |       | 1,808        |       | —                       |       | — |   | — |   | 1,808 |   |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Deemed  dividend on issuance of Series A preferred stock               |       | —                                      |       | —                                      |       | —                |       | —         |       | —     |       | —              |       | (1,808       | )          | —                       |       | — |   | — |   | (1,808 | ) |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Dividends  on Series A preferred stock                                 |       | —                                      |       | —                                      |       | 38,398                |       | —         |       | —     |       | —              |       | (187         | )          | —                       |       | — |   | — |   | (187 | ) |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Payment on note from  director                                         |       | —                                      |       | —                                      |       | —                |       | —         |       | —     |       | —              |       | —       |       | —                       |       | 711 |   | — |   | 711 |   |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Net loss                                                               |       | —                                      |       | —                                      |       | —                |       | —         |       | —     |       | —              |       | —       |       | (7,280                       | )          | — |   | — |   | (7,280 | ) |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Balance at December 31,  2005                                          |       | $                                           | —     |                                        | $          | —                |       | 1,638,398      |       | $          | 16         |                | $          | 10,636,658   |       | $                            | 106        |   | $ | 53,809 |   | $ | (55,616 | ) | $ | (300 | ) | $ | (1,298 | ) | $ | (3,283 | ) |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Conversion  of Series A preferred stock to Series B preferred stock    |       | 174,693                                     |       | 17                                          |       | (1,638,398            | )          | (16            | )          | —     |       | —              |       | 170          |       | —                       |       | — |   | — |   | 171 |   |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Stock-based  compensation expense                                      |       | —                                      |       | —                                      |       | —                |       | —         |       | —     |       | —              |       | 86           |       | —                       |       | — |   | — |   | 86 |   |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Sale of common stock to  officer                                       |       | —                                      |       | —                                      |       | —                |       | —         |       | 108,695    |       | 1                   |       | 99           |       | —                       |       | — |   | — |   | 100 |   |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Forgiveness of officer  note                                           |       | —                                      |       | —                                      |       | —                |       | —         |       | —     |       | —              |       | —       |       | —                       |       | 300 |   | — |   | 300 |   |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
| Net loss                                                               |       | —                                      |       | —                                      |       | —                |       | —         |       | —     |       | —              |       | —       |       | (2,029                       | )          | — |   | — |   | (2,029 | ) |
|                                                                   |       |                                        |       |                                        |       |                  |       |           |       |       |       |                |       |         |       |                         |       |   |   |   |   |   |   |
|                                                                   |       | 174,693                                     |       | $                                           | 17         |                  | $          | —         |       | $          | —     |                | $          | 10,745,353   |       | $                            | 107        |   | $ | 54,164 |   | $ | (57,645 | ) | $ | — |   | $ | (1,298 | ) | $ | (4,655 | ) |

 

See accompanyingnotes to consolidated financial statements.

F-5

----

**NEWHORIZONS WORLDWIDE, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements**

**December 31, 2006, 2005 and 2004**(Dollars in thousands, except per share data)

**1.****              Organizationand Summary of Significant Accounting Policies**

*(a)**                   Descriptionof Business*

New Horizons Worldwide, Inc. (“New Horizons” or the “Company”) owns andfranchises computer-training centers. The Company has two reporting units: company-owned training centers andfranchising operations, both of which operate principally within theinformation technology (“IT”) training industry.  As of December 31, 2006, the company-owned trainingcenter reporting unit operated 6 wholly-owned computer training centers withinthe continental United States and generated revenue through the sale anddelivery of personal computing (“PC”) applications, technical software trainingcourses, business skills and healthcare information management.  The franchising operations reporting unitearns revenue through the sale of New Horizons master and unit franchiseswithin the United States and abroad, on-going royalties in return for providingfranchises with systems of instruction, sales, and management conceptsconcerning computer training, and the sale of courseware materials, EnglishLanguage courses and e-learning products. The franchising operations reporting unit has places of business inAnaheim, California; Leiden, The Netherlands; and Singapore.

*(b)**                   GoingConcern and Liquidity Matters*

The Company has experienced recurring losses, has an accumulateddeficit and negative working capital. The Company has incurred losses in 2006 and prior years and has anaccumulated deficit of $57,645 as of December 31, 2006.  Substantially all of the Company’s assets areencumbered and the Company has experienced difficulty in meeting some shortterm obligations in a timely manner. During 2006 and 2007, the Company has raised approximately $6,725through the issuance of debt and from the sale of company-owned trainingcenters.  These capital inflows, combinedwith cost cutting initiatives in 2006 have allowed the Company to continueoperating through the date of this report. However, there can be no assurance that capital can be raised in thefuture at terms the Company deems acceptable, or at all, or that cost cuttingby itself can sustain the Company until such time as the operating performanceimproves.  The need for additionalliquidity will depend on future operating performance, which is itselfdependent on a number of factors, many of which the Company cannot control,including prevailing economic conditions, availability of other sources ofliquidity, and financial, business, regulatory and other factors affecting theCompany’s business and operation.  Theconsolidated financial statements do not include any adjustments relating tothe recoverability and classification of asset amounts or the amounts andclassification of liabilities that might be necessary should the Company beunable to continue as a going concern.

*(c)**                    Principlesof Consolidation*

The consolidated financialstatements include the accounts of the Company and its subsidiaries, all ofwhich are wholly-owned.  All significantinter-company balances and transactions have been eliminated in consolidation.

*(d)**                   Basisof Presentation*

The accompanyingconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”),which contemplate continuation of the Company as a going concern.

Certainreclassifications have been made to the prior years’ consolidated financialstatements to conform to the current year’s presentation.

*(e)**                    Useof Estimates*

The preparation ofthe consolidated financial statements in conformity with GAAP in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes.  The Company believes its estimates related torevenue recognition, deferred costs, and allowance for doubtful accounts

F-6

----

to be the mostsensitive estimates impacting financial position and results ofoperations.  Other significant estimatesby management include: impairment analysis of long-lived assets, goodwill anddeferred tax assets.  On an ongoingbasis, management evaluates its estimates and judgments in these areas based onits historical experience and other relevant factors.  The Company’s estimates as of the date of theconsolidated financial statements reflect its best judgment givingconsideration to all currently available facts and circumstances.  As such, these estimates may requireadjustment in the future, as additional facts become known or as circumstanceschange.  Changes in these estimates couldpotentially have a material impact on the presentation of the Company’sfinancial position or results of operations. Actual results could differ materially from these estimates.

*(f)**                       Cashand Cash Equivalents*

**Cash and cash equivalents includeshort-term investments with a maturity of less than 90 days whenpurchased.  The carrying amounts of cashand cash equivalents approximate their fair values due to their shortmaturities.**

*(g)**                   AccountsReceivable*

Accounts receivable are shown net of allowances for doubtful accounts. TheCompany records and allowance for bad debts based on the age of individualinvoices. For the company-owned training centers, the percentage appliedreflects each center’s historical experience of bad debts and mix of business.

*(h)**                   Concentrationof Risk*

Financial instrumentsthat subject the Company to credit risk consist primarily of cash and cash equivalentsand accounts receivable.  At December 31,2006, the Company had $1,617 (of which $1,501 was restricted cash) in accountsin excess of the Federal Deposit Insurance Corporation insurance coveragelimit.  The Company has not experiencedany losses in these accounts and believes it is not exposed to any significantcredit risk on cash and cash equivalents.

The Company issues creditto a significant number of customers that are diversified over a widegeographic area.  The Company monitorsthe payment histories of its customers and maintains an allowance for doubtfulaccounts which is reviewed for adequacy on a quarterly basis.  The Company does not require collateral fromits customers.  For the years endedDecember 31, 2006, 2005 and 2004, no single customer accounted for greater than10% of consolidated revenues or consolidated accounts receivable.

*(i)**                      RevenueRecognition*

The Company earns revenue through its franchising operations and fromthe delivery of instructor-led and e-Learning training courses by itscompany-owned training centers.

*Franchising Operations*

Franchising revenues are earned from initial franchise fees, royaltiesfrom franchisees, courseware sales, delivery fees for e-Learning courses, andadministration fees for courses delivered pursuant to the

F-7

----

Company’s Enterprise Learning Solutions (“ELS”) initiative, a programto service large corporate customers.

Initial franchise fees are charged to unit and master franchisees.  Unit franchisees receive the exclusive rightto own and operate franchises within a certain territory.  Master franchisees receive an exclusive rightto operate within a specific territory in which the master franchisee is ableto award unit sub-franchises.  Initialfranchise fees for master and unit franchises are recognized when all relatedfranchise training and all material conditions or services related to the salehave been performed or satisfied by the Company.  Initial fees under unit and master franchiseagreements are not refundable under any circumstance.

Unit franchisees and master franchisees are obliged to remit certainpercentages of their gross revenue to the Company for continuing royalties,advertising fees, and marketing and distribution fees.  These fees are recognized as the underlyingunit and master franchisee recognizes revenue.

The Company sells both licensed and internally developed coursewarematerials and curriculum to its franchisees. Courseware sales are recognized upon shipment.  The Company utilizes a third party for the productionof courseware items and fulfillment of orders placed by franchisees.  Franchisees may order courseware materialsand curriculum through the Company or directly through the fulfillment house.  In transactions where the Company acts as aprincipal, takes title to the products, and has the risks and rewards ofownership, such as the risk of loss for collection, delivery and returns,revenue is recognized on a gross basis. In cases where the Company acts as an agent or broker and is compensatedon a commission or fee basis, the Company recognizes only the net commissionsor fees as revenue.

Per-student fees are charged to the franchisees for e-Learning coursesdelivered through the Online LIVE and Online ANYTIME formats.  Online LIVE courses are synchronous,interactive virtual classrooms that feature instructor-facilitated classesdelivered over the Internet.  Studentfees related to the sale of Online LIVE courses are recognized upon thedelivery of the course.  Online ANYTIMEcourses are asynchronous, self-paced training courses which are similar incontent to classroom instruction.  OnlineANYTIME courses are delivered over the Internet over a period of one year.  Student fees related to the sale of OnlineANYTIME courses are recognized on a straight-line basis over one year.

The Company’s ELS facilitates training for large organizations thathave locations and training needs throughout the world.  The Company recognizes revenue, derived fromfees based on a percentage of the covered training when the customer isinvoiced.

*Company-Owned Training Centers*

Company-owned training centers earn revenue from the delivery ofinstructor-led and e-Learning computer training courses to individuals andemployer-sponsored individuals from domestic and international, public andprivate corporations, service organizations and government agencies worldwide.Instructor-led learning programs allow students to choose from several options,including training vouchers, club memberships, technical certificationprograms, individual classes, and bootcamps.

Revenue associated with training vouchers, club memberships, technicalcertifications and bootcamps are recognized over time as the services aredelivered, net of estimated returns and refunds.

Revenue recognition rates utilized for certain training vouchers, clubmemberships, and technical certification programs are based on the results ofstudent attendance analyses performed by the Company.  The Company’s student attendance analyseshave been derived from historical experience over the past eight quarterlyanalyses, or two years of trailing data. For training vouchers, club memberships, and technical certificationprograms for which the Company does not perform student attendance analysis,the

F-8

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Company recognizes revenue on a straight-line basis.  Generally, the studentattendance analyses indicate a greater percentage of attendance in the earliermonths and the last month of the time periods associated with trainingvouchers, club memberships, and technical certification programs.  Thus, a greater percentage of revenues arerecognized in these time periods than if the straight-line method were applied.

The continual revision ofestimated student attendance rates results in cumulative adjustments to revenuerecognized for sales transactions consummated in prior periods.  Upon completion of the historical studentattendance analyses in the fourth quarter of 2006, the Company adjusted itsrevenue recognition rates and recorded a decrease in deferred revenue and anincrease in revenue of $1,109.  Uponcompletion of the historical student attendance analyses in the fourth quarterof 2005, the Company adjusted its revenue recognition rates and recorded adecrease in deferred revenue and an increase in revenue of $381.  Upon completion of the historical studentattendance analysis in the fourth quarter of 2004, the adjustments to deferredrevenue amounted to a decrease in deferred revenue and an increase in revenueof $854.

Although the Company believes its current revenue recognition rates areconsistent with current student attendance patterns, no assurance can be giventhat such rates will not change in the future.

*(j)**                       Inventories*

Inventories arestated at the lower of cost or market. Inventory costs are determined using the first-in, first-out (“FIFO”)method.  Inventories consist primarily ofcourseware materials, books, and kits. At December 31, 2006 and 2005, the Company maintained an inventoryvaluation allowance of $23 and $208, respectively.

*(k)**                   Propertyand Equipment*

Property and equipmentare stated at cost, less accumulated depreciation and amortization.Depreciation is computed on a straight-line basis, based upon the estimateduseful lives of the various asset classes. The estimated useful lives are as follows:
| Computer equipment and  software |   | 3 to 5 years                             |
|----------------------------------|--------|------------------------------------------|
|                             |   |                                     |
| Furniture and  fixtures          |   | 5 to 10 years                            |
|                             |   |                                     |
| Leasehold  improvements          |   | Useful life or term of lease, if shorter |

 

Costs incurredrelated to repairs and maintenance that do not improve or extend the life ofthe assets are expensed as incurred.  Thecost and accumulated depreciation on property and equipment sold, retired, orotherwise disposed of is removed from the respective accounts and the resultinggains and losses are reflected in other income.

*(l)**                      Valuationof Long-lived Assets*

Pursuant toStatement of Financial Accounting Standards (“SFAS”) No. 144 - “Accounting forthe Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”), the Companyperforms impairment tests on its long-lived assets if an event or circumstanceindicates that the carrying amount of the long-lived assets may not berecoverable.  During the year endedDecember 31, 2006, the Company recorded long-lived asset impairment chargesrelated to computer software of $391. During the years ended December 31, 2005 and 2004, the Company recordedlong-lived asset impairment charges related to fixed assets held for use at itscompany-owned training centers totaling $2,351 and $1,868, respectively.  The fair value of each impaired asset groupwas determined to be the greater of the

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estimateddiscounted cash flows of the company-owned training center or the current salesprice of like asset groups, which was based on historical sales by theCompany.  See also Note 4 “Property andEquipment” to the Company’s consolidated financial statements for additionaldiscussion.

*(m)**                 Goodwill*

Pursuant to SFASNo. 142 “Goodwill and Other Intangible Assets,” the Company ceased amortizinggoodwill as of January 1, 2002.  Thegoodwill balances attributable to the Company’s franchising reporting unit aretested for impairment annually as of December 31 of each year and on an interimbasis if events or circumstances exist which suggest that goodwill may beimpaired.  Factors the Company considersimportant which could trigger an impairment review include significantunderperformance relative to expected historical or projected future operatingresults, significant changes in the manner of use of acquired assets or thestrategy for the overall business, and significant negative industry oreconomic trends.  The Company utilizes anoutside valuation consultant in determining the fair value of its reportingunits.  Both the income approach and themarket approach are utilized.

No impairment wasrecorded related to the franchising reporting unit during 2006, 2005 or2004.   All goodwill related to thecompany-owned location reporting unit was fully impaired as of December 31,2004 and was accordingly written off. See also Note 5 “Goodwill” to the Company’s consolidated financialstatements for additional discussion.

*(n)**                   IncomeTaxes*

The Companyaccounts for income taxes under SFAS No. 109, “Accounting for Income Taxes.”  Under the asset and liability method of SFASNo. 109, deferred tax assets and liabilities are recognized for future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  Under SFAS No. 109,the effect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.  A valuation allowance is recorded againstdeferred tax assets to the extent the Company believes it is more likely thannot that those assets will not be realized through future taxable income.

The Company regularly analyzes the future recovery ofits deferred tax assets based on its best estimates of future taxableincome.  In the recovery analysis, recentcumulative losses are provided greater weight than estimated futureprofitability.  As a result, due to theabsence of significant positive evidence indicating that future taxable incomeis imminent combined with a decline in the Company’s business and decreasingrevenues, and significant recent losses, the Company concluded that a valuationallowance was required as of December 31, 2006 and 2005.  See also Note 6 “Income Taxes” to the Company’sconsolidated financial statements for additional discussion.

*(o)**                   Stock-BasedCompensation*

Effective January 1, 2006, the Company adopted SFASNo. 123(R), “Share-Based Payments” (“SFAS 123R”), using the modifiedprospective application transition method. The modified prospective applicationtransition method requires compensation cost to be recognized beginning on theeffective date (a) based on the requirements of SFAS 123R for allshare-based payments granted after the effective date and (b) based on therequirements of SFAS 123R for all awards granted to employees prior to theeffective date of SFAS 123R that remain unvested on the effective date. Asall options awards granted prior to the adoption date are fully vested, priorperiods will not reflect restated amounts.

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During 2006, theCompany granted 1,151,000 stock options to employees. As a result, the Companyrecognized approximately $86 of share-based compensation expense related to theadoption of SFAS 123R which is included in the Company’s results of operationsas of December 31, 2006.
| Effects of SFAS 123R                            | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------|------------|
| Share-based  compensation effect on operating loss             |       | $                               | 86         |   |
| Income taxes                                                   |       | —                          |       |
| Net share-based  compensation effect on operating loss         |       | $                               | 86         |   |
|                                                           |       |                            |       |
| Share-based  compensation effect on basic net loss per share   |       | $                               | 0.01       |   |
|                                                           |       |                            |       |
| Share-based  compensation effect on diluted net loss per share |       | $                               | 0.01       |   |

 

The 2006 compensation expense was determined by calculating the fairvalue of each option grant using the Black-Scholes-Merton option-pricing modelassuming risk-free interest rate of 4.9%, volatility of 99%, and zero dividendyield with expected lives of 1 to 3 years.

The total fair value of stock options granted was$379, $1,230 and $2,295 during the year ended December 31, 2006, 2005 and2004, respectively.  At December 31,2006, unrecognized compensation cost related to stock options outstanding as ofDecember 31, 2006 was $299 ($179 after income taxes), which is expected tobe recognized over a weighted average remaining vesting period of approximately2 years.

Prior to January 1, 2006, the Company elected to follow the fairvalue based method of accounting for stock options consistent with AccountingPrinciples Board Opinion No. 25 (“APB 25”) “Accounting for StockIssued to Employees” and to provide the pro forma disclosures of net income andearnings per share as if the fair value based method had been applied.  Under the fair value based method,compensation cost is recorded based on the fair value of the award at the grantdate and is recognized over the service period. No stock-based employee compensationexpense related to stock options was reflected in net income prior toJanuary 1, 2006.

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Had compensation expense been recognized in 2005 and 2004, net loss andloss per share would have been adjusted to the pro forma amounts indicatedbelow:
|                                                                                                                                       | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss, as  reported                                                                                                                |       | $          | (7,280     | )          | $          | (23,170 | ) |
| Less: Stock  dividend and deemed dividend on Series A Preferred Stock                                                                 |       | (2,131     | )          | —     |       |
| Net loss  attributable to common stockholders                                                                                         |       | (9,411     | )          | (23,170    | )          |
| Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |       | (1,302     | )          | (1,071     | )          |
| Net loss, pro  forma                                                                                                                  |       | $          | (10,713    | )          | $          | (24,241 | ) |
|                                                                                                                                  |       |       |       |       |       |
| Basic Loss Per  Common Share                                                                                                          |       |       |       |       |       |
| As reported                                                                                                                           |       | $          | (0.90      | )          | $          | (2.22 | ) |
| Pro forma                                                                                                                             |       | $          | (1.03      | )          | $          | (2.32 | ) |
|                                                                                                                                  |       |       |       |       |       |
| Diluted Loss Per  Common Share                                                                                                        |       |       |       |       |       |
| As reported                                                                                                                           |       | $          | (0.90      | )          | $          | (2.22 | ) |
| Pro forma                                                                                                                             |       | $          | (1.03      | )          | $          | (2.32 | ) |

 

The fair value of each optiongrant was calculated using the Black-Scholes-Merton option-pricing model assumingrisk-free interest rates of 4.5%, volatility of 98%, and zero dividend yieldfor 2005; risk-free interest rates of 3.3%, volatility of 77%, and zerodividend yield for 2004; with expected lives of four to ten years.

Restricted Stock

Pursuant to the terms of the restricted stock agreement (the“Restricted Stock Agreement”), the Company granted the Company’s ChiefExecutive Officer (“CEO”) 350,000 shares of Common Stock (the “RestrictedShares”), subject to the Company’s reaching certain performance goals. Underthe terms of the Restricted Stock Agreement, if the Company reaches an AdjustedEBITDA (as defined in the Restricted Stock Agreement) of (i) $5,000,000 in anyconsecutive twelve month period ending on or before June 30, 2009, or (ii)$1,250,000 during the three months ending June 30, 2009, 175,000 of theRestricted Shares will vest. If the Company reaches its performance target of$7,000,000 in Adjusted EBITDA during any consecutive twelve month period endingon or before June 30, 2011, an additional 175,000 shares of the RestrictedShares will vest. Unvested shares will be held by the Company in escrow, andthe CEO will be entitled to vote and receive dividends on such escrowed shares.In the event that death or disability occurs during employment, the unvestedshares will vest if the twelve month performance target is achieved during thecalendar twelve month period ending immediately following such death ordisability, or if the three month target is reached during the calendar threemonth period ending immediately following such death or disability. All rightsto unvested shares are forfeited upon termination of employment. The RestrictedShares will vest immediately upon a Change in Control (as defined in theRestricted Stock Agreement). The Restricted Shares may not be assigned,transferred or otherwise encumbered until the shares have vested.  The CEO is restricted from transferring orreselling the common stock issued to him upon vesting of the Restricted Sharesuntil such time as such securities are eligible for resale, subject to thevolume and manner of sale limitations, under Rule 144.  As of December 31, 2006, none of therestricted stock had vested and compensation expense has not been recognized inthe Company’s consolidated financial statements.

*(p)**                     LossPer Share*

Earnings per share is computed in accordance with SFAS No. 128, “Earningsper Share”. Basic earnings per common share (“Basic EPS”) is computed bydividing income available to common shareholders by the weighted average numberof common shares outstanding during the period. Shares issued and sharesreacquired during the period are weighted for the portion of the period theywere outstanding.

Diluted earnings per common share (“Diluted EPS”) is computed similarlyto Basic EPS except that the weighted average number of shares outstanding isincreased to include the number of additional common shares that would havebeen outstanding if the potentially dilutive common shares had been issued. TheCompany’s potentially dilutive common shares consist of unexercised stockoptions, restricted shares and warrants.

The computation of Diluted EPS does not assume conversion, exercise orcontingent issuance of securities that may have an anti-dilutive effect onearnings per share. Consequently, Convertible Preferred Stock, stock optionsand warrants with an exercise price greater than the average market price forthe period are not included in the computation of potentially dilutive commonshares. For 2006, 2005 and 2004, options, restricted stock, preferred stock andwarrants that have not been included in the Diluted Loss Per Share computationbecause they would have produced an anti-dilutive effect totaled 3,746,758,5,028,777 and 1,662,625, respectively. See also Note 12 “Stockholders’ Deficit” to the Company’s consolidatedfinancial statements for additional discussion.

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*(q)**                     FairValue of Financial Instruments*

The Company’sconsolidated balance sheets include the following financial instruments:accounts receivable, accounts payable and long-term debt.  The Company considers the carrying amounts inthe financial statements to approximate fair value of these financialinstruments due to the relatively short period of time between the originationof the instruments and their expected realization.

*(r)**                       DeferredCosts*

The Company defers those direct and incremental costsassociated with the sale of products and services for which revenue isdeferred.  Direct and incremental costsassociated with the sale of products and services for which revenue is deferredinclude commissions paid to sales persons and technology and hosting costsassociated with the Company’s e-Learning products. At December 31, 2006 and2005, deferred costs included in our balance sheets totaled $582 and $2,516.Deferred costs are recorded to results of operations at the same rate that theassociated product revenues are recorded to earnings.

*(s)**                       DeferredRent*

In accordance with SFAS No. 13, “Accounting forLeases,” the Company recognizes rent expense on a straight-line basis andrecords deferred rent during periods of free-rent based on the differencebetween cash paid and contractual amounts.

*(t)**                        AdvertisingExpense*

The Company’s North American franchise networkcontributes approximately 1% of their gross revenues to an advertising fund(0.2% outside of North America), which is used by the Company to market andpromote the services provided by the franchise network.  All advertising expenses paid for by the fundare presented net against advertising expenses within the Company’sconsolidated financial statements.  Inaddition, the Company is entitled to retain approximately 15% of the feescollected to offset the internal costs of administering and accounting for thefund.  Total advertising expense was$1,767, $2,822 and $3,770 for the years ended December 31, 2006, 2005 and 2004,respectively.

*(u)**                     RecentAccounting Pronouncements*

In July 2006, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation (“FIN”) No. 48,*“Accountingfor Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109”*(“FIN 48”).  FIN 48 prescribesdetailed guidance for the financial statement recognition, measurement anddisclosure of uncertain tax positions recognized in an enterprise’s financialstatements in accordance with SFAS No. 109,*“Accounting for Income Taxes.”*  Tax positions must meet a more-likely-than-notrecognition threshold at the effective date to be recognized upon the adoptionof FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning afterDecember 15, 2006, and the provisions of FIN 48 will be applied toall tax positions upon initial adoption of the Interpretation.  The cumulative effect of applying theprovisions of this Interpretation will be reported as an adjustment to theopening balance of retained earnings for that fiscal year.  The Company is currently evaluating theimpact, if any, of FIN 48 on our financial statements.

In September 2006, the FASB issued SFAS No. 157,*“Fair Value Measures”* (“SFAS 157”).SFAS 157 defines fair value, establishes a framework for measuring fairvalue in GAAP, expands disclosures about fair value measurements, and appliesunder other accounting pronouncements that require or permit fair valuemeasurements.  SFAS No. 157 does notrequire any new fair value measurements. However, the FASB anticipates that for some entities, the application ofSFAS 157 will change current practice. SFAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007.  The Company

F-13

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does not expect the adoption of SFAS 157 will have a material impact onour financial position, results of operations, and cash flows.

In September 2006, the Securities and Exchange Commission (“SEC”)issued Staff Accounting Bulletin No. 108 (Topic 1N),*“Quantifying Misstatements in Current Year Financial Statements,”*(“SAB 108”).  SAB 108 addresses howthe effect of prior-year uncorrected misstatements should be considered whenquantifying misstatements in current-year financial statements.  It indicates that the current-year correctionof a material error that includes prior-year effects may result in the need tocorrect prior-year financial statements even if the misstatement in the prioryear or years is considered immaterial. Any prior-year financial statements found to be materially misstated inyears subsequent to the issuance of SAB 108 would be restated in accordancewith SFAS No. 154,*“Accounting Changes andError Corrections.”*   Theadoption of SAB 108 did not have a material impact on our financial position,results of operations, and cash flows.

In February 2007, the FASB issued Statement of Financial AccountingStandards No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities”*, (“SFAS 159”). SFAS 159permits entities to choose to measure many financial instruments and certainother items at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. SFAS 159 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007.The Company has not yet determined the impact of adopting SFAS 159 on theCompany’s financial position.

Other recent accounting pronouncements issued by the FASB (includingits Emerging Issues Task Force), the American Institute of Certified PublicAccountants and the SEC did not or are not believed by management to have amaterial impact on the Company’s present or future financial statements.

**2.****              Allowance ForDoubtful Accounts**

Accounts receivable are carriednet of an allowance for doubtful accounts. The allowance for doubtful accounts includes the following:
|                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance,  beginning of year |       | $        | 2,917      |     | $          | 1,731    |       | $ | 2,467 |   |
| Provisions                  |       | 850      |       | 2,596    |       | 3,015    |       |
| Write offs                  |       | (2,070   | )          | (1,410   | )          | (3,751   | )          |
| Balance, end of year        |       | $        | 1,697      |     | $          | 2,917    |       | $ | 1,731 |   |

 

**3.****              Debt**

On July 19, 2006, the Company entered into a Credit Agreement (the“Credit Agreement”) among the Company, Camden Partners Strategic III, LLC (“CamdenLLC”), as administrative agent, Camden Partners Strategic Fund III, L.P. (“CamdenIII”), Camden Partners Strategic Fund III-A, L.P. (“Camden III-A”, with CamdenLLC and Camden III, “Camden”), George S. Rich and Alkhaleej Training andEducation Corporation (“Alkhaleej”), (collectively, “the Lenders”).

The Credit Agreement provides for a $4 million term loan,comprised of a single advance from each of the Lenders, which matures onJuly 19, 2009 (the “Financing”). Under the terms of the Credit Agreement, interest is paid quarterly, atthe annual rate of 10% per year.  Concurrentwith the execution of the Credit Agreement, the Company converted alloutstanding Preferred Series A Stock (“Series A Shares”) and accrued dividendsand interest into 174,693 shares of Preferred Series

F-14

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B Stock (“Series BShares”).  In the event that any paymentis not made when due, all outstanding obligations under the Credit Agreementwill accrue interest at the default rate equal to 12% per year.  Accrued and unpaid interest on past dueamounts will compound monthly.  Theindebtedness  may be required to beprepaid in the event of certain receipts by the Company.  No prepayment shall be required upon thedisposition of any location owned by the Company.  All or any portion of the outstandingprincipal may be prepaid in whole or in part subject to restrictions.  Asof December 31, 2006, the Company was in default of various covenants of theCredit Agreement including the failure to file financial reports and excesscapital expenditures and capital lease obligations.  The Company has obtained a waiver of theseevents of default. See Note 12 “Stockholders’ Deficit” for additionaldiscussion.

F-15

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*Wells Fargo Credit Agreement*

On February 27, 2003 and as amended December 16, 2003 and February 7,2005, the Company consummated a credit agreement (the “Wells Fargo CreditAgreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). Theavailable funds under the initial Wells Fargo Credit Agreement totaled $12,139,consisting of a term loan of $10,639 and revolving loan of $1,500. As ofDecember 31, 2006 and 2005, the outstanding balance on the facility totaled $0and $980. The loan also included a $1,000 sub-limit for the issuance of standbyand commercial letters of credit. One standby letter of credit was outstandingunder the revolving loan as of December 31, 2005 for $650. No standby letter ofcredit was outstanding at December 31, 2006. Borrowings under the Wells Fargo Credit Agreement were collateralized bysubordinating all of the Company’s assets. After failing to comply with financial covenants at September 30, 2004,December 31, 2004 and March 31, 2005, the Wells Fargo Credit Agreement wasamended in July 2005 to require the Company to make monthly payments toextinguish the debt by June 15, 2006.

On May 3, 2006, the Company paid in full the remaining principal amountof $260 plus interest on the term note due pursuant to the Wells Fargo CreditAgreement.

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**4.****              Property andEquipment**

Propertyand equipment are comprised of the following:
|                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Computer  equipment and software                 |       | $        | 6,540      |     | $          | 18,409 |   |
| Furniture and  fixtures                          |       | 355      |       | 4,282    |       |
| Leasehold  improvements                          |       | 2,080    |       | 2,843    |       |
|                                             |       | 8,975    |       | 25,534   |       |
| Less: accumulated  depreciation and amortization |       | (5,967   | )          | (22,168  | )          |
| Total                                            |       | $        | 3,008      |     | $          | 3,366 |   |

 

During 2006, the Company recorded a non-cash impairment charge of $391against fixed assets at the Company’s corporate location.  During 2005, the Company recorded a non-cashimpairment charge of $2,351 against fixed assets at the Company’s Chicago,Cleveland and New York City company-owned training centers. During 2004, theCompany recorded a non-cash impairment charge of $1,868 which primarily relatedto fixed assets at the Company’s Anaheim, Charlotte, Chicago, Cleveland,Memphis, Los Angeles and Sacramento company-owned training centers. Thenon-cash impairment charge is the result of continued operating and cash flowlosses arising from the respective training centers and a decrease in theestimated fair value of each company-owned training centers. The estimated fairvalue of each company-owned training center was determined based on the greaterof the estimated discounted cash flows of the company-owned training centers orrecent sales of comparable locations within the Company’s franchise network.

The Company has no material commitments to purchase property andequipment in 2007.

Depreciation expense was $1,726, $3,042 and $6,207 for the years endedDecember 31, 2006, 2005 and 2004, respectively.

**5.****              Goodwill**

No impairment wasrecorded related to the franchising reporting unit during 2006, 2005 or2004.  Company-owned location goodwillwas fully impaired as of December 31, 2004 by $6,960.  Such charge is reflected in the Company’sconsolidated statement of operations for the year then ended.

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**6.****              Income Taxes**

Income tax expense for the periods below differs from the amountscomputed by applying the United States federal income tax rate of 34% to pretaxincome as a result of the following:
|                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed  “expected” tax benefit                               |       | $        | (343       | )        | $          | (2,186   | )          | $ | (7,559 | ) |
| State and local  tax expense (benefit), net of federal income tax effect |       | 109      |       | (296     | )          | (825     | )          |
| Foreign taxes                                                            |       | 522      |       | 583      |       | 544      |       |
| Valuation  allowance for deferred tax assets                             |       | 629      |       | 2,681    |       | 8,897    |       |
| Other                                                                    |       | 102      |       | 68       |       | (121     | )          |
| Income tax  expense from continuing operations                           |       | $        | 1,019      |     | $          | 850      |       | $ | 936 |   |
|                                                                     |       |     |       |     |       |     |       |
| Effective rates                                                          |       | (100.91  | )%         | (13.22   | )%         | (4.21    | )%         |

 
|                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax  expense consists of:               |       |     |       |     |       |     |       |
| Federal:                                       |       |     |       |     |       |     |       |
| Deferred                                       |       | $        | —     |     | $          | —   |       | $ | — |   |
| Current                                        |       | —   |       | —   |       | —   |       |
| State and local:                               |       |     |       |     |       |     |       |
| Deferred                                       |       | —   |       | —   |       | —   |       |
| Current                                        |       | 228      |       | (34      | )          | 111      |       |
| Foreign                                        |       | 791      |       | 884      |       | 825      |       |
| Income tax expense from  continuing operations |       | $        | 1,019      |     | $          | 850      |       | $ | 936 |   |

 

The tax effects oftemporary differences that give rise to significant portions of the deferredtax assets and liabilities at December 31, 2006 and 2005, are presented below:

F-18

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|                                                                          | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Deferred tax  assets:                                                    |       |                                                     |       |                                                     |       |
| Accounts receivable, principally due to allowance  for doubtful accounts |       | $                                                        | 1,103      |                                                     | $          | 1,624 |   |
| Reserve for uninsured losses and litigation                              |       | 101                                                      |       | —                                                   |       |
| Accrued expenses                                                         |       | 264                                                      |       | 427                                                      |       |
| Property and equipment, principally due to  differences in depreciation  |       | 751                                                      |       | 1,116                                                    |       |
| Net operating loss                                                       |       | 19,771                                                   |       | 15,648                                                   |       |
| Deferred rent                                                            |       | 216                                                      |       | 469                                                      |       |
| Goodwill                                                                 |       | 12,402                                                   |       | 14,813                                                   |       |
| Other                                                                    |       | 244                                                      |       | 196                                                      |       |
|                                                                     |       | 34,852                                                   |       | 34,293                                                   |       |
| Deferred tax  liabilities:                                               |       |                                                     |       |                                                     |       |
| Prepaid expenses                                                         |       | (4                                                       | )          | (74                                                      | )          |
|                                                                     |       |                                                     |       |                                                     |       |
| Valuation  allowance                                                     |       | (34,848                                                  | )          | (34,219                                                  | )          |
| Net deferred income  taxes                                               |       | $                                                        | —     |                                                     | $          | — |   |

 

The Company regularly analyzes the future recovery of its deferred taxassets based on its best estimates of future taxable income. In the recoveryanalysis, a decline in the Company’s business since 2001 combined withdecreasing revenues and recent cumulative losses are provided greater weightthan estimated future profitability. As a result, due to the absence ofsignificant positive evidence indicating that future taxable income isimminent, the Company concluded that a full valuation allowance is required asof December 31, 2006 and 2005.

The Company performed an analysis of the deferred income tax assets andliabilities for the quarter ended December 31, 2006 and determined that theadditional net deferred tax asset calculated as of December 31, 2006 of $629required an equal valuation allowance, which brought the total valuationallowance at December 31, 2006 to $34,848.

As December 31, 2006 and 2005, the Company had federal and state netoperating loss carryforwards of approximately $50,178 and $39,340,respectively, which will begin to expire in 2023 and 2008 respectively, unlessutilized. Pursuant to Section 382 and 383 of the Internal Revenue Code, annualuse of the Company’s net operating loss carryforwards may be limited in theevent of a cumulative change in ownership of more than 50% within a three-yearperiod.

**7.****              Prepaid Expenses**

Prepaid expenses are comprised of the following:
|                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| Deferred costs   |       | $        | 582        |     | $          | 2,516 |   |
| Prepaid expenses |       | 312      |       | 812      |       |
| Prepaid rent     |       | 422      |       | 625      |       |
| Total            |       | $        | 1,316      |     | $          | 3,953 |   |

 

F-19

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**8.****              OtherAssets**

Other assets are comprised of the following:
|                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Notes receivable  from franchisees, net of allowance |       | $        | 188        |     | $          | 299 |   |
| Security  deposits                                   |       | 696      |       | 416      |       |
| Other                                                |       | 417      |       | —   |       |
|                                                 |       | 1,301    |       | 715      |       |
| Less: Current  portion of notes receivable           |       | (145     | )          | (223     | )          |
| Total other assets –  long term                 |       | $        | 1,156      |     | $          | 492 |   |

 

Notes receivable from franchisees is shown net of an allowancefor loan losses of $349 and $251 as of December 31, 2006 and 2005,respectively.

**9.****              RelatedParty Transactions**

Note receivable from an officer, dated August 31,1999, totaling $300 relates to a non-interest bearing term loan, was due andpayable on August 31, 2007. The note was issued in connection with such officer’srelocation expenses. Per the agreement dated February 7, 2006 between theCompany and the officer, the note balance of $300 was forgiven effective July31, 2006. The director note receivable totaling $711 as of December 31, 2004,was paid in full in December 2005.

**10.****       OtherCurrent Liabilities**

Other current liabilities are comprised of thefollowing:
|                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Accounts payable  to franchisees                   |       | $        | 3,575      |     | $          | 5,133 |   |
| Salaries, wages  and commissions payable           |       | 2,448    |       | 3,572    |       |
| Royalties and  fees payable to courseware partners |       | 337      |       | 3,283    |       |
| Deferred revenue                                   |       | 1,694    |       | 2,811    |       |
| Accrued  operating expenses and other liabilities  |       | 7,189    |       | 7,556    |       |
| Total                                              |       | $        | 15,243     |     | $          | 22,355 |   |

 

**11.****       EmployeeSavings Plan**

The Company established the New Horizons Worldwide, Inc. 401(k)Retirement Savings Plan (the “Plan”) on January 1, 1995.  All full-time employees of the Company areeligible to participate in the Plan after six months of employment.  While the Plan provides for a discretionarymatch of employee contributions, the Company did not match such contributionsin 2006, 2005 or 2004.

**12.****       Stockholders’Deficit**

(a)          PreferredStock

*Convertible Series B*

On July 19, 2006, the Company entered into a Credit Agreement (the“Credit Agreement”) among the Company, Camden Partners Strategic III, LLC (“CamdenLLC”), as administrative agent, Camden Partners Strategic Fund III, L.P. (“CamdenIII”), Camden Partners Strategic Fund III-A, L.P. (“Camden III-A”, with 

F-20

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Camden LLC and Camden III, “Camden”), George S. Rich and AlkhaleejTraining and Education Corporation (“Alkhaleej”), (collectively, “the Lenders”)

The Credit Agreementprovides for a $4 million term loan, comprised of a single advance fromeach of the Lenders, which matures on July 19, 2009 (the“Financing”).  Under the terms of theCredit Agreement, interest is paid quarterly, at the annual rate of 10% peryear.   Concurrent with the execution ofthe Credit Agreement, the Company converted all outstanding Preferred Series AStock (“Series A Shares”) and accrued dividends and interest into 174,693shares of Preferred Series B Stock.  SeeNote 3 “Debt” to the Company’s consolidated financial statements for additionaldiscussion.

In connection withthe Financing discussed in Note 3 - “Debt”, the Company entered into an Amendedand Restated Stockholders’ Agreement with Camden, Alkhaleej, and the holders ofWarrants (the “Warrant Holders”), dated as of July 19, 2006 (the “AmendedStockholders’ Agreement”).  The AmendedStockholders’ Agreement amends and restates the Stockholders’ Agreement, datedas of February 7, 2005, and filed as Exhibit 10.2 to the Company’sCurrent Report on Form 8-K dated February 11, 2005. Pursuant to theAmended Stockholders’ Agreement and the Certificate of Designation, theSeries B Stockholders are entitled to elect three directors to the Boardof Directors (the “Series B Preferred Directors”).  All other directors of the Company will beelected by holders of Common Stock and the Series B Stockholders voting asa single class, on an as-converted basis. Pursuant to the Amended Stockholders’ Agreement, for so long as theSeries B Stockholders are entitled to elect Series B PreferredDirectors, the Company, each Series B Stockholder and each Warrant Holderare required to take certain actions, including, without limitation, to establishthe size of the Board at nine directors, to elect the Series B PreferredDirectors, with such directors initially being Donald W. Hughes, David L.Warnock and Alwaleed Aldryann, and, within eighteen (18) months of thedate of the Amended Stockholders’ Agreement, to elect an independent directorto replace an incumbent director. Additionally, Camden is required to vote all of its shares in favor ofthe Common Directors proposed by the Board of Directors’ GovernanceCommittee.  Under the terms of theAmended Stockholders’ Agreement, for as long as the loan is outstanding orAlkhaleej beneficially holds not less than seventy-five percent (75%) of theSeries A Warrants issued, or the Common Stock issued pursuant to theWarrants, the Company, the holders of Series B Shares and Alkhaleej shalltake all steps necessary to retain Mr. Aldryann as a Director.  The Amended Stockholders’ Agreement alsoprovides that so long as Camden holds at least 25% of the Series B Shares,it will have board observation rights. Under the terms of the AmendedStockholders’ Agreement, the Series B Stockholders may transferSeries B shares subject to a right of first refusal by the Company.  Under the terms of the Amended Stockholders’Agreement, the Company granted preemptive rights with respect to futureissuances of equity securities by the Company to each holder of at 10,000Series B Shares and each Warrant Holder, subject to customary exceptions.

*Amended and Restated Registration Rights Agreement*

In connection withthe Credit Agreement, the Company entered into an Amended and RestatedRegistration Rights Agreement, dated July 19, 2006, by and among the Company,Camden, Alkhaleej and the Warrant Holders (the “Amended Registration RightsAgreement”).  The Amended Registration RightsAgreement amends and restates the Registration Rights Agreement, dated as ofFebruary 8, 2005, and filed as Exhibit 10.3 to the Company’s Current Report onForm 8-K dated February 11, 2005. Pursuant to the terms of the Amended Registration Rights Agreement, theCompany agreed to register the resale of the shares of Common Stock issuableupon conversion of the Series B Shares and the Warrants under the SecuritiesAct of 1933 (the “Securities Act”) under certain circumstances.  These rights include two opportunities torequire registration by the Company, at any time after the Company is eligibleto file a registration statement on Form S-3, as well as the right toparticipate in other registrations initiated by the Company or otherstockholders.  The Amended RegistrationRights Agreement provides for customary indemnifications between the Company,Camden and the Warrant Holders.  Underthe Amended Registration Rights Agreement, the Company agreed not to grantregistration rights with respect to Common Stock to any other person unlesssuch rights are subordinate to those granted under the Amended RegistrationRights Agreement. The Company has concluded that the registration rightsagreement does not meet the definition of a derivative because it does not requirethe Company to have the registration statement declared effective by the end ofa specified period or pay liquidating damages to the Series B shares if theregistration statement is not declared effective or effectiveness is notmaintained for a prescribed period. In reaching its conclusion, the Companyutilized the guidance in FASB Staff Position No. EITF 00-19-2 “Accounting forRegistration Payment Arrangements”.

*Certificate of Decrease*

In connection with theExchange, on July 10, 2006, the Company filed a Certificate of Decreaserelating to the Certificate of Designation, Preferences and Rights of Series AConvertible Preferred Stock of the Company (the “Certificate of Decrease”) withthe Secretary of State of the State of Delaware to decrease the number ofdesignated shares of Series A Preferred from 2,000,000 shares to 1,638,398shares.

F-21

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*Certificate of Designation of Series B Shares*

Subsequent tofiling the Certificate of Decrease, on July 10, 2006, the Company filed aCertificate of Designation, Preferences and Rights of Series B ConvertiblePreferred Stock (the “Certificate of Designation”), pursuant to which theSeries B Shares are entitled to receive cumulative quarterly dividends at aninitial rate of 8% per annum when, as and if declared by the Company’s Board ofDirectors.  On the fourth anniversary ofthe date of issuance, the dividend rate will increase to 12% per annum.  Upon any liquidation, dissolution or windingup of the corporation, either voluntary or involuntary, the Series B Shares areentitled to a liquidation preference in an amount equal to $37.50 per share,plus any accrued but unpaid dividends. At December 31, 2006, cumulative, undeclared and unaccrued dividendsequaled approximately $240.  A Change ofControl (as defined in the Certificate of Designation) will be considered aliquidation event, unless a majority of the outstanding Series B Shares electotherwise.  The Series B Shares areconvertible at any time, at the option of each holder of Preferred Series BShares, into fully paid and non-assessable shares of Common Stock,  initially at the conversion rate is 20.8333shares of Common Stock for one Series B Share. The conversion price of the Series B Shares is subject to adjustment inthe event of a consolidation, merger subdivision or combination of shares orthe issuance of stock dividends, in the event that the Company issuesadditional shares of Common Stock at a price per share which is less than theconversion price, or in the event that the Company issues warrants, options orother stock purchase rights for which the purchase price for the Common Stockis less than the conversion price. The Company has concluded that the embeddedconversion feature in the Series B Shares does not qualify for bifurcation asit meets the scope exception of paragraph 11 a of SFAS No. 133 “Derivatives andHedging Activities”. The conversion feature is indexed to the Company’s owncommon stock and meets the criteria of EITF 00-19- Issue No. 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”.  At any time after February 7, 2007, theCompany may convert all the Series B Shares into shares of Common Stock at thethen-applicable conversion price; provided that the Common Stock meets certainrequirements with respect to trading volume and price on the market or exchangeon which the Common Stock is trading, or if none, by a nationally recognizedquotation reporting service, and there is then in effect a registrationstatement permitting the resale of the Common Stock received upon conversion ofthe Series B Shares. At any time after February 7, 2009, the Company mayconvert fifty percent (50%) of the Series B Shares into shares of Common Stockat the then-applicable conversion price; provided that the Common Stock meets acertain requirement with respect to its trading price on the market or exchangeon which the Common Stock is trading, or if none, by a nationally recognizedquotation reporting service, and there is then in effect a registrationstatement permitting the resale of the Common Stock received upon conversion ofthe Series B Shares.  The Companymay convert all Preferred Series B Shares not previously converted any timeafter February 7, 2011; provided that the Common Stock meets a certaintrading price requirement on the market or exchange on which the Common Stockis trading, or if none, by a nationally recognized quotation reporting serviceand there is then in effect a registration statement permitting the resale of theCommon Stock received upon conversion of the Series B Shares.  At any time after the sixth anniversary ofthe date that Series B Shares are first issued, the Company may redeem theSeries B Shares, in whole or in part, at a redemption price equal to 2.25times the original issue price of the Series B Shares, $37.50, plus anamount equal to the accrued but unpaid dividends thereon.  Until the holders of Series B Shares ownless than 50% of the Series B Shares originally issued, the Company cannot takecertain actions without obtaining the approval of the holders of a majority ofthe outstanding Series B Shares, including the issuance, creation,designation or authorization of any new equity securities having rights orpreferences senior to or on parity with the Series B Shares, incurindebtedness in excess of $5 million, effect a single capital expenditurein excess of $2,500, or enter into an acquisition or joint venture for whichthe consideration is in excess of $2,500. As long as at least fifty percent(50%) of the Series B Shares issued upon the closing of the ExchangeAgreement remain outstanding, the holders thereof shall be entitled to elect,at a meeting of such stockholders, three Series B Directors, who will notserve a classified term with the directors elected by the holders of CommonStock together with the holders of any other class or series of capital stockentitled to vote thereon.  In addition,holders of the Preferred Series B Shares are entitled to vote with the CommonStock as a single class at stockholders’ meetings, on an as-convertedbasis.  The rights of the Series AShares have been eliminated and replaced by the rights granted under theSeries B Shares.  The rights of theCommon Stock have been materially limited by the issuance of the Series BShares.  The general effect of theissuance of the Series B Shares upon the rights of the holders of theCommon Stock is more fully described in the Certificate of Designation, asdescribed above.

 

*Certificate of Elimination*

On July 20, 2006,the Company filed with the Secretary of State of the State of Delaware aCertificate of Elimination of Series A Convertible Preferred Stock toeliminate all matters set forth in the Certificate of Designation with respectto the Series A Shares from the Company’s Certificate of Incorporation.

* *

*Convertible Series A*

On February 7, 2005, the Company entered into the Series A StockPurchase Agreement (the “Purchase Agreement”) with Camden Partners StrategicFund III, L.P. and Camden Partners Strategic Fund III-A, L.P (together “CamdenPartners”) to issue and sell in an offering exempt from registration under theSecurities Act of 1933, as amended, 1,600,000 shares of its Series AConvertible Preferred Stock (“Series A Shares”), without par value, at a pershare price of $3.75, for an aggregate offering price of $6,000.  The Series A Shares were issued on February8, 2005.  Each Series A Share isconvertible into one share of the Company’s common stock, subject to adjustmentas set forth in the Certificate of Designation, Preferences and Rights ofSeries A Shares filed with the Secretary of State of the State of Delaware,dated as of February 7, 2005.  The netproceeds of the Series A Share offering was $5,440, and were used for workingcapital and other general corporate purposes. Pursuant to the Purchase Agreement, the Company has agreed to indemnifyCamden Partners for breaches of representations, warranties and covenantscontained in the Purchase Agreement and the other agreements relating to theSeries A Share offering.  The Series AShares are entitled to receive cumulative quarterly dividends at an initialrate of 6% per annum at the end of each fiscal quarter.  The dividend rate has an annual escalationbased on specific terms and conditions included in the Purchase Agreement.    In connection with the Series A Shareoffering, the Company entered into a Stockholders’ Agreement with CamdenPartners, dated February 8, 2005.  Bothof these agreements have been amended and the Series A Shares exchanged as perthe Credit Agreement dated July 19, 2006 as discussed above.

Beneficial ConversionFeature Associated with Series A Preferred Stock

The Series A Preferred Stock Shares contain a beneficial conversionfeature.  In accordance with the FASB’sEmerging Issues Task Force (EITF) Issue No. 00-27, “Application of EITF 98-5 toCertain Convertible Instruments”, the Company recorded an imputed dividend tothe Series A Preferred shareholders as a reduction of additional paid incapital of $1,808 during the quarter ended March 31, 2005 because theconversion price was below the fair value of the Company’s common stock atissuance.  The Series A preferred shareswere exchanged per the Credit Agreement as noted above.

F-22

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(b)         RestrictedStock

Pursuant to the terms of the restricted stockagreement (the “Restricted Stock Agreement”), the Company granted the Company’sChief Executive Officer (“CEO”)  350,000shares of Common Stock (the “Restricted Shares”), subject to the Company’sreaching certain performance goals. As of December 31, 2006, none of therestricted stock had vested and compensation expense has not been recognized inthe Company’s consolidated financial statements.

(c)          StockOption Plans

The Companymaintains an Omnibus Equity Plan, which provides for the issuance ofnon-qualified options, incentive stock options, and stock appreciationrights.  The Omnibus Equity Plan providesfor the granting of options to purchase up to 2,250,000 shares of commonstock.  Incentive stock options areexercisable for up to ten years, at an option price of not less than the fairmarket value on the date the option is granted, or at a price of not less than110% of the fair market price in the case of an option granted to an individualwho, at the time of grant, owns more than 10% of the Company’s commonstock.  Non-qualified stock options maybe issued at such exercise price and on such other terms and conditions as theCompensation Committee of the Board of Directors may determine.  Optionees may also be granted stockappreciation rights under which they may, in lieu of exercising an option, electto receive cash or common stock, or a combination thereof, equal to the excessof the fair market value of the common stock over the option price at the dateof exercise.  All options were granted atthe average of the Company’s opening and closing price of its common stock asof the date of grant.

Independent directors of the Company hold options to acquire a total of213,333 shares of common stock all of which were issued prior to 2006.  Options were not issued to directors during2006.  The exercise price under all suchoptions was equal to the average of the Company’s opening and closing price ofits common stock as of the date of grant.

F-23

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Changes in shares and disclosures required under SFAS 123R, for allcurrent and former plans and other arrangements, for the year ended December31, 2006 are summarized as follows:
| 2006                                                                | ** ** | **Shares** | ** ** | **Weighted   Average   Price** | ** ** | **Weighted   Average   Contractual   Period (Yrs)** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding,  beginning of year                                     |       | 1,569,266  |       | $                                        | 6.85       |                                                                    |       |                                        |       |   |
| Granted                                                             |       | 1,151,000  |       | 0.98                                     |       |                                                                    |       |                                        |       |
| Exercised                                                           |       | —     |       | —                                   |       |                                                                    |       |                                        |       |
| Canceled                                                            |       | (649,175   | )          | 6.25                                     |       |                                                                    |       |                                        |       |
| Outstanding, end  of year                                           |       | 2,071,091  |       | $                                        | 3.77       |                                                                    | 5.62       |                                        | $          | 223 |   |
|                                                                |       |       |       |                                     |       |                                                                    |       |                                        |       |
| Vested and  expected to vest                                        |       | 1,954,911  |       | 3.93                                     |       | 0.51                                                                    |       | 208                                         |       |
|                                                                |       |       |       |                                     |       |                                                                    |       |                                        |       |
| Options  exercisable, end of year                                   |       | 1,080,091  |       | $                                        | 6.30       |                                                                    | 2.64       |                                        | $          | 0.00 |   |
|                                                                |       |       |       |                                     |       |                                                                    |       |                                        |       |
| Weighted average fair  value of all options granted during the year |       |       |       | $                                        | 0.33       |                                                                    |       |                                        |       |   |

 

The aggregate intrinsic value in the table above represents thedifference between the Company’s closing stock price on the last trading day ofthe year (December 29, 2006) and the exercise price, multiplied by the numberof in-the-money options outstanding, whether vested or not vested.

The total fair value of stock options granted was $379, $1,230 and$2,295 during the years ended December 31, 2006, 2005 and 2004,respectively.  At December 31, 2006,unrecognized compensation cost related to stock options outstanding as ofDecember 31, 2006 was $299 ($179 after income taxes), which is expected tobe recognized over a weighted average remaining vesting period of approximately2 years.

F-24

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Changes in sharesand disclosures required under APB 25, for all current and former plans andother arrangements, for years ended December 31, 2005 and 2004 respectively aresummarized as follows:
| ** **                                                          | ** ** | **2005  Shares** | ** ** | **Weighted   Average   Price** | ** ** | **2004  Shares** | ** ** | **Weighted   Average   Price** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|------------------------------------------|------------|------------------|------------|------------------------------------------|------------|
|                                                                |       |             |       |                                     |       |             |       |                                     |       |
| Outstanding,  beginning of year                                     |       | $                | 1,728,666  |                                     | $          | 8.55             |       | 1,968,032                                |       | $ | 9.42 |   |
|                                                                |       |             |       |                                     |       |             |       |                                     |       |
| Granted                                                             |       | 407,500          |       | 3.90                                     |       | 527,508          |       | 5.77                                     |       |
| Exercised                                                           |       | —           |       | —                                   |       | (1,500           | )          | 4.70                                     |       |
| Canceled                                                            |       | (566,900         | )          | 9.71                                     |       | (765,374         | )          | 8.88                                     |       |
|                                                                |       |             |       |                                     |       |             |       |                                     |       |
| Outstanding, end  of year                                           |       | $                | 1,569,266  |                                     | $          | 6.85             |       | 1,728,666                                |       | $ | 8.55 |   |
|                                                                |       |             |       |                                     |       |             |       |                                     |       |
| Options  exercisable, end of year                                   |       | $                | 1,569,266  |                                     | $          | 6.85             |       | 1,078,476                                |       | $ | 8.91 |   |
|                                                                |       |             |       |                                     |       |             |       |                                     |       |
| Weighted average fair  value of all options granted during the year |       |             |       | $                                        | 3.19       |             |       |                                     | $          | 4.35 |   |

 

Outstanding stock options at December 31, 2006 consist of thefollowing:
| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                          | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Shares**                   | ** ** | **Weighted   Average   Remaining   Life (Years)** | ** ** | **Weighted   Average   Price** | ** ** | **Shares** | ** ** | **Weighted Average   Price** | ** ** |
| $                                           | 0.67       | -                            | $          | 0.80                                                                  |       | 518,000 |   | 8.09 |   | $ | 0.74 |   | — |   | $ | — |   |
| $                                           | 1.10       | -                            | $          | 1.50                                                                  |       | 473,000 |   | 9.72 |   | $ | 1.32 |   | — |   | $ | — |   |
| $                                           | 2.15       | -                            | $          | 5.79                                                                  |       | 624,958 |   | 3.40 |   | $ | 4.58 |   | 624.958 |   | $ | 4.58 |   |
| $                                           | 6.04       | -                            | $          | 12.06                                                                 |       | 384,133 |   | 1.90 |   | $ | 7.72 |   | 384,133 |   | $ | 7.72 |   |
| $                                           | 13.75      | -                            | $          | 13.75                                                                 |       | 71,000 |   | 0.01 |   | $ | 13.75 |   | 71,000 |   | $ | 13.75 |   |
|                                        |       | -                            |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| $                                           | 0.67       | -                            | $          | 13.75                                                                 |       | 2,071,091 |   | 5.62 |   | $ | 3.77 |   | 1,081,091 |   | $ | 6.30 |   |

 

As of December 31, 2006, there were 178,909 shares of common stockunder the Omnibus Equity Plan that were available for future grant.

(d)         Accelerationof Stock Options

On December 12,2005, the Board of Directors of the Company upon the recommendation of theBoard’s Compensation Committee, approved the acceleration of the vesting of alloutstanding stock options granted under the Company’s stock option plans heldby employees and officers, that were both unvested and “out-of-the-money” as ofDecember 12, 2005.  As a result ofthe decision to accelerate vesting, options to purchase 539,675 shares,representing approximately 32% of total options outstanding of the Company’scommon stock, which would have vested from time to time over the next fouryears, became immediately exercisable. The number of shares, exercise prices, and remaining terms of theOptions subject to the acceleration remain unchanged.

The accelerated optionsincluded 266,250 options held by the Company’s executive officers and 273,425options held by employees.  Theacceleration did not impact options held by the Company’s non-employeedirectors.  Based on the Company’sclosing stock price of $0.79 per share on December 12, 2005, all of theaccelerated options had exercise prices above the closing stock price at thattime.  The accelerated options hadexercise prices ranging from $2.15 to $13.75 per share.  The weighted average exercise price of allaccelerated options was $5.33 per share. There was no incremental cost uponacceleration under SFAS No. 123R.

(e)   *Series AWarrants*

The Company issued Series A Warrants (the “Series AWarrants”) to the Lenders to purchase, in the aggregate, 2,000,000 shares of commonstock of the Company.  The Series AWarrants entitle the warrant holder to exercise the warrant to purchase commonshares beginning after July 19, 2006, until July 19, 2011, at anexercise price of $1.50 per common share. The exercise price is subject to adjustment under certain circumstancesspecified in the Series A Warrants.

*Series B Warrants*

The Company issuedSeries B Warrants (the “Series B Warrants”) and together with theSeries A Warrants, (the “Warrants”) to the Lenders to purchase, in theaggregate, 666,667 shares of common stock of the Company.  The Series B Warrant entitles thewarrant holder to exercise the warrant to purchase common shares (the“Series B Warrant Shares”) beginning August 15, 2007, untilJuly 19, 2011, at an exercise price of $1.50 per share. The Series BWarrants are subject to cancellation in full, in the event that both of thefollowing occur: (i) the Adjusted EBITDA (as defined in the CreditAgreement) for the three-month period ending June 30, 2007 is greater than$750,000, as determined under the terms of the Series B Warrant, and(ii) certain claims have been resolved in accordance with the terms of theSeries B Warrant.  The number of Series BWarrant shares to be issued are subject to cancellation in part in the eventthat condition (i) above is satisfied, but condition (ii) above isnot.  The exercise price of theSeries B Warrants is subject to adjustment under certain circumstances as specifiedin the Series B Warrants.

F-25

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**13.****       Commitments andContingencies**

*(a)**       Leases*

The Company leasesits offices, training facilities and certain equipment under operating leaseobligations.  Operating leases expire onvarious dates through 2015.

The future minimumlease payments under the non-cancelable operating leases are as follows:
| 2007                 |   | $     | 7,360  |   |
|----------------------|--------|-------|--------|--------|
| 2008                 |   | 6,050 |   |
| 2009                 |   | 5,154 |   |
| 2010                 |   | 4,327 |   |
| 2011                 |   | 3,291 |   |
| 2012 and  thereafter |   | 4,875 |   |
|                 |   | $     | 31,057 |   |

 

Rent expense was$7,381, $10,295, and $11,145 for the years ended 2006, 2005, and 2004,respectively.

The future minimumsublease receipts under the non-cancelable operating leases are as follows:
| 2007                 |   | $      | 1,517  |   |
|----------------------|--------|--------|--------|--------|
| 2008                 |   | 1,310  |   |
| 2009                 |   | 1,213  |   |
| 2010                 |   | 1,053  |   |
| 2011                 |   | 802    |   |
| 2012 and  thereafter |   | — |   |
|                 |   | $      | 5,895  |   |

 

F-26

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*(b)   Purchase Commitment*

Effective July 1,2004, the Company entered an Amended and Restated Content License Agreementwith a vendor that terminates on December 31, 2006 and obligates the Company topurchase $15.0 million of such products and services over the term of theAgreement.  The Company has satisfiedthis agreement as of December 31, 2006. This Agreement was not renewed in 2007.

*(c)   Litigation*

On February 24,2006, the Company reached a settlement in the amount of $850 with a plaintiffwho was a former employee of the Company. The settlement was paid in installments during 2006.  The Company’s insurance carrier contributed$192 to the settlement.  In connectionwith this case, the Company accrued a loss on legal settlement of $658 in 2005.

During the fourthquarter of 2004, the Company agreed to settle a putative class action lawsuitfiled by two former employees of the Company. The Company settled the matter with a class comprised of persons employedby the Company as instructors during the class period from July 29, 1998through December 31, 2002.  The Companypaid a settlement amount of $1,700 on May 20, 2005 to the class members inconsideration of the full and final compromise, settlement and dismissal withprejudice of the litigation and all claims that have been or could have beenasserted therein, on and subject to the terms and conditions of a SettlementAgreement entered into on December 29, 2004.

On May 10, 2004, the Company reached a settlement ofcertain environmental liabilities in the amount of approximately $557 inconnection with the sale of its environmental remediation business in1996.  This amount was paid during thesecond quarter of 2004.

The Company alsois involved in various other claims and legal actions arising in the ordinarycourse of business.  In the opinion ofmanagement, the ultimate disposition of these matters will not have a materialadverse effect on the Company’s consolidated financial position or results of operations.

*(d)   Guarantees*

The Company hasmade guarantees and indemnities, under which it may be required to makepayments to a guaranteed or indemnified party. Due to events in certain company-owned training centers in 2006, theCompany has deposited $751 as of December 31, 2006 to guarantee performance invarious states with respect to providing training to consumers.  In the event the Company was to abandontraining in a state where there is a deposit, the state agency could draw downthe deposit to satisfy undelivered training obligations.    The Company has agreed to indemnify itsfranchisees against any trademark infringement claims that may arise out oftheir use of the New Horizons’ trademark. The Company has also agreed to indemnify its directors and officers tothe maximum extent permitted under the laws of the State of Delaware.  The Company has not recorded any liabilityfor these guarantees and indemnities in the accompanying consolidated balancesheets.

*(e)   Letterof Credit*

The Company had anoutstanding letter of credit in the amount of $650, under which it may berequired to make payments to a guaranteed or indemnified party.  The letter of credit was cancelled in April2006.

F-27

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*(f)Compliance Matters*

**LateFiling of SEC Reports**

Due to the substantialtime and effort management has devoted to the completion of the tasks requiredfor completing the 2004, 2005 and 2006 audits, management was unable to performthe control procedures and develop the financial information necessary toprepare the information required to be included in the Company’s QuarterlyReports on Form 10-Q for the quarterly periods ended March 31, 2005, June 30,2005 and September 30, 2005.  Inaddition, the Company was late in filing Form 10-Q for the quarterly periodsended March 31, 2006, June 30, 2006 and September 30, 2006, and is filing thoseForms concurrently with its Annual Report on Form 10-K for 2006.  The Company was also late in filing its Form10-Q for the quarterly period ended March 31, 2007, and expects to file itduring the third quarter of 2007.  Inaddition, the Company was unable to file the Annual Report on Form 10-K for theyears ended December 31, 2005 and 2004.

**Delistingfrom the NASDAQ National Market**

On July 20, 2005, theCompany received notification from The Nasdaq Stock Market, Inc. (“Nasdaq”)that the Company’s securities were being delisted from the Nasdaq GlobalMarket, effective with the open of business on Friday, July 22, 2005.  The Company has been unable to timely fileits Annual Report on Form 10-K for the fiscal year ended December 31, 2004 andits Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.  The Company’s failure to timely file theseperiodic reports violates Nasdaq Marketplace Rule 4310(c)(14) for continuedlisting on Nasdaq.

The Company’s commonstock is not currently eligible to trade on the OTC Bulletin Board because, asdescribed above, the Company is not current in its reporting obligations underthe Securities Exchange Act of 1934. Quotations for the Company’s common stock appear in the National DailyQuotations Journal, often referred to as the “pink sheets,” where subscribingdealers can submit bid and ask prices on a daily basis.

**Notice ofNon-Compliance with State Regulatory Requirements**

In conjunction with theCompany’s license renewal process in New York, the State Education Departmentreviewed both school and student files in the New York company-owned locationin 2005 and 2006.  The review notedviolations of the state’s education law during the years ended 2004, 2005 and2006.

As a result, the Companywas fined $150 by the Education Department for violations occurring during 2004and 2005, and $200 for violations occurring in 2006.  Under the terms of a payment arrangement withthe state, the Company paid $75 in May 2005 and $75 in August 2005 for the 2004violations.  The remaining $200 was paidin 2006 and 2007.  Management is notaware of non-compliance issues in any other states.

**14.****       Gain/Loss on Sale of Company-OwnedTraining Centers**

During 2006, the Company sold and re-franchised its wholly ownedcompany-owned training centers in San Antonio, Charlotte, Memphis, Nashville,Atlanta, Hartford and Albuquerque in asset sale agreements for $1,650 in cashand notes plus assumption of liabilities of $2,439.  The unsecured notes receivable totaled $203,bear interest at rates of 6% to 8% per annum and have maturity dates over thenext 12 to 24 months.  The Company alsodisposed of fixed assets as a result of a relocation of its corporatefacilities. The Company determined that the sale of these centers did not meetall necessary criteria to be classified as discontinued operations within theCompany’s consolidated financial statements at any time during the year endedDecember 31, 2006.  Due to significantcontinuing involvement between the Company and these re-franchised centers, theCompany deferred a portion 

F-28

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of the gross gain on the sale of these centers of $1,374.

The deferred gain on sale amount at the date of sale consisted ofdiscount to buyers on royalty revenue over periods of 1 to 2 years and anestimate of the Company’s continuing obligation for future refunds (based onhistorical experience at each center sold).  Subsequent to the sales, a portion of thedeferred royalty revenue was earned and recognized, totaling $618 throughDecember 31, 2006.

The portion of the deferred gain relating to royalty revenue isexpected to be recognized as summarized in the following table:

| Year  | ** ** | **Royalty   Revenue** | ** ** |
|-------|------------|----------------------------|------------|
| 2007  |       | $                          | 478        |   |
| 2008  |       | 62                         |       |
| 2009  |       | —                     |       |
| 2010  |       | —                     |       |
| Total |       | $                          | 540        |   |

 

The sale of fixed assetsrelated to the Company’s relocation of its corporate offices resulted in a netloss of approximately $195 and deferral of the loss would not be appropriate.

During 2005, the Companysold its wholly owned company-owned training center in Sacramento in an assetsale agreement for $75 in cash.  As aresult of this sale, the Company recorded a loss on sale of $329 in as ofDecember 2005.

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**15.****       Other Income/Loss**

In 2006, the Company recorded a loss of $704 primarilyincurred to terminate the Company’s corporate office lease.

**16.****       Subsequent Events**

**Filing of 2005 Audited Financials on Form 8-K**

On February 20, 2007, the Company filed a CurrentReport on Form 8-K with the SEC to announce financial results for the yearended December 31, 2005.  As explained more fully in the Form 8-K, releaseof the 2005 financial results was delayed due to issues associated with thecompletion of the 2004 audit and restatement of 2003 financial results.

**Filing of Amended Quarterly Consolidated FinancialStatements on Form 10-Q/A**

On January 31, 2007, the Company filed its restatedand unaudited Quarterly Reports on Form 10-Q/A for the quarterly periods endedMarch 31, 2004, June 30, 2004 and September 30, 2004.

**Sale of Company-OwnedTraining Centers**

On March 31, 2007,the Company sold its wholly owned company-owned training centers in Chicago andCleveland in asset sale agreements.  As aresult of these sales, the Company recorded a gain on sale of assets of $31.

On May 31, 2007,the Company sold its wholly owned company-owned training center in Anaheim inan asset sale agreement for approximately $75 in cash and notes.

**17.****       Segment Reporting**

In accordance with SFAS 131 “*Disclosuresabout Segments of an Enterprise and Related Information”*, theCompany’s business units have been aggregated into two reportable segments,company-owned locations and franchising. The two segments are managed separately due to differences in theirsources of revenues and services offered. At December 31, 2006 the company-owned locations segment operateswholly-owned computer training centers in 6 metropolitan areas (14 metropolitanareas at December 31, 2005) within the continental United States and generatesrevenue through the sale and delivery of PC applications, technical softwaretraining courses and business skills courses. The franchising segment franchises domestic and international computertraining centers and provides computer training instruction, sales, andmanagement concepts and support to franchisees. The franchising segment earns revenues from initial franchise fees,on-going royalties from franchise operations, and the sale of courseware andother products to franchisees.

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Summarizedfinancial information concerning the Company’s reportable segments is shown inthe following tables:

For the year endedand at December 31, 2006:

 
|                                    | ** ** | **Franchising** | ** ** | **Company-owned   training   centers** | ** ** | **Consolidated** | ** ** |   |
|------------------------------------|------------|-----------------|------------|---------------------------------------------|------------|------------------|------------|--------|
| Total revenues -  domestic         |       | $               | 22,016     |                                        | $          | 48,717           |       | $      | 70,733 |   |
| Total revenues -  international    |       | 5,947           |       | —                                      |       | 5,947            |       |
| Depreciation and  amortization     |       | 1,209           |       | 517                                         |       | 1,726            |       |   |
| Fixed asset  impairment            |       | 391             |       | —                                      |       | 391              |       |   |
| Interest expense                   |       | 197             |       | 107                                         |       | 304              |       |   |
| Investment  income                 |       | (283            | )          | (10                                         | )          | (293             | )          |   |
| Income (loss)  before income taxes |       | 5,356           |       | (6,366                                      | )          | (1,010           | )          |   |
| Income tax  provision              |       | (846            | )          | (173                                        | )          | (1,019           | )          |   |
| Net income  (loss)                 |       | $               | 4,511      |                                        | $          | (6,540           | )          | $      | (2,029 | ) |   |
|                               |       |            |       |                                        |       |             |       |   |
| Total assets                       |       | $               | 19,280     |                                        | $          | 8,330            |       | $      | 27,610 |   |   |
|                                    |            |                 |            |                                             |            |                  |            |        |  |  |  |  |  |  |

 

For the year endedand at December 31, 2005:

 
|                                    | ** ** | **Franchising** | ** ** | **Company-owned   training   centers** | ** ** | **Consolidated** | ** ** |
|------------------------------------|------------|-----------------|------------|---------------------------------------------|------------|------------------|------------|
| Total revenues -  domestic         |       | $               | 24,724     |                                        | $          | 75,044           |       | $ | 99,768 |   |
| Total revenues -  international    |       | 6,653           |       | —                                      |       | 6,653            |       |
| Depreciation and  amortization     |       | 1,659           |       | 1,383                                       |       | 3,042            |       |
| Fixed asset  impairment            |       | —          |       | 2,351                                       |       | 2,351            |       |
| Interest expense                   |       | 217             |       | 6                                           |       | 223              |       |
| Investment  income                 |       | (370            | )          | (1                                          | )          | (371             | )          |
| Income (loss)  before income taxes |       | 1,850           |       | (8,279                                      | )          | (6,430           | )          |
| Income tax provision               |       | (830            | )          | (20                                         | )          | (850             | )          |
| Net income  (loss)                 |       | $               | 1,019      |                                        | $          | (8,299           | )          | $ | (7,280 | ) |
|                               |       |            |       |                                        |       |             |       |
| Total assets                       |       | $               | 25,707     |                                        | $          | 13,546           |       | $ | 39,253 |   |
|                                    |            |                 |            |                                             |            |                  |            |  |  |  |  |  |

 

For the year endedand at December 31, 2004:

 
|                                 | ** ** | **Franchising** | ** ** | **Company-owned   training   centers** | ** ** | **Consolidated** | ** ** |
|---------------------------------|------------|-----------------|------------|---------------------------------------------|------------|------------------|------------|
| Total revenues -  domestic      |       | $               | 26,686     |                                        | $          | 86,760           |       | $ | 113,446 |   |
| Total revenues -  international |       | 6,479           |       | —                                      |       | 6,479            |       |
| Depreciation and  amortization  |       | 3,453           |       | 2,754                                       |       | 6,207            |       |
| Fixed asset  impairment         |       | 400             |       | 1,468                                       |       | 1,868            |       |
| Goodwill  impairment            |       | —          |       | 6,960                                       |       | 6,960            |       |
| Interest expense                |       | 342             |       | 5                                           |       | 347              |       |
| Investment  income              |       | (481)           |       | (1                                          | )          | (482             | )          |
| Loss before  income taxes       |       | (1,437          | )          | (20,797                                     | )          | (22,234          | )          |
| Income tax benefit  (provision) |       | (1,001          | )          | 65                                          |       | (936             | )          |
| Net loss                        |       | $               | (2,438     | )                                           | $          | (20,732          | )          | $ | (23,170 | ) |
|                            |       |            |       |                                        |       |             |       |
| Total assets                    |       | $               | 33,229     |                                        | $          | 15,029           |       | $ | 48,258 |   |

** **

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**18.****       Quarterly Financial Data(Unaudited)**

Summarizedquarterly financial data for 2006 and 2005 is as follows:
| ** **                                                             | ** ** | **First   Quarter** | ** ** | **Second   Quarter** | ** ** | **Third   Quarter** | ** ** | **Fourth   Quarter** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------|------------|--------------------------|------------|---------------------------|------------|
|                                                                   |       |                     |       |                      |       |                     |       |                      |       |
| Year ended  December 31, 2006                                          |       |                     |       |                      |       |                     |       |                      |       |
| Revenues                                                               |       | $                        | 23,131     |                      | $          | 22,873                   |       | $                         | 15,590     |   | $ | 15,086 |   |
| Gross profit                                                           |       | 9,785                    |       | 10,756                    |       | 7,031                    |       | 7,267                     |       |
| Fixed asset  impairment                                                |       | —                   |       | —                    |       | —                   |       | (391                      | )          |
| Operating income  (loss)                                               |       | (1,973                   | )          | 1,357                     |       | (1,102                   | )          | (697                      | )          |
| Provision for  income taxes                                            |       | 185                      |       | 321                       |       | 224                      |       | 289                       |       |
| Net income (loss)  attributable to common stockholders                 |       | $                        | (1,656     | )                         | $          | 2,665                    |       | $                         | (1,359     | ) | $ | (1,883 | ) |
| Basic earnings  (loss) per share attributable to common stockholders   |       | $                        | (0.16      | )                         | $          | 0.25                     |       | $                         | (0.13      | ) | $ | (0.17 | ) |
| Diluted earnings  (loss) per share attributable to common stockholders |       | $                        | (0.16      | )                         | $          | 0.25                     |       | $                         | (0.13      | ) | $ | (0.17 | ) |
|                                                                   |       |                     |       |                      |       |                     |       |                      |       |
| Year ended  December 31, 2005                                          |       |                     |       |                      |       |                     |       |                      |       |
| Revenues                                                               |       | $                        | 26,245     |                      | $          | 27,724                   |       | $                         | 26,314     |   | $ | 26,138 |   |
| Gross profit                                                           |       | 10,966                   |       | 12,935                    |       | 11,708                   |       | 12,508                    |       |
| Fixed asset  impairment                                                |       | 64                       |       | 2,287                     |       | —                   |       | —                    |       |
| Operating loss                                                         |       | (2,239                   | )          | (2,691                    | )          | (160                     | )          | (1,133                    | )          |
| Provision for  income taxes                                            |       | 180                      |       | 328                       |       | 117                      |       | 225                       |       |
| Net loss  attributable to common stockholders                          |       | $                        | (4,278     | )                         | $          | (3,259                   | )          | $                         | (442       | ) | $ | (1,432 | ) |
| Basic loss per  share attributable to common stockholders              |       | $                        | (0.41      | )                         | $          | (0.31                    | )          | $                         | (0.04      | ) | $ | (0.14 | ) |
| Diluted loss per share  attributable to common stockholders            |       | $                        | (0.41      | )                         | $          | (0.31                    | )          | $                         | (0.04      | ) | $ | (0.14 | ) |

 

*Impairmentof Fixed Assets*

During the fourthquarter of 2006, the Company recorded a non-cash impairment charge of $391,against fixed assets at the Company’s corporate location.  During the first and second quarter of 2005,the Company recorded a non-cash impairment charge totaling $64 and $2,287 respectively,against fixed assets of company-owned training centers.  See Note 4 “Property and Equipment” foradditional discussion.

*Gain on Sale of Company-Owned Training Centers*

During the secondquarter of 2006, the Company recorded a gain of $1,726 net of deferred revenuerelated to the sale of four company-owned training centers. See Note 14 “Gain/Losson Sale of Company-Owned Training Centers” for additional discussion.

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**Item 9.****            Changes In AndDisagreements With Accountants On Accounting And Financial Disclosure**

None.

**Item 9A.****         Controls And Procedures**

**Evaluation of Disclosure Controlsand Procedures**

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as ofDecember 31, 2006. Our Chief Executive Officer and Chief Financial Officer  recognize that any controls and procedures,no matter how well designed and operated, can provide only reasonable assuranceof achieving their objectives.  Based onthe evaluation of our disclosure controls and procedures as ofDecember 31, 2006, our Chief Executive Officer and Chief Financial Officerconcluded that, as of such date, our disclosure controls and procedures werenot effective at a reasonable assurance level.

We have not filed ourperiodic reports timely since the third quarter of 2004, primarily due to turnoverin key finance roles and other internal control matters, as reported in aCurrent Report on Form 8-K dated November 6, 2006, which contains our 2004consolidated financial statements and management’s assessment of internalcontrol over financial reporting. The Company expects to file its QuarterlyReport on Form 10-Q for the quarterly period ended March 31, 2007 during thethird quarter of 2007 and to file its Quarterly Report on Form 10-Q for thequarterly period ended June 30, 2007 on a timely basis.

**InternalControl Over Financial Reporting**

SinceDecember 31, 2005, we have taken the following remedial actions designed toimprove our internal control over financial reporting and remediate material weaknessesidentified in our Current Report on Form 8-K dated November 6, 2006.

·      Wehave hired or contracted additional qualified financial reporting andaccounting personnel including an Executive Vice President of Finance andAdministration and a Chief Financial Officer, both certified public accountants.

·      Accountingpolicies and procedures have been revised, documented and implemented toaddress weaknesses identified during our initial testing phase in 2005.

·      Wehave instituted a formal program of remediation to correct all materialweaknesses and significant deficiencies under the direction of a newly hiredDirector of Internal Audit and with the full support of our current ChiefExecutive Officer and Chief Financial Officer.

·      We have put in place aseries of manual controls specifically designed to compensate for known orsuspected weaknesses in our internal control environment. As a result, ourauditors have been able to complete audits of our financial statements forpreviously unaudited periods.

We believe that throughthe addition of the above-listed remedial actions, including the hiring ofqualified personnel and the addition of manual compensating controls, we haveimproved our current control over financial reporting. On-going remediationwill continue to strengthen the internal control environment of the Company.

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**Limitationson the Effectiveness of Internal Controls**

Our management, including the Chief Executive Officer and ChiefFinancial Officer, does not expect that our disclosure controls or internalcontrols over financial reporting will necessarily prevent or detect all fraudand material errors, if any. An internal control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations on all internal control systems, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, have been detected. These inherent limitations include the realitiesthat judgments in decision-making can be faulty, and that breakdowns can occurbecause of unintended errors or mistakes. Additionally, controls can be intentionally circumvented by theindividual acts of some persons, by collusion of two or more people, and/or bymanagement override of the control. The design of any system of internalcontrol is also based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Over time,controls may become inadequate because of changes in circumstances, and/or thedegree of compliance with the policies and procedures may deteriorate. Becauseof the inherent limitations in a cost-effective internal control system,financial reporting misstatements due to error or fraud may occur and not be detectedon a timely basis.

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**PART III**

**Item 10.****        ****Directors and Executive Officers of the Registrant**

The following containsinformation regarding the Company’s current executive officers and directors asof the date of this report:
| **Name**               | ** ** | **Age** | ** ** | **Position**                                           |
|------------------------|------------|---------|------------|--------------------------------------------------------|
| Curtis Lee  Smith, Jr. |       | 79      |       | Chairman of the Board and Director                     |
|                   |       |    |       |                                                   |
| Stuart O. Smith        |       | 74      |       | Vice Chairman of the Board, Secretary and Director     |
|                   |       |    |       |                                                   |
| Mark A. Miller         |       | 58      |       | President, Chief Executive Officer and Director        |
|                   |       |    |       |                                                   |
| David A.  Goldfinger   |       | 71      |       | Director                                               |
|                   |       |    |       |                                                   |
| William H.  Heller     |       | 68      |       | Director                                               |
|                   |       |    |       |                                                   |
| Richard L.  Osborne    |       | 69      |       | Director                                               |
|                   |       |    |       |                                                   |
| David L. Warnock       |       | 49      |       | Director                                               |
|                   |       |    |       |                                                   |
| Donald W. Hughes       |       | 56      |       | Director                                               |
|                   |       |    |       |                                                   |
| Alwaleed  Aldryann     |       | 47      |       | Director                                               |
|                   |       |    |       |                                                   |
| Charles J.  Mallon     |       | 50      |       | Executive Vice President of Finance and Administration |
|                   |       |    |       |                                                   |
| Timothy A.  Kleczka    |       | 46      |       | Senior Vice President of Operations                    |
|                   |       |    |       |                                                   |
| Charles M.  Caporale   |       | 56      |       | Senior Vice President and Chief Financial Officer      |
|                   |       |    |       |                                                   |
| Gregory E.  Marsella   |       | 43      |       | VP, General Counsel and Assistant Secretary            |

 

Curtis Lee Smith, Jr. hasserved as the Company’s Chairman of the Board and as a Director since July1986, and had the additional titles and duties of President from August 1989through July 1992 and Chief Executive Officer from July 1986 to August1999.  Mr. Smith served as Presidentof National Copper & Smelting Co., a Cleveland, Ohio-based manufacturer anddistributor of copper products, from 1962 to 1985, and as President of NCSHoldings Corporation, a Cleveland, Ohio-based holding company which operated acopper tubing importing and fabricating business, from 1985 to 1988.

Stuart O. Smith hasserved as a Director of the Company since July 1986, as the Company’s Secretarysince February 1989 and as Vice Chairman of the Board since August 1992.  Mr. Smith served as a Vice President fromJuly 1986 to August 1992.  Mr. Smith alsoserved as Vice President of National Copper & Smelting Co. from 1962 to1985 and as Vice President of National Copper & Smelting from 1985 to 1988.

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Mark A. Miller has servedas President and Chief Executive Officer of the Company since July 2006.  From 2000 to 2006, Mr. Miller served as GroupExecutive Vice President for the Americas for Right Management Consultants,Inc., a career transition and organizational consulting services provider,where he was responsible for business in North and Latin America.  Prior to joining Right ManagementConsultants, Inc., Mr. Miller served as Chairman and CEO of Signature CareNetworks from 1994 to 2000, a consolidated surgical practice management companythat he co-founded.  From 1988 through1994, Mr. Miller held a number of executive positions at Nutri/System, aconsumer weight loss business. Prior to joining Nutri/System, Mr. Millerserved as a division manager for PepsiCo.

David A. Goldfinger hasserved as a Director of the Company since July 1986.  Mr. Goldfinger served as President of U.S.Consolidated, Inc., a Cleveland, Ohio-based manufacturers’ representativeagency, from 1966 to 1991.  From January1992 to the present, Mr. Goldfinger has served as President of M.S.C.I.Holdings, Inc., a Tavernier, Florida-based private consulting and investmentcorporation.  Mr. Goldfinger has servedas a member of the Company’s Compensation Committee, Audit Committee andGovernance Committee during the term of his directorship.  He is currently Chairman of the CompensationCommittee.

William H. Heller wasformerly a partner with the public accounting firm of KPMG Peat Marwick LLPfrom February 1971 until December 1991, and currently manages his own assetmanagement firm, William H. Heller & Associates.  He was elected as a director on July 1,1992.  Mr. Heller also serves as adirector of Ohio Savings Financial Corporation, a Cleveland, Ohio-based savingsand loan holding company.  Mr. Heller hasserved as a member of the Company’s Audit Committee and Compensation Committeeduring the term of his directorship.  Heis currently Chairman of the Audit Committee.

Richard L. Osborne waselected to the Company’s Board of Directors in January 1989.  Currently a Professor of Management Practice,he served as the Executive Dean of the Weatherhead School of Management, CaseWestern Reserve University, Cleveland, Ohio, from 1971 to 1999.  Mr. Osborne is also a management consultant,and serves on the Board of Directors of Ohio Savings Financial Corporation, aCleveland, Ohio-based savings bank holding company, and Myers Industries, Inc.,an Akron, Ohio-based manufacturer of plastic and rubber parts for theautomotive and other industries.  Mr. Osbornehas served as a member of the Company’s Compensation Committee, Audit Committeeand Governance Committee during the term of his directorship.  He is currently Chairman of the GovernanceCommittee.

David L. Warnock waselected to the Company’s Board of Directors in February 2005.  Mr. Warnock is a founding member of CamdenPartners Holdings, LLC (and its predecessor Cahill, Warnock & Company, LLC)an asset management firm established to make private equity investments.  Prior to founding Camden Partners Holdings,LLC in 1995, Mr. Warnock had been employed from 1983 through 1995 at T. RowePrice Associates.  He was the Presidentof T. Rowe Price Strategic Partners and T. Rowe Price Strategic Partners II,private equity partnerships.  Mr. Warnockwas also an Executive Vice President of the T. Rowe Price New HorizonsFund.  Mr. Warnock serves on the boardsof directors of Nobel Learning Communities, Inc. and Questar Assessment,Inc.  Mr. Warnock is Chairman of the boardsof directors of Calvert Education Services and the Center for Fathers, Familiesand Workforce Development.  He is also onthe board of directors of the National Alliance to End Homelessness and theCalvert School.  Mr. Warnock earneda B.A. degree from the University of Delaware and an M.S. (in Finance) from theUniversity of Wisconsin.  He is aChartered Financial Analyst.

Donald W. Hughes waselected to the Company’s Board of Directors in July 2006.  Mr. Hughes is a Managing Member and the ChiefFinancial Officer of Camden Partners Holdings, LLC.  He is also a principal of Cahill Warnock& Company, LLC where he holds similar positions.  Prior to joining Camden Partners in 1997,Mr. Hughes served as Chief Financial Officer of Capstone PharmacyServices, Inc., a public, small-cap institutional pharmacy services providerfrom December 1995.  He previouslyspent 11 years as Executive Vice President and Chief Financial Officer ofBroventure Company, Inc., a closely-held investment company and 12 yearsin the audit division of Arthur Andersen LLP. Mr. Hughes has served on the boards of several public and privatecompanies and presently serves on the Board of Questar Assessment, Inc.  Mr. Hughes also serves on the Board ofThe Maryland Food Bank.  Mr. Hughesreceived a B.A. degree from Lycoming College, an M.S.F. degree from LoyolaCollege in Maryland and is a Certified Public Accountant.

Alwaleed Aldryaan waselected to the Company’s Board of Directors in July 2006.  Mr. Aldryaan serves as President of AlkhaleejTraining and Education Corporation, or Alkhaleej.  He served in various computer operations 

31

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positions with the Saudigovernment until 1993, when he and four other individuals formedAlkhaleej.  Alkhaleej became a NewHorizons franchisee in 1994 and now operates 32 centers in Saudi Arabia andsub-franchises 11 others in the region. Mr. Aldryaan graduated from the University of Wisconsin with a B.Adegree in 1983 and with a M. S. degree in electrical engineering in 1985.

Charles J. Mallon joinedthe Company in February 2007 as Executive Vice President of Finance andAdministration.  From October 1996through November 2006, Mr. Mallon was with Right Management Consultants, wherehe served as Senior Vice President of Financial Operations until September 2006when he was promoted to the role of Executive Vice President  & Chief Financial Officer.  Right isa global provider of career transition and organizational consultingservices.  From  October 1990through October 1996, Mr. Mallon served as Senior Vice President &Chief Financial Officer of ACS Enterprises, Inc., or ACS, a publicly tradedwireless cable television provider. Prior to ACS, Mr. Mallon spent twelve years with Ernst & Young wherehe progressed to senior audit manager.

Timothy A. Kleczka hasbeen with the Company since 1994.  He waspromoted to Senior Vice President of Operations (Worldwide) in November2006.  Prior to his recent promotion he served as Senior VicePresident  of our subsidiary New HorizonsComputer Learning Centers EMEA, LLC, or EMEA.  He joined EMEA in 1998 asDirector of Franchise Support and was promoted to Vice President of NewHorizons and Vice President of EMEA in 1999.  Prior to that, Mr. Kleczkaserved as the General Manager of New Horizons Auckland, New Zealand from 1996to 1998.  He started his career with New Horizons at the company’soriginal location in Santa Ana, California from 1994 to 1996, where he servedas Vice President of Sales and Marketing.  Mr. Kleczka is a United StatesMarine Corps veteran, a graduate of the Naval Air Traffic Control Academy,Memphis, Tennessee and a Certified Franchise Executive (CFE).

Charles M. Caporalejoined the Company in February 2006 as Senior Vice President and ChiefFinancial Officer.  From 2003 until he joined the Company, Mr. Caporalewas self-employed as a consultant providing financial services to variouspublic companies in Southern California.  From September 2000 to October2003, Mr. Caporale served as Senior Vice President and Chief Financial Officerof Women First HealthCare, Inc., a specialty pharmaceutical company located inSan Diego, California.  Mr. Caporale earned a CPA certification in NewYork and a Bachelor in Business Administration from Pace University.

Gregory A. Marsellajoined New Horizons in October 2004 as Vice President, Assistant Secretary andGeneral Counsel.  From 2002 to October 2004, Mr. Marsella was VicePresident, Secretary and General Counsel to JCM Engineering Corp., or JCM, amanufacturer of precision machine components for the aerospace and defenseindustries, located in Ontario, California.  Prior to joining JCM, Mr. Marsellaserved as Vice President and Assistant General Counsel, from 1999 to 2002, forFRD Acquisition Corp., the parent company for Coco’s Restaurants, CarrowsRestaurants and El Pollo Loco, located in Irvine, California.  Mr.Marsella is a member of the California State Bar, received his Juris Doctorfrom Loyola Law School and his Bachelor in Arts degree from the University ofCalifornia at Los Angeles.

**Board ofDirectors and Committee Meetings**

Members of the board ofdirectors elected by the common shareholders hold office for three-year terms.As of December 31, 2006, the current members of the board have terms which haveall expired, and they continue to serve until new elections of directors by theCompany’s shareholders can occur. Members of the board of directors who hold their positions due to theCompany’s Preferred Stock and Secured Debt agreements hold their positions forsuch period of time as the related securities are substantially outstanding.

There are no familyrelationships among New Horizon’s officers and directors other than thatbetween Curtis Lee Smith, Jr., Chairman of the Board and Stuart O. Smith, ViceChairman of the Board who are brothers.

During the fiscal yearended December 31, 2006, the board of directors held a total of seven meetings.Each member of the board of directors attended more than 75% of the meetings ofthe board and of the committees of which he was a member.

The non-employeedirectors are independent within the meaning of NASDAQ Rule 4200 (a) (15).

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The board of directorshas constituted a Corporate Governance Committee, a Compensation Committee andan Audit Committee.

The Corporate GovernanceCommittee, comprised entirely of independent directors, met on three occasionsin 2006 and operates under a charter approved by the board of directors.  The Corporate Governance Committee isresponsible for (i) identifying individuals qualified to become directorsand selecting director nominees or recommending nominees to the board ofdirectors for nomination; (ii) recommending nominees for appointment tocommittees of the board of directors; (iii) developing and recommendingcharters of committees of the board of directors; and (iv) overseeing thecorporate governance of New Horizons and, as deemed necessary or desirable fromtime to time, developing and recommending corporate governance policies to theboard of directors. The Corporate Governance Committee currently consists of RichardOsborne (Chairman), David Goldfinger, Curtis Lee Smith and David Warnock. Acopy of the charter of the Corporate Governance Committee is posted andavailable on the Corporate Governance link of the “About Us” section of the NewHorizon’s website, *www.newhorizons.com*.  Information on our website is notincorporated by reference in this report.

The CompensationCommittee, comprised entirely of independent directors, met on four occasionsin 2006, operates under a charter approved by the board of directors, and isresponsible for (i) determining or recommending to the board of directors thecompensation of the Chief Executive Officer and each other executive officer orany other officer who reports directly to the Chief Executive Officer based onthe performance of each officer; (ii) making recommendations to the board ofdirectors regarding stock option and purchase plans and other equitycompensation arrangements; and (iii) preparing reports regarding executivecompensation for disclosure in New Horizons proxy statements or as otherwiserequired by applicable laws. The Compensation Committee currently consists ofDavid A. Goldfinger (Chairman), Richard L. Osborne, David Warnock, and WilliamH. Heller. A copy of the Compensation Committee charter is posted and availableon the Corporate Governance link of the “About Us” section of the New Horizon’swebsite,*www.newhorizons.com.*  Information on our website is notincorporated by reference in this report.

The Audit Committee, comprisedentirely of independent directors, operates under a charter approved by theboard of directors. The Audit Committee’s primary responsibilities are to (i)oversee New Horizons accounting and financial reporting policies, processes,practices and internal controls; (ii) appoint, compensate and oversee theindependent registered public accounting firm; (iii) review the quality andobjectivity of New Horizons independent audit and financial statements; and(iv) act as liaison between the board of directors and the independentregistered public accounting firm. The Audit Committee currently consists ofWilliam H. Heller (Chairman), Richard L. Osborne and Donald W. Hughes andmet on seven occasions in 2006. A copy of the Audit Committee charter is postedand available on the Corporate Governance link of the “About Us” section of theNew Horizons website, *www.newhorizons.com*.Information on our website is not incorporated by reference in this report.

**Section 16(a) Beneficial Ownership Reporting Compliance**

Section 16(a) of the Exchange Act requires the Company’s named executive officers, directors and persons who own 10% or more of the Company’s common stock to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (the “Commission”) .  Named executive officers, directors and 10% or greater stockholders are required by Commission regulations to furnish the Company with copies of all Forms 3, 4 and 5 they file.

Based solely on the information provided to the Company during or with respect to fiscal 2006 by persons required to file such reports, the Company believes that its named executive officers, directors and owners of 10% or more of the common stock have complied with all applicable Section 16(a) filing requirements with the exception of the failure to timely file Form 5 for option awards granted in December 2006 to Mr. Caporale.

**Code OfConduct**

On March 11, 2004, theCompany adopted a Code of Business Conduct and Ethics that applies to theCompany’s directors, Chief Executive Officer, Executive Vice President ofFinance, Chief Financial Officer, Controller, 

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Treasurer, or personsperforming similar functions.  The Codeof Business Conduct and Ethics is posted under the heading “CorporateGovernance” on the Internet website maintained by the Company at *www.newhorizons.com*. Information on the Company’s website is not incorporated by referenceinto this report.  Any amendment to orwaiver from a provision of the Code of Business Conduct and Ethics that must bedisclosed under rules and forms of the Securities and Exchange Commission willbe disclosed at the same Internet website address within four business daysfollowing the date of the amendment or waiver.

The Company’s legaldepartment maintains a hotline available to all employees that allows for theanonymous submission of employee complaints on accounting, internal accountingcontrols or auditing matters.

**Item 11.****        ****Compensation Discussion and Analysis**

**REPORT OFTHE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION**

The Compensation Committeereviewed and discussed with management the Compensation Discussion and Analysisrequired by Securities and Exchange Commission regulations. Based on its reviewand discussions, the Committee recommended to the board of directors that theCompensation Discussion and Analysis be included in this report. 

***The Role of the Compensation Committee***

TheCompensation Committee of the Board of Directors, which is comprised entirelyof independent directors, is responsible for ensuring that the Company’s executivecompensation policies and programs are competitive within the markets in whichNew Horizons competes for talent and reflect the long-term investmentinterests of our stockholders. The Compensation Committee reviews and approvesthe compensation levels and benefits programs for executive officers, includingthe named executive officers. With respect to the Chief Executive Officer, orCEO, the Compensation Committee reviews and approves the corporate goals andobjectives relevant to the CEO’s compensation, evaluates the CEO’s performanceagainst these objectives, and makes recommendations to the Board of Directorsregarding the CEO’s compensation level based on that evaluation.

TheCompany’s named executive officers are:

MarkA. Miller, President, CEO and DirectorCharles M. Caporale, Senior Vice President and Chief Financial OfficerGregory E. Marsella, Vice President, General CounselTimothy E. Kleczka, Senior Vice President, OperationsShelley Morris, Vice President, Enterprise Learning Solutions (“ELS”)

Inaddition, Thomas J. Bresnan, former President, CEO and Director, who resignedin July 2006, is also included as named executive officer for purposes of thisreport.

***Compensation Objectives***

The Company’s compensation programs are intended to provide its named executive officers with a mix of salary, benefits and incentive compensation arrangements that are: (i) consistent with the interests of stockholders, (ii) competitive with the arrangements provided by other companies in the industry, (iii) commensurate with each executive’s performance, experience and responsibilities, and (iv) sufficient to attract and retain highly qualified executives.  In making its recommendations concerning adjustments to salaries and awards under compensation plans, the Compensation Committee considers the financial condition and performance of the Company during the prior year and the Company’s success in achieving financial, operational and other strategic objectives.  The Compensation Committee also makes an assessment of the contributions of the individual named executive officer to the Company’s performance and to the achievement of its objectives, as well as the success of the executive in achieving individual objectives.  In assessing individual performance, the Compensation Committee also seeks to recognize individual contributions during periods when the Company experienced adverse business or financial conditions.

Each component of an named executive officers compensation package is intended to assist in attaining one or more of the objectives outlined above.  The Company attempts to provide its executives with base salaries and benefits that are competitive with those of comparable companies and commensurate with the performance, experience and responsibilities of each executive.  Through salary adjustments and bonuses, the Company also seeks to provide its executives with incentives to improve the Company’s financial and operational performance by providing a method for rewarding individual performance.  Finally, the Omnibus Equity Plan has been used to provide named executive officers with an opportunity to acquire a proprietary interest in the Company, thereby providing these individuals with increased incentive to promote the long-term interests of the Company’s stockholders.

While the Compensation Committee seeks to assure that the Company’s compensation programs further the objectives described above and considers the various factors outlined above in making compensation decisions, it does not take a highly formalized or objective approach to determining compensation.  Instead, the Compensation Committee gives consideration to these various factors in subjectively evaluating the compensation of each individual named executive officer.

In 1993, Congress adopted Section 162(m) of the Internal Revenue Code.  Section 162(m) limits the ability of public companies to deduct compensation in excess of $1,000,000 paid to certain executive officers, unless such compensation is “performance based” within the meaning of Section 162(m).  Section 162(m) also imposes certain requirements on the composition of compensation committees.  The Compensation Committee seeks to satisfy these requirements.

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***CompensationElements***

Presentedbelow are the key characteristics of the primary elements of the namedexecutive officer’s compensation.
| Compensation Element                          | ** ** | **Key  Characteristics**                                                                                                                                                                           |
|-----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Based Pay (Fixed)                             |       | · Fixed  component of pay based on an individual’s skills, responsibilities,  experience and performance.                                                                           |
|                                               |       | · named  executive officer’s, as well as all other salaried employees, are eligible  for annual increases based on performance, experience and/or changes in job  responsibilities. |
| Non-Equity  Incentive                         |       | · Variable  cash component of pay.                                                                                                                                                       |
| Compensation  (Variable)                      |       | · Reward  for achieving specified Company and individual goals.                                                                                                                          |
| Option Awards (Variable “at  risk”) |       | · Variable  equity component of pay.                                                                                                                                                     |
|                                               |       | · Reward  for long-term stockholder value creation.                                                                                                                                      |
|                                               |       | · The value  realized by the awardee is based on increases in the price of New Horizons  Common Stock.                                                                                   |
| Benefits (Health  and Welfare)                |       | Named executive  officers are eligible to participate in benefits programs that are available  to substantially all salaried employees which provide for basic life, health  and security needs    |
| Severance                                     |       | Salary  continuation in the event of termination without cause or as a result of  change-in-control                                                                                                |

 

All compensation elements are cash-based, except for option awards which are solely equity-based (and have a value related to the price of New Horizons Common Stock). Unless otherwise noted in the detailed discussion below, the named executive officers participate in the same compensation programs and on comparable terms to other salaried employees.

*Base Pay*.  Mr. Miller joined the Company in July 2006 following a search performed at the direction of the Compensation Committee.  His base salary, $335,000 per annum, is in the range of his predecessor.   The base salaries provided to named executive officers other than the Chief Executive Officer for 2006 were established by the Compensation Committee in accordance with the compensation philosophy discussed above.  The Compensation Committee approved an increase in Mr. Kleczka’s salary of $43,750 during 2006 on the recommendation of Mr. Miller.  The base salaries of Mr. Caporale, Mr. Marsella and Ms. Morris were increased in January 2007 by $5,000, $5,000 and $35,950 respectively, upon recommendation of Mr. Miller and the approval of the Compensation Committee.

*Bonuses and Non-Equity Incentive Compensation Awards*.  During 2006, the named executive officers of the Company participated in bonus arrangements and individual non-equity incentive compensation plans tied to various measures of the Company’s performance.  Under these arrangements, Mr. Miller earned a bonus of $75,000 as provided for in his employment agreement, which was paid in February 2007.  Mr. Caporale earned an award under the Company’s non-equity incentive compensation plan of $56,375.  His target award was $100,000 for achievement of a combination of audit completion and corporate earnings goals.  Mr. Marsella earned an award under the Company’s non-equity incentive compensation plan of $26,563.  His target award was $33,750 for achievement of corporate earnings goals.  Mr. Kleczka earned an award under the Company’s non-equity incentive compensation plan of $34,353.  His target award was 42,000 Euros for achievement of regional, segment and corporate earnings goals.  Ms. Morris earned an award under the Company’s non-equity incentive compensation plan of $17,700.  Her target award was $20,000 for achievement of departmental revenue and corporate earnings goals.  In addition, Ms. Morris earned commissions of $182,940 as a result of collections from enterprise customers.  Her compensation plan provides for a commission based on the level of collections from enterprise customers.

*Option Awardsand Restricted Stock*.  Stock options are granted in order to provide incentive forlong-term creation of stockholder value. Stock options only have value tothe extent the price of New Horizons Common Stock appreciates relative to theexercise price. The exercise price equals the average of the high and low stockprice on the date of grant. Options generally vest in three equal annualinstallments and expire after 10 years. The Company does not grant discountedoptions, nor does it re-price outstanding options. The Company does notbackdate or grant options retroactively. In addition, the Company does not planto coordinate grants of options so that they are made before announcement offavorable information, or after announcement of unfavorable information.  Option grants are approved by theCompensation Committee and administered by the Company’s Human ResourcesDepartment.

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New Horizons calculates the accounting cost of equity-based long-term incentive awards under SFAS No. 123 (“SFAS 123R”), Share Based Payment. As such, the grant date accounting fair value, which is fixed at date of grant, is expensed over the vesting period. Consistent with the SEC regulations, the 2006 compensation expense associated with any outstanding equity grants for the named executive officer’s is presented in the Summary Compensation Table.

Total outstanding unexercised stock option grants are shown in the Outstanding Equity Awards at Fiscal Year-End table. The ultimate value to the employee is determined at the time of exercise. Stock option exercises are taxed at the applicable income tax rates, and the Company receives a corresponding tax deduction.

During 2006, the Company awarded 1,151,000 stock options to employees of the Company, which includes 756,000 to named executive officers.  In addition, the Company awarded 350,000 shares of restricted stock to Mr. Miller.  Mr. Miller’s option awards and restricted stock award were determined through negotiation between Mr. Miller and the Compensation Committee.  The option awards to the other named executive officers were recommended by Mr. Miller and approved by the Compensation Committee.

*Other Compensation*.  All full time employees, including the named executive officers, are eligible to participate in the Company’s benefit plans which provide medical, dental, vision, supplemental life, long term disability and life benefits.  The Company provides an Employee Assistance Program and health savings accounts.  In addition, the Company has established a 401(k) plan for its employees.  The Company did not make a contribution to the 401(k) plan in 2006 or 2007.

*Change-in-Control and Severance Arrangements. *The Company has provided severance arrangements for Messrs. Miller, Caporale, Marsella and Kleczka.  In addition, Mr. Miller has a change-in-control provision in his employment agreement as discussed in the section entitled “Potential Payments Upon Termination or Change-in-Control”.

In the event of a change in control, outstanding options awards generally become immediately vested.

The following table shows compensation received by the Company’s Chief Executive Officer and all other executive officers and other persons required to be included in the table for the fiscal year ended December 31, 2006 (collectively, the “Named Executive Officers”):

**Summary Compensation Table - 2006**
| Name and  Principal Position                  | ** ** | **Year** | ** ** | **Salary  (1)** | ** ** | **Bonus  (2)** | ** ** | **Stock   Awards  $** | ** ** | **Option  Awards $ ** | ** ** | **Non-Equity  Incentive  Plan  Compensation (5)** | ** ** | **Change in  Pension Value  and Non-  Qualified  Deferred  Compensation  Earnings** | ** ** | **All other  compensation** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|----------|------------|-----------------|------------|----------------|------------|----------------------------|------------|---------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
|                                                    |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
| Mark A. Miller(3)                                       |       | 2006     |       | $               | 158,481    |           | $          | 75,000                     |       | —                          |       | $                                                      | 22,198     |                                                                                               | —     |                             | —     |      | $          | 8,308 |   | $ | 263,987 |   |
| President, Chief Executive Officer and  Director        |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
|                                                    |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
| Thomas J. Bresnan(4)                                    |       | 2006     |       | $               | 189,263    |           |       |                       | —     |                            | $          | 9,866                                                  |       | —                                                                                             |       | —                           |       | $         | 633,622    |   | $ | 832,751 |   |
| Former President, Chief Executive  Officer and Director |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
|                                                    |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
| Charles M. Caporale(6)                                  |       | 2006     |       | $               | 190,191    |           | —     |                       | —     |                            | $          | 9,286                                                  |       | $                                                                                                  | 56,375     |                             | —     |      | $          | 8,020 |   | $ | 263,872 |   |
| Senior Vice President and Chief  Financial Officer      |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
|                                                    |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
| Gregory E. Marsella                                     |       | 2006     |       | $               | 175,000    |           |       |                       | —     |                            | $          | 4,813                                                  |       | $                                                                                                  | 26,563     |                             | —     |      | $          | 3,043 |   | $ | 209,419 |   |
| Vice President, General Counsel                         |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
|                                                    |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
| Timothy E. Kleczka                                      |       | 2006     |       | $               | 215,221    |           | —     |                       | —     |                            | $          | 3,058                                                  |       | $                                                                                                  | 34,353     |                             | —     |      | $          | 355 |   | $ | 252,987 |   |
| Senior Vice President – Operations                 |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
|                                                    |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
| Shelley Morris                                          |       | 2006     |       | $               | 117,658    |           | —     |                       | —     |                            | $          | 89                                                     |       | $                                                                                                  | 200,640    |                             | —     |      | $          | 6,461 |   | $ | 324,848 |   |
| Vice President – ELS                               |       |     |       |            |       |           |       |                       |       |                            |       |                                                   |       |                                                                                               |       |                             |       |      |       |
|                                                         |            |          |            |                 |            |                |            |                            |            |                                 |            |                                                        |            |                                                                                                    |            |                                  |            |           |            |  |  |  |  |  |  |

 

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(1)          Salary adjustments for our namedexecutive officers are reviewed by the Compensation Committee on an annualbasis.

(2)          No named executiveofficer received perquisites or other personal benefits having a valueexceeding the lesser of (i) 10% of such executive’s salary and bonus for 2006,2005 and 2004, or (ii) $10,000.

(3)          Mr. Miller started asPresident and Chief Executive Officer on July 5, 2006 at an annual salary of$335,000.  The amount for 2006 representsthe pro-rata share of his annual salary. Mr. Miller was guaranteed a minimum bonus of $75,000 at the end of 2006,which he was paid in February 2007.

(4)          Mr. Bresnan resigned as Presidentand Chief Executive Officer of the Company on July 31, 2006.  Mr. Bresnan received a severance packagewhich included twelve months of salary continuation ($324,450), forgiveness ofa promissory note ($300,000), medical continuation ($9,172), and vesting of75,000 options.   Pursuant to apromissory note dated August 31, 1999, Mr. Bresnan received an interest freeloan from the Company to relocate to the Company’s headquarters in southernCalifornia in the amount of $300,000 payable on August 31, 2007.  Had the loan carried a market interest rate,Mr. Bresnan would have paid $29,880 in interest in 2006, $24,570 in interest in2005 and $19,020 in interest in 2004. The loan was made prior to enactment ofthe Sarbanes-Oxley Act of 2002, which prohibited such transactions.

(5)          Includes $17,762 for Mr. Kleczkathat was earned in 2006 and paid in 2007 in accordance with the Company’sincentive compensation plans.

(6)          Mr. Caporale started as anexecutive officer and employee of the Company on February 6, 2006 at an annualsalary of $215,000.  The amount for 2006represents the pro-rata share of his annual salary.

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**Grants ofPlan-Based Awards - 2006**
|                                                         | ** ** | ** **          | ** ** | **Estimated Future  Payouts Under Non-  Equity Incentive Plan  Awards** | ** ** | **Estimated Future  Payouts Under Equity  Incentive Plan Awards** | ** ** | **All Other  Stock  Awards: #  of  Securities  Underlying** | ** ** | **All Other  Option  Awards: #  of  Securities  Underlying** | ** ** | **Exercise  or Base  Price of  Option** | ** ** | **Grant  Date  Fair  Value  of Stock  and  Option** | ** ** |
|---------------------------------------------------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| **Name**                                                | ** ** | **Grant Date** | ** ** | **Threshold**                                                                                    | ** ** | **Target**                                                                                 | ** ** | **Maximum**                                                           | ** ** | **Threshold**                                                          | ** ** | **Target**                                        | ** ** | **Maximum**                                              | ** ** | **Options** | ** ** | **Options** | ** ** | **Awards** | ** ** | **Awards** | ** ** |
| Mark A. Miller                                          |       | Jul.  15, 2006      |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   | 263,000 |   | $  | 0.80 |   | $  | 14,415 |   |
| President, Chief Executive Officer and  Director        |       |                |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   | 263,000 |   | $ | 1.50 |   | $ | 7,783 |   |
|                                                    |       |                |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Thomas J. Bresnan                                       |       | Jan.  13, 2006      |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   | 75,000 |   | $ | 0.67 |   | $ | 9,866 |   |
| Former President, Chief Executive  Officer and Director |       |                |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
|                                                    |       |                |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Charles M. Caporale                                     |       | Feb.  16, 2006      |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   | 50,000 |   | $  | 0.70 |   | $  | 9,233 |   |
| Senior Vice President and  Chief Financial Officer      |       | Dec.  26, 2006      |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   | 15,000 |   | $ | 1.10 |   | $ | 53 |   |
|                                                    |       |                |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Gregory E. Marsella                                     |       | Jan.  13, 2006      |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   | 25,000 |   | $  | 0.67 |   | $  | 4,742 |   |
| Vice President, General Counsel                         |       | Dec.  26, 2006      |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   | 20,000 |   | $ | 1.10 |   | $ | 71 |   |
|                                                    |       |                |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Timothy A. Kleczka                                      |       | Jan.  13, 2006      |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   | 15,000 |   | $  | 0.67 |   | $  | 2,845 |   |
| Senior Vice President – Operations                 |       | Dec.  26, 2006      |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   | 60,000 |   | $ | 1.10 |   | $ | 213 |   |
|                                                    |       |                |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Shelley Morris                                          |       | Dec.  26, 2006      |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   | 25,000 |   | $ | 1.10 |   | $ | 89 |   |
| Vice President – ELS                               |       |                |       |                                                                                             |       |                                                                                       |       |                                                                  |       |                                                                   |       |                                              |       |                                                     |       |   |   |   |   |   |   |   |   |

 

Option grants are made from the Company’s Omnibus Equity Plan.  The Omnibus Equity Plan provides for thegranting of options to purchase up to 2,250,000 shares of common stock.  Incentive stock options are exercisable forup to ten years, at an option price of not less than the fair market value onthe date the option is granted, or at a price of not less than 110% of the fairmarket price in the case of an option granted to an individual who, at the timeof grant, owns more than 10% of the Company’s common stock.  Non-qualified stock options may be issued atsuch exercise price and on such other terms and conditions as the CompensationCommittee of the Board of Directors may determine.  All options were granted at a price equal to orgreater than the market value of the Company’s common stock on the date ofgrant.

TheCompany has not repriced any stock options granted or entered into a stockoption repricing arrangement with any executive officer, director or employeeof the Company.

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**Outstanding Equity Awards at Fiscal Year End - 2006**

The following tableprovides details regarding outstanding equity awards for our named executiveofficers as of December 31, 2006.
|                               | ** ** | **Option Awards**                                                                    | ** ** | **Stock Awards**                                                                       | ** ** |
|-------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| **Name**                      | ** ** | **Number of  Securities  Underlying  Unexercised  Options #  Exercisable  (1)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options #  Unexercisable  (2)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options** | ** ** | **Option  Exercise  Price** | ** ** | **Option  Expiration  Date** | ** ** | **Number  of  Shares  or Units  of Stock  That  Have  Not  Vested** | ** ** | **Market  Value of  Shares  or Units  of Stock  That  Have  Not  Vested** | ** ** | **Equity  Incentive  Plan  Awards:  Number  of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested** | ** ** | **Equity  Incentive  Plan  Awards:  Market or  Payout  Value of  Unearned  Shares  Units or  Other  Rights  That  Have Not  Vested** | ** ** |
|                          |       |                                                                                      |       |                                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mark A. Miller                |       |                                                                                      |       | 263,000                                                                                     |       |   |   | $ | 0.80 |   | 7/5/2016 |   | 350,000 |   | $ | 350,000 |   | — |   |   |   |
| President and Chief Executive |       |                                                                                      |       | 263,000                                                                                     |       |   |   | $  | 1.50 |   | 7/5/2016 |   |   |   |   |   |   |   |   |   |
| Officer and Director          |       |                                                                                      |       |                                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |       |                                                                                      |       |                                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Thomas J. Bresnan             |       | 50,000                                                                                    |       |                                                                                        |       |   |   | $ | 6.91 |   | 10/31/2007 |   |   |   |   |   |   |   |   |   |
| Former President, Chief       |       | 75,000                                                                                    |       |                                                                                        |       |   |   | $ | 3.85 |   | 10/31/2007 |   |   |   |   |   |   |   |   |   |
| Executive Officer and         |       | 75,000                                                                                    |       |                                                                                        |       |   |   | $  | 0.67 |   | 10/31/2007 |   |   |   |   |   |   |   |   |   |
| Director                      |       | 146,300                                                                                   |       |                                                                                        |       |   |   | $  | 6.91 |   | 10/31/2007 |   |   |   |   |   |   |   |   |   |
|                               |       | 50,000                                                                                    |       |                                                                                        |       |   |   | $ | 13.75 |   | 1/3/2007 |   |   |   |   |   |   |   |   |   |
|                               |       | 67,500                                                                                    |       |                                                                                        |       |   |   | $  | 5.79 |   | 10/31/2007 |   |   |   |   |   |   |   |   |   |
|                               |       | 75,000                                                                                    |       |                                                                                        |       |   |   | $  | 5.79 |   | 10/31/2007 |   |   |   |   |   |   |   |   |   |
|                               |       | 50,000                                                                                    |       |                                                                                        |       |   |   | $  | 10.93 |   | 10/31/2007 |   |   |   |   |   |   |   |   |   |
|                          |       |                                                                                      |       |                                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Charles M. Caporale           |       |                                                                                      |       | 50,000                                                                                      |       |   |   | $ | 0.70 |   | 2/6/2016 |   | — |   |   |   | — |   |   |   |
| Senior Vice President and     |       |                                                                                      |       | 15,000                                                                                      |       |   |   | $  | 1.10 |   | 12/26/2016 |   |   |   |   |   |   |   |   |   |
| Chief Financial Officer       |       |                                                                                      |       |                                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |       |                                                                                      |       |                                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gregory E. Marsella           |       | 10,000                                                                                    |       |                                                                                        |       |   |   | $ | 3.48 |   | 10/11/2014 |   |   |   |   |   | — |   |   |   |
| Vice President, General       |       |                                                                                      |       | 25,000                                                                                      |       |   |   | $ | 0.67 |   | 1/13/2016 |   |   |   |   |   |   |   |   |   |
| Counsel                       |       |                                                                                      |       | 20,000                                                                                      |       |   |   | $  | 1.10 |   | 12/26/2016 |   |   |   |   |   |   |   |   |   |
|                               |       | 20,000                                                                                    |       |                                                                                        |       |   |   | $  | 3.85 |   | 1/18/2015 |   |   |   |   |   |   |   |   |   |
|                          |       |                                                                                      |       |                                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Timothy A. Kleczka            |       | 3,000                                                                                     |       |                                                                                        |       |   |   | $ | 13.75 |   | 1/3/2007 |   |   |   |   |   | — |   |   |   |
| Senior Vice President -       |       | 3,000                                                                                     |       |                                                                                        |       |   |   | $ | 10.93 |   | 1/14/2009 |   |   |   |   |   |   |   |   |   |
| Operations                    |       | 2,500                                                                                     |       |                                                                                        |       |   |   | $  | 5.79 |   | 1/2/2014 |   |   |   |   |   |   |   |   |   |
|                               |       | 5,000                                                                                     |       |                                                                                        |       |   |   | $  | 6.91 |   | 8/16/2012 |   |   |   |   |   |   |   |   |   |
|                               |       | 20,000                                                                                    |       |                                                                                        |       |   |   | $  | 3.85 |   | 1/18/2015 |   |   |   |   |   |   |   |   |   |
|                               |       |                                                                                      |       | 15,000                                                                                      |       |   |   | $  | 0.67 |   | 1/13/2016 |   |   |   |   |   |   |   |   |   |
|                               |       |                                                                                      |       | 60,000                                                                                      |       |   |   | $  | 1.10 |   | 12/26/2016 |   |   |   |   |   |   |   |   |   |
|                          |       |                                                                                      |       |                                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shelley Morris                |       | 2,500                                                                                     |       |                                                                                        |       |   |   | $ | 5.79 |   | 1/2/2014 |   |   |   |   |   | — |   |   |   |
| Vice President – ELS     |       | 3,000                                                                                     |       |                                                                                        |       |   |   | $ | 13.75 |   | 1/3/2007 |   |   |   |   |   |   |   |   |   |
|                               |       | 10,000                                                                                    |       |                                                                                        |       |   |   | $  | 3.85 |   | 1/18/2015 |   |   |   |   |   |   |   |   |   |
|                               |       |                                                                                      |       | 25,000                                                                                      |       |   |   | $  | 1.10 |   | 12/26/2016 |   |   |   |   |   |   |   |   |   |
|                               |       | 3,000                                                                                     |       |                                                                                        |       |   |   | $  | 6.91 |   | 8/16/2012 |   |   |   |   |   |   |   |   |   |
|                               |       | 3,000                                                                                     |       |                                                                                        |       |   |   | $  | 10.93 |   | 1/14/2009 |   |   |   |   |   |   |   |   |   |
|                               |            |                                                                                           |            |                                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)    On December 12,2005, the Board of Directors of the Company upon the recommendation of theBoard’s Compensation Committee, approved the acceleration of the vesting of alloutstanding stock options held by employees and named executive officers thatwere unvested.

(2)    Options grantedin January and February 2006, vest in one year. Options granted in July and December 2006, vest ratably over a threeyear period.

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**Option Exercises and Stock Vested – 2006**

No options were exercised in 2006 and no stock awardsvested in 2006.  On December 12,2005, the Board of Directors of the Company upon the recommendation of theBoard’s Compensation Committee, approved the acceleration of the vesting of alloutstanding stock options granted under the Company’s stock option plans heldby employees and officers, that were both unvested and “out-of-the-money” as ofDecember 12, 2005.  As a result ofthe decision to accelerate vesting, options to purchase 539,675 shares,representing approximately 32% of total options outstanding of the Company’scommon stock, which would have vested from time to time over the next fouryears, became immediately exercisable. The number of shares, exercise prices, and remaining terms of the optionssubject to the acceleration remain unchanged.

The accelerated optionsincluded 266,250 options held by the Company’s named executive officers and273,425 options held by employees.  Theacceleration did not impact options held by the Company’s non-employeedirectors.  Based on the Company’sclosing stock price of $0.79 per share on December 12, 2005, all of theaccelerated options had exercise prices above the closing stock price at thattime.  The accelerated options hadexercise prices ranging from $2.15 to $13.75 per share.  The weighted average exercise price of allaccelerated options was $5.33 per share.

**Pension Benefits**

TheCompany does not currently offer the ability to participate in a pension plan,supplemental executive retirement plan (SERP) or deferred compensation plan toits named executive officers or other employees of the Company.

**Nonqualified Deferred Compensation**

TheCompany does not offer its named executive officers or employee’s  nonqualified deferred compensation plans.

**Potential Payments Upon Termination or Change-in-Control**

EmploymentAgreement with Mark A. Miller

On July 5, 2006 theCompany entered into an employment agreement with Mark A. Miller (the “EmploymentAgreement”) to serve as the Company’s President and Chief Executive Officer.

Pursuant to the terms ofthe Employment Agreement, in the event that the Company terminates Mr. Miller’semployment without Cause, or Mr. Miller resigns for Good Reason (each asdefined in the Employment Agreement), the Company will continue to payMr. Miller’s salary for a period of twelve months.  Mr. Miller’s current annual salary is  $335,000.  Upon a Change of Control (asdefined in the Employment Agreement), Mr. Miller may elect to terminatehis employment, in which case he will receive (i) a lump sum payment equalto twelve months salary and an amount equal to the most currently paid annualperformance bonus, if the total consideration paid in connection with thetransaction, or the fair market value of the Company at the time of the Changeof Control due to a majority change in the Board of Directors, is less than$25 million, and (ii) a lump sum equal to twenty-four months salaryand an amount equal to the two most currently paid annual performance bonuses,if the total consideration paid in connection with the transaction, or the fairmarket value of the Company at the time of the Change of Control due to amajority change in the Board of Directors, is equal to or greater than$25 million. In the event of a Change of Control, regardless ofconsideration paid or fair market value of the Company at that time, theCompany will provide Mr. Miller with career transition services, in anamount not to exceed $25,000.

BresnanAgreement

On February 7, 2006, theCompany entered into an agreement with Thomas J. Bresnan, the Company’s former Presidentand Chief Executive Officer (the “Bresnan Agreement”). The Bresnan Agreementsets forth the terms pursuant to which Mr. Bresnan led the Company through atransition period during which a search for a new President and Chief ExecutiveOfficer was undertaken by the Board of Directors of the Company.

The Bresnan Agreementprovides for the following terms after the Separation Date as defined therein,which occurred on July 31, 2006: one year’s annual base salary of $324,450 pursuantto the Company’s normal payroll practices; continued healthcare coverage for aperiod of 12 months from 

40

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the Separation Date orsuch shorter period that may occur if Mr. Bresnan becomes insured elsewhere;loan forgiveness in an amount up to $300,000 in the event that the Companyachieves certain objectives with the active participation and assistance of Mr.Bresnan relating to the sale of company owned locations and completion ofaudits; extension of the period for the exercise of vested options to theshorter of (i) 15 months from the Separation Date or (ii) the expiration of theterm of such options; and on the Separation Date and upon Mr. Bresnan’sexecution of a general release of claims, immediate vesting of the options topurchase 75,000 shares of common stock of the Company granted to Mr. Bresnan asof January 13, 2006 and extension of the exercise period to 15 months from theSeparation Date.

Mr. Bresnan has alsoagreed to be subject to confidentiality, non-solicitation and non-interferenceprovisions as set forth in the Bresnan Agreement.

CaporaleAgreement

On February 6, 2006, theCompany entered into an agreement with Charles Caporale, which sets forth theprincipal terms of Mr. Caporale’s employment as Senior Vice President andChief Financial Officer of the Company (the “Caporale Agreement”).  The Caporale Agreement provides for sixmonths severance based on a salary of $215,000 in the event Mr. Caporale isterminated without cause.

**Director Compensation – 2006**
| Name                      | ** ** | **Fees  Earned or  Paid in  Cash** | ** ** | **Stock  Awards** | ** ** | **Option  Awards** | ** ** | **Non-Equity  Incentive  Plan  Compensation** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred**

**Compensation  Earnings** | ** ** | **All  Other  Compensation** | ** ** | **Total** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|-------------------|------------|--------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------|------------|
| Alwaleed  Aldryann (1)    |       | $                                            | 11,250     |              | —     |               | —     |                                          | —     |                                                                                            | —     |                         | —     |      | $          | 11,250 |   |
| David A.  Goldfinger (2)  |       | $                                            | 40,000     |              | —     |               | —     |                                          | —     |                                                                                            | —     |                         | —     |      | $          | 40,000 |   |
| William H.  Heller (3)    |       | $                                            | 45,000     |              | —     |               | —     |                                          | —     |                                                                                            | —     |                         | —     |      | $          | 45,000 |   |
| Donald W. Hughes  (4)     |       | $                                            | 13,500     |              | —     |               | —     |                                          | —     |                                                                                            | —     |                         | —     |      | $          | 13,500 |   |
| Richard L.  Osborne (5)   |       | $                                            | 40,000     |              | —     |               | —     |                                          | —     |                                                                                            | —     |                         | —     |      | $          | 40,000 |   |
| Curtis Lee  Smith, Jr (6) |       | $                                            | 12,500     |              | —     |               | —     |                                          | —     |                                                                                            | —     |                         | —     |      | $          | 12,500 |   |
| Stuart O. Smith  (6)      |       | $                                            | 12,500     |              | —     |               | —     |                                          | —     |                                                                                            | —     |                         | —     |      | $          | 12,500 |   |
| David L. Warnock  (7)     |       | $                                            | 35,000     |              | —     |               | —     |                                          | —     |                                                                                            | —     |                         | —     |      | $          | 35,000 |   |

 

Directorsare entitled to an annual fee of $25,000 plus $5,000 for committeemembership.  In addition, committeemembers are entitled to additional fees for services as committee members, asfollows: Chair of Audit Committee: $15,000; member of Audit, Compensation orCorporate Governance Committee; $5,000.  TheCompany stopped making payments to the directors in July 2007 and has deferredthe unpaid amount for payment in the future. Mr. Miller, the Company’sChief Executive Officer, is not included in this table as he is an employee andreceives no compensation for his services as a director.

----

(1)   Mr.Alwaleed became a director of the Company on July 12, 2006 and earned $11,250for his services.

(2)   Inaddition to the base director fee of $25,000, Mr. Goldfinger earned anadditional $15,000 ($5,000 for each committee) for his participation on theAudit Committee, Compensation Committee and Governance Committee.  Mr. Goldfinger is also the Chairman of theCompensation Committee.

(3)   Inaddition to the base director fee of $25,000, Mr. Heller earned an additional$15,000 as Chairman of the Audit Committee and $5,000 for his participation onthe Compensation Committee.

(4)   Mr.Hughes became a director of the Company on July 12, 2006 and earned $11,250 forhis services.  In addition, Mr. Hughesearned $2,250 for his participation on the Audit Committee.

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(5)          Inaddition to the base director fee of $25,000, Mr. Osborne earned an additional$15,000 ($5,000 for each committee) for his participation on the AuditCommittee, Compensation Committee and Governance Committee.  Mr. Osborne is also the Chairman of theGovernance Committee.

(6)          Mr.Smith and Mr. Smith started to receive director compensation beginning July 1,2006.

(7)          Inaddition to the base director fee of $25,000, Mr. Warnock earned an additional$10,000 for his participation on the Governance Committee and Compensation Committee.

Director compensation for2006 to be paid in the future is as follows:
| Name                  | ** ** | **Fees  Earned to  be paid in  the future** | ** ** | **Stock  Awards** | ** ** | **Option  Awards** | ** ** | **Non-Equity  Incentive  Plan  Compensation** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All  Other  Compensation** | ** ** | **Total** | ** ** |
|-----------------------|------------|------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------|------------|
| Alwaleed  Aldryann    |       | $                                                          | 6,250      |              | —     |               | —     |                                          | —     |                                                                                        | —     |                         | —     |      | $          | 6,250 |   |
| David A.  Goldfinger  |       | $                                                          | 10,000     |              | —     |               | —     |                                          | —     |                                                                                        | —     |                         | —     |      | $          | 10,000 |   |
| William H.  Heller    |       | $                                                          | 11,250     |              | —     |               | —     |                                          | —     |                                                                                        | —     |                         | —     |      | $          | 11,250 |   |
| Donald W. Hughes      |       | $                                                          | 7,500      |              | —     |               | —     |                                          | —     |                                                                                        | —     |                         | —     |      | $          | 7,500 |   |
| Richard L.  Osborne   |       | $                                                          | 10,000     |              | —     |               | —     |                                          | —     |                                                                                        | —     |                         | —     |      | $          | 10,000 |   |
| Curtis Lee  Smith, Jr |       | $                                                          | 6,250      |              | —     |               | —     |                                          | —     |                                                                                        | —     |                         | —     |      | $          | 6,250 |   |
| Stuart O. Smith       |       | $                                                          | 6,250      |              | —     |               | —     |                                          | —     |                                                                                        | —     |                         | —     |      | $          | 6,250 |   |
| David L. Warnock      |       | $                                                          | 7,500      |              | —     |               | —     |                                          | —     |                                                                                        | —     |                         | —     |      | $          | 7,500 |   |

 

**Compensation Committee Interlocks and InsiderParticipation**

No member of the CompensationCommittee has ever been an officer or employee of the Company or any of itssubsidiaries and none of our executive officers has served on the Compensation Committeeor board of directors of any company of which any of our directors is anexecutive officer.

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**Stockholder Return Performance Presentation**

Set forth below is a graph comparing the yearly percentage changes in the cumulative stockholder return on the Company’s common stock against the cumulative total return of the NASDAQ Stock Market Index (U.S.) and a Company-determined peer group for the period commencing December 31, 2001 and ending December 31, 2006.  The Company’s peer group index has changed from that of 2003 as a result of changes that have occurred in the technology training sector.  The peer group used by the Company in 2006 includes Apollo Group, Inc., Career Education Corp., Corinthian Colleges Inc., DeVry, Inc., EVCI Career College Holdings CP., Learning Tree International, Inc.,  Scientific Learning Corp. and VCampus Corp.  The graph assumes that the value of the investment in the Company’s common stock and each index was $100 at December 31, 2001, and that all dividends, if any, were reinvested.

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

The number of Shares beneficially owned, beneficialownership and percentage ownership are determined in accordance with the rulesof the Securities and Exchange Commission. Under these rules, beneficialownership includes any Shares as to which the individual or entity has sole orshared voting power or investment power and includes any Shares that anindividual or entity has the right to acquire beneficial ownership of within 60days of June 15, 2007, through the exercise of any warrant, stock option orother right. In computing the number of Shares beneficially owned by a personand the percentage ownership of that person, Shares of our common stockunderlying options and warrants that are exercisable within 60 days of June 15,2007 are considered to be outstanding. To our knowledge, except as indicated inthe footnotes to the following table and subject to community property lawswhere applicable, the persons named in this table have sole voting andinvestment power with respect to all Shares shown as beneficially owned bythem. The following table is based on 11,095,353 Shares outstanding as of June15, 2007. Unless otherwise indicated, the address of all individual andentities listed below is 1900 S. State College Blvd, Suite 650, Anaheim, CA92806.

Thefollowing table sets forth information with respect to common stock owned on June15, 2007, unless otherwise noted, by each person known by the Company to ownbeneficially more than 5% of the Company’s outstanding common stock at suchdate, the number of shares owned by each such person and the percentage of theoutstanding shares represented thereby. The table also lists beneficial ownership of common stock by each of theCompany’s Directors,  each namedexecutive officer named in the summary compensation table set forth in Item 11of this Annual Report on Form 10-K, and all directors and executive officers asa group.  Unless indicated otherwise, theaddress of each director and named executive officer is 1900 S. State CollegeBlvd., Suite 650, Anaheim, California 92806:
| Name and Address of  Beneficial Owner     | ** ** | **Shares Beneficially  Owned** | ** ** | **Percent of  Class** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------|------------|----------------------------|------------|
|                                                          |       |                                |       |                       |       |
| Curtis Lee Smith, Jr. (1)                                     |       | 922,797                             |       | 8.3                        | %          |
| Stuart O. Smith  (2)                                          |       | 1,102,438                           |       | 9.9                        | %          |
| Mark A. Miller (3)                                            |       | 644,028                             |       | 5.7                        | %          |
| Charles M.  Caporale (4)                                      |       | 50,000                              |       | 0.4                        | %          |
| Gregory E. Marsella (5)                                       |       | 55,000                              |       | 0.5                        | %          |
| Timothy A.  Kleczka (6)                                       |       | 48,500                              |       | 0.4                        | %          |
| Shelley Morris (7)                                            |       | 21,500                              |       | 0.2                        | %          |
| Thomas J.  Bresnan (8)                                        |       | 636,481                             |       | 5.7                        | %          |
| Alwaleed Aldryaan (9)                                         |       | 1,333,333                           |       | 10.7                       | %          |
| David A.  Goldfinger (10)                                     |       | 97,000                              |       | 0.9                        | %          |
| Richard L. Osborne (11)                                       |       | 59,333                              |       | 0.5                        | %          |
| William H.  Heller (12)                                       |       | 80,750                              |       | 0.7                        | %          |
| Donald Hughes (13)                                            |       | 4,306,099                           |       | 28.0                       | %          |
| David L. Warnock  (13)                                        |       | 4,316,099                           |       | 28.0                       | %          |
| Camden Partners Strategic  III, LLC (13).                     |       | 4,306,099                           |       | 28.0                       | %          |
| One South Street, Suite 2150                                  |       |                                |       |                       |       |
| Baltimore, Maryland 21202                                     |       |                                |       |                       |       |
| Henry Investment  Trust (14)                                  |       | 1,049,000                           |       | 9.5                        | %          |
| 255 South 17th Street                                    |       |                                |       |                       |       |
| Philadelphia, PA 19103                                        |       |                                |       |                       |       |
| Financial & Investment  Management Group, Ltd. (15)       |       | 763,399                             |       | 6.9                        | %          |
| 111 Cass Street                                               |       |                                |       |                       |       |
| Traverse City, MI 49684                                       |       |                                |       |                       |       |
| Underhill  Partners LP (16)                                   |       | 982,500                             |       | 8.9                        | %          |
| 61 Broadway, NY, NY 10006                                     |       |                                |       |                       |       |
| All Directors and  Executive Officers as a Group (13 persons) |       | 8,730,778                           |       | 66.4                       | %          |

 

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(1)          Theseshares are owned directly by the Declaration of Trust of Curtis Lee Smith, Jr.,of which Mr. Curtis Lee Smith, Jr., is the settlor and trustee.

(2)          Theseshares are owned directly by the Declaration of Trust of Stuart O. Smith, ofwhich Mr. Stuart O. Smith is the settlor and trustee.

(3)          Mr.Miller’s ownership figure includes 175,333 shares, which may be acquired uponthe exercise of immediately exercisable stock options.

(4)          Mr.Caporale’s ownership figure includes 50,000 shares, which may be acquired uponthe exercise of immediately exercisable stock options.

(5)          Mr.Marsella’s ownership figure includes 55,000 shares, which may be acquired uponthe exercise of immediately exercisable stock options.

(6)          Mr.Kleczka’s ownership figure includes 48,500 shares, which may be acquired uponthe exercise of immediately exercisable stock options.

(7)          Ms.Morris’s ownership figure includes 21,500 shares, which may be acquired uponthe exercise of immediately exercisable stock options.

(8)          Mr.Bresnan’s ownership figure includes 538,800 shares, which may be acquired uponthe exercise of immediately exercisable stock options.

44

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(9)          Mr.Aldryaan’s ownership figures include 1,333,333 warrants received as part of the$4,000 term loan described in Note 3 to the consolidated financial statements.

(10)    Mr.Goldfinger’s ownership figure includes 72,000 shares, which may be acquiredupon the exercise of immediately exercisable stock options.

(11)    Mr.Osborne’s ownership figure includes 59,333 shares, which may be acquired uponthe exercise of immediately exercisable stock options.

(12)    Mr.Heller’s ownership figure includes 72,000 shares, which may be acquired uponthe exercise of immediately exercisable stock options.

(13)    Mr. Hughes and Mr. Warnock are managing members of Camden Partners StrategicIII, LLC (“CPS III”) which is the sole general partner of the Camden PartnersStrategic Fund III, L.P. (“Fund III”) and Camden Partner Strategic Fund III-A,L.P. (“Fund III-A” and together with “Fund III”, the “Funds”).  Collectively, the Funds hold 174,693 sharesof the Company’s Series B Convertible Preferred Stock, without par value (the“Series B Shares”), with Fund III holding 167,723 shares and Fund III-A holding6,970 shares.  The Series B Shares areconvertible at any time, at the option of each holder, into fully paid andnon-assessable shares of common stock at the initial conversion rate of20.8333.  Based solely upon informationin a Schedule 13-G filed with the Securities and Exchange Commission datedFebruary 9, 2007, because of their relationship as affiliated entities, each ofthe Funds may be deemed to own beneficially the securities held of record bythe other.  Additionally, as the solegeneral partner of the Funds, CPS III may be deemed to own beneficially thesecurities held of record by each of the Funds, and the managing members of CPSIII may be deemed to own beneficially the securities held of record by each ofthe Funds.  Mr. Warnock’s beneficialownership figure also consists of 10,000 shares, which may be acquired upon theexercise of immediately exercisable stock options.

(14)    Basedsolely upon information in a Schedule 13-G filed with the Securities andExchange Commission dated February 7, 2007. David W. Wright has authority and responsibilityfor investment, voting and disposition decisions for Henry Investment Trust.

(15) Based solely upon information in a Schedule13-G filed with the Securities and Exchange Commission dated February 7, 2007. SuzanneStepan, CFA has authority and responsibility for investment, voting and dispositiondecisions for Financial & Investment Management Group.

(16) Based solely upon information in a Schedule13-G filed with the Securities and Exchange Commission dated February 12, 2007.Ingalls & Synder LLC has authority and responsibility for investment,voting and disposition decisions for Underhill Partners LP.

45

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**Item 13.         Certain Relationships and Related Transactions**

As part of aseverance agreement between the Company and Mr. Thomas Bresnan, the Company’sprior President and Chief Executive Officer dated February 7, 2006, the Boardof Directors determined to forgive an interest free promissory note made to Mr. Bresnanin the amount of $300,000.  The note wasissued in 1999 for the purpose of Mr. Bresnan relocating to California. Theloan was made prior to enactment of the Sarbanes-Oxley Act of 2002, whichprohibited such transactions.

In August 2006,the Company sold 108,695 shares of common stock at $0.92 per share whichrepresented the Pink Sheet’s market price of our common stock on the date ofsale.  The sale was made to the Company’sChief Executive Officer per the terms of his employment agreement dated July 5,2006.

Except as referenced above, no executive officer, director or nominee for director of the Company has been indebted to the Company or has acquired a material interest in any transaction to which the Company is a party, during the last fiscal year.

**Item 14.         Principal Accountant Fees and Services**

The Company retained Grant Thornton LLP (“Grant Thornton”) as its auditors for its 2003 fiscal year following the resignation of Deloitte & Touche.  The engagement of Grant Thornton was approved by the Audit Committee of the Company’s Board of Directors and affirmed by the entire Board of Directors.

As previously disclosedin a Current Report on Form 8-K dated July 21, 2005, during the course of theiraudit of the financial statements for the year ended December 31, 2004, GrantThornton advised the Company that due to their identification of materialweaknesses in the systems of internal control, the scope of their work wouldneed to be expanded significantly in order to complete the audit and render anauditors’ report for 2004.  Subsequently, as disclosed in an amendedCurrent Report on Form 8-K dated October 3, 2005, Grant Thornton advised the Companythat even after expanding the scope of their work, they were unable to completethe audit for 2004 and were terminating the client-auditor relationship.

Following the resignationof Grant Thornton, the Audit Committee engaged Squar, Milner, Peterson, Miranda& Williamson, LLP (“Squar Milner”) to perform the audit for the year endedDecember 31, 2004.  During the course of their audit of 2004, Squar Milnerand the Company identified a number of adjustments that required the Company torestate the previously issued audited financial statements for the year endedDecember 31, 2003 and unaudited interim financial statements for the quartersended March 31, 2004, June 30, 2004 and September 30, 2004.  The 2003 unaudited financial results havebeen restated and filed on a Current Report on Form 8-K dated November 6,2006.  The quarterly results for the quarters ended March 31, June 30 andSeptember 30, 2004 have been restated and filed on amended Quarterly Reports onForm 10-Q/A dated January 31, 2007.

The2004 audited financial results have been filed on a Current Report on Form 8-Kdated November 6, 2006.  The 2005 audited financial results have beenfiled on a Current Report on Form 8-K dated February 20, 2007.  Squar Milner issued unqualified audit reportsfor each of these years.

All auditing and permissible non-audit services provided by the Company’s independent auditor are pre-approved by the Audit Committee in accordance with the Audit Committee Charter.  Fees paid for services rendered by Squar Milner for 2006 and 2005 were as follows:
| Fee Category   | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Audit Fees (1)      |       | $        | 2,475,000  |     | $          | 100,000 |   |
| Audit-Related  Fees |       | —   |       | —   |       |
| Tax Fees            |       | —   |       | —   |       |
| All Other Fees      |       | —   |       | —   |       |
| Total Fees          |       | $        | 2,475,000  |     | $          | 100,000 |   |

 

----

(1)                   Audit feesconsisted principally of fees billed to the Company for professional servicesperformed for the audit of consolidated financial statements for the yearsended December 31, 2006, 2005 and 2004, for review of financial statementsincluded in our Form 10-Qs, and for services generally only the independentregistered public accounting firm can reasonably be expected to provide, suchas statutory and regulatory filings or engagements. 

46

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**Non-Audit Services Performed by Independent Auditors**

Under the Exchange Act, the Company must disclose the non-audit services approved by the Company’s Audit Committee to be performed by the Company’s independent auditors.  Non-audit services are generally services other than those provided in connection with an audit or a review of the Company’s financial statements.

During the period covered by this Annual Report on Form 10-K, no non-audit services were provided by Squar Milner.

 

47

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**PART IV**

**Item 15****          Exhibits,Financial Statement Schedules And Reports**

**(a) (1)****             Financial Statements**

The following Consolidated Financial Statements of the Registrant andits subsidiaries are included in Part II, Item 8:
|                                                                 | ** ** |
|-----------------------------------------------------------------|------------|
|                                                            |       |
| Reports of Independent Registered Public Accounting  Firms      |       |
| Consolidated Balance Sheets                                     |       |
| Consolidated Statements of Operations                           |       |
| Consolidated Statements of Cash Flows                           |       |
| Consolidated Statements of Stockholders’ Equity  (Deficit) |       |
| Notes to Consolidated Financial Statements                      |       |

 

**(a) (2)****             FinancialStatement Schedules**

No financial statement schedules required.

**(a) (3)****             Exhibits**

See the Exhibit Index on page 50 of this Annual Reporton Form 10-K

48

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**Signatures**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| June 25, 2007 |
|---------------|
|          |
|          | By: | /s/ Mark A.  Miller |   |
|          | Mark A. Miller |
|          | President, Chief  Executive Officer and Director |

 

Pursuant to therequirements of the Securities Exchange Act of 1934 as amended, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated:
| Signature                  | ** ** | **Title**                              | ** ** | **Date**      |
|----------------------------|------------|----------------------------------------|------------|---------------|
|                       |       |                                   |       |          |
| /s/ Mark A.  Miller        |       | Chief Executive Officer                |       | June 25, 2007 |
| Mark A. Miller             |       | (Principal Executive Officer)          |       |          |
|                       |       |                                   |       |          |
| /s/ Charles M.  Caporale   |       | Senior Vice President and Chief        |       | June 25, 2007 |
| Charles M.  Caporale       |       | Financial Officer (Principal Financial |       |          |
|                       |       | and Accounting Officer)                |       |          |
|                       |       |                                   |       |          |
| /s/ Curtis Lee  Smith, Jr. |       | Chairman of the Board of Directors     |       | June 25, 2007 |
| Curtis Lee  Smith, Jr.     |       |                                   |       |          |
|                       |       |                                   |       |          |
| /s/Alwaleed  Aldryann      |       | Director                               |       | June 25, 2007 |
| Alwaleed  Aldryann         |       |                                   |       |          |
|                       |       |                                   |       |          |
| /s/ David A.  Goldfinger   |       | Director                               |       | June 25, 2007 |
| David A.  Goldfinger       |       |                                   |       |          |
|                       |       |                                   |       |          |
| /s/ William H.  Heller     |       | Director                               |       | June 25, 2007 |
| William H.  Heller         |       |                                   |       |          |
|                       |       |                                   |       |          |
| /s/ Donald W.  Hughes      |       | Director                               |       | June 25, 2007 |
| Donald W. Hughes           |       |                                   |       |          |
|                       |       |                                   |       |          |
| /s/ Richard L.  Osborne    |       | Director                               |       | June 25, 2007 |
| Richard L.  Osborne        |       |                                   |       |          |
|                       |       |                                   |       |          |
| /s/ Stuart O.  Smith       |       | Director                               |       | June 25, 2007 |
| Stuart O. Smith            |       |                                   |       |          |
|                       |       |                                   |       |          |
| /s/ David L.  Warnock      |       | Director                               |       | June 25, 2007 |
| David L. Warnock           |       |                                   |       |          |

 

49

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**Exhibit Index:**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                             | ** ** | ** ** |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1         |       | Restated Certificate of Incorporation of the Company                                                                                                                                                                                                                        |       | (I)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 3.2         |       | Amended and Restated By-laws of the Company                                                                                                                                                                                                                                 |       | (I)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.1         |       | Specimen Certificate for Share of Common Stock, $.01  par value, of the Company                                                                                                                                                                                             |       | (E)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.2         |       | Credit Agreement, dated February 27, 2003, between  the Company and Wells Fargo Bank, N.A.                                                                                                                                                                                  |       | (M)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.3         |       | Amendment No. 1, dated December 16, 2003 to the  Credit Agreement between the Company and Wells Fargo Bank, N.A.                                                                                                                                                            |       | (N)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.4         |       | Waiver, dated March 9, 2004, to the Credit Agreement  between the Company and Wells Fargo Bank, N.A.                                                                                                                                                                        |       | (N)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.5         |       | Second Amendment to Credit Agreement, dated February  7, 2005, to the Credit Agreement between the Company and Wells Fargo Bank,  N.A.                                                                                                                                      |       | (P)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.6         |       | Third Amendment to Credit Agreement, dated July 25,  2005, to the Credit Agreement between the Company and Wells Fargo Bank, N.A.                                                                                                                                           |       | (Q)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.7         |       | Certificate of Designation, Preferences and Rights  of Series A Preferred Convertible Stock of the Company, dated February 7,  2005                                                                                                                                         |       | (P)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.8         |       | Specimen Certificate for Share of Series A  Convertible Preferred Stock, $.01 par value, of the Company                                                                                                                                                                     |       | (P)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.9         |       | Certificate of Decrease Relating to Certificate of  Designation, Preference sand Rights of Series A Convertible Preferred  Stock of the Company, filed July 10, 2006                                                                                              |       | (HH)       |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.10        |       | Certificate of Designation, Preferences and Rights  of Series B Convertible Preferred Stock of the Company, filed  July 10, 2006                                                                                                                                  |       | (HH)       |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.11        |       | Certificate of Elimination of Series A  Convertible Preferred Stock of the Company, dated July 20, 2006.                                                                                                                                                          |       | (HH)       |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.12        |       | Specimen certificate of the Series B  Convertible Preferred Stock of the Company                                                                                                                                                                                       |       | (HH)       |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.13        |       | Form of Series A Warrant                                                                                                                                                                                                                                               |       | (HH)       |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.14        |       | Form of Series B Warrant                                                                                                                                                                                                                                               |       | (HH)       |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.15        |       | Stockholders’ Agreement, dated as of February 8,  2005, by and among the Company, Camden Partners Strategic Fund III, L.P. and  Camden Partners Strategic Fund III-A, L.P.                                                                                             |       | (P)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.16        |       | Registration Rights Agreement, dated as of February  8, 2005, by and among the Company, Camden Partners Strategic Fund III, L.P.  and Camden Partners Strategic Fund III-A, L.P.                                                                                            |       | (P)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.17        |       | Amended and Restated Stockholders’ Agreement, dated  as of July 19, 2006, by and among the Company, Camden Partners Strategic  Fund III, L.P., Camden Partners Strategic Fund III-A, L.P., Alkhaleej  Training and Education Corporation and the Warrant Holders. |       | (HH)       |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 4.18        |       | Amended and Restated Registration Rights Agreement,  dated as of July 19, 2006, by and among the Company, Camden Partners  Strategic Fund III, L.P., Camden Partners Strategic Fund III-A, L.P.,  Alkhaleej Training and Education Corporation and the Warrant Holders |       | (HH)       |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 10.1**      |       | Omnibus Equity Plan of the Company                                                                                                                                                                                                                                          |       | (B)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 10.2**      |       | Amendment No. 1 dated March 15, 2002 to the Omnibus  Equity Plan of the Company                                                                                                                                                                                             |       | (K)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 10.3**      |       | Form of Stock Option Agreement executed by employee  recipients of options under Omnibus Equity Plan                                                                                                                                                                        |       | (G)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 10.4**      |       | Key Employees Stock Option Plan of the Company                                                                                                                                                                                                                              |       | (A)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 10.5**      |       | Amendment No. 1 to the Key Employees Stock Option  Plan of the Company                                                                                                                                                                                                      |       | (E)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 10.6**      |       | Stock Option Agreement dated January 22, 1998,  between the Company and Robert S. McMillan based on performance criteria                                                                                                                                                    |       | (D)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 10.7**      |       | Stock Option Agreement dated September 19, 1996,  between the Company and David A. Goldfinger                                                                                                                                                                               |       | (B)        |
|        |       |                                                                                                                                                                                                                                                                        |       |       |
| 10.8**      |       | Stock Option Agreement dated September 19, 1996,  between the Company and William Heller                                                                                                                                                                                    |       | (B)        |

 

50

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|         |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.9**  |   | Stock Option Agreement dated September 19, 1996,  between the Company and Scott R. Wilson                                                                                                                                                                                                                                                              |   | (B)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.10** |   | Form of Stock Option Agreement executed by  non-employee Director recipients of options under Omnibus Equity Plan                                                                                                                                                                                                                                      |   | (B)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.11   |   | Form of Indemnity Agreement with Directors and  Officers of the Company                                                                                                                                                                                                                                                                                |   | (E)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.12   |   | Warrants for the purchase of 43,750 shares of Common  Stock, $.01 par value per share, of the Company issued to The Nassau Group,  Inc. - December 31, 1997 with an expiration date of February 21, 2004                                                                                                                                               |   | (C)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.13** |   | Relocation agreement dated July 27, 1999, between  the Company and Thomas J. Bresnan                                                                                                                                                                                                                                                                   |   | (F)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.14   |   | Promissory note dated August 31, 1999, between the  Company and Thomas J. Bresnan                                                                                                                                                                                                                                                                      |   | (G)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.15** |   | Amendment dated January 4, 2000, to relocation  agreement between the Company and Thomas J. Bresnan                                                                                                                                                                                                                                                    |   | (G)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.16   |   | Amended Promissory Note, dated July 29, 2002,  between the Company and Thomas J. Bresnan                                                                                                                                                                                                                                                               |   | (K)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.17** |   | Severance agreement dated January 4, 2000, between  the Company and Robert S. McMillan                                                                                                                                                                                                                                                                 |   | (G)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.18** |   | Employment Agreement dated January 7, 2002, between  the Company and Martin G. Bean                                                                                                                                                                                                                                                                    |   | (J)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.19   |   | Lease Agreement dated February 15, 2000, between New  Horizons Worldwide, Inc. and Stadium Gateway Associates, LLC, guaranteed by  the Company                                                                                                                                                                                                         |   | (G)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.20   |   | Lease Agreement dated April 27, 2000, between New  Horizons Worldwide, Inc. and 1114 Trizechahn-Swig, guaranteed by the Company                                                                                                                                                                                                                        |   | (H)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.21   |   | Revised Class Action Settlement and General Release  Agreement                                                                                                                                                                                                                                                                                         |   | (O)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.22   |   | Series A Stock Purchase Agreement, dated as of  February 7, 2005, by and among the Company, Camden Partners Strategic Fund  III, L.P. and Camden Partners Strategic Fund III-A, L.P.                                                                                                                                                                   |   | (P)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.23   |   | Credit Agreement, dated as of July 19, 2006, by  and among the Company, Camden Partners Strategic III, LLC and the Lenders  named therein                                                                                                                                                                                                         |   | (HH)   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.24   |   | Preferred Stock Exchange Agreement, dated as of  July 19, 2006, by and among the Company, Camden Partners Strategic Fund  III, L.P. and Camden Partners Strategic Fund III-A, L.P.                                                                                                                                                                |   | (HH)   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.25** |   | Employment Agreement, dated July 5, 2006, by and  between the Company and Mark A. Miller                                                                                                                                                                                                                                                               |   | (GG)   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.26** |   | Nonqualified Stock Option Agreement, dated July 5,  2006, by and between the Company and Mark A. Miller.                                                                                                                                                                                                                                               |   | (GG)   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.27** |   | Nonqualified Stock Option Agreement, dated July 5,  2006, by and between the Company and Mark A. Miller                                                                                                                                                                                                                                                |   | (GG)   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.28** |   | New Horizons Worldwide, Inc. Restricted Stock  Agreement, dated July 5, 2006, between the Company and Mark A. Miller.                                                                                                                                                                                                                                  |   | (GG)   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.29** |   | Letter Agreement, dated February 7, 2005, between  the Company and Jeffrey S. Cartwright, as amended February 10, 2005                                                                                                                                                                                                                                 |   | (P)    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.30** |   | President and Chief Executive Officer Compensation                                                                                                                                                                                                                                                                                                     |   | (EE)   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.31** |   | Offer Letter, dated February 6, 2006, between the  Company and Charles Caporale                                                                                                                                                                                                                                                                        |   | (FF)   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.32** |   | Agreement, dated February 2, 2006, between the  Company and Thomas Bresnan                                                                                                                                                                                                                                                                             |   | (FF)   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.33** |   | Employment Agreement, dated February , 2006, between  the Company and Mark A. Miller                                                                                                                                                                                                                                                                   |   | (GG)   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.34*  |   | Asset Purchase Agreement, dated September 15, 2005,  by and between NHCLC of San Antonio, Inc., a Delaware corporation, and South  Texas Horizons, L.P., a Texas limited partnership, Derek Wright, an  individual, Scott Hardin, an individual, Robert Dupree, an individual and  South Texas Horizons GP, L.L.C., a Texas limited liability company. |   | (II)   |

 

51

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|        |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
|--------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.35* |     | Asset Purchase Agreement, dated March 10, 2006, by  and between New Horizons Computer Learning Center of Charlotte, Inc., a  Delaware corporation, and Sukothai, Inc., a North Carolina corporation, and  Kimberly Pongpat, an individual.                                                                                                                                                                                                            |   | (II)   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| 10.36* |     | Asset Purchase Agreement, dated April 28, 2006, by  and among New Horizons Computer Learning Center of Memphis, Inc., a Delaware  corporation, together with its direct or indirect parent corporation, New  Horizons Worldwide, Inc., on the one hand; Integrated Learning Solutions  Memphis, LLC, a Tennessee limited liability company; and David L. Weinstein,  Robert J. Hussey, III, Stanley Graber and Joel W. Brown, each a natural  person. |   | (JJ)   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| 10.37* |     | Asset Purchase Agreement, dated April 28, 2006, by  and among: New Horizons Computer Learning Center of Nashville, Inc., a  Delaware corporation, together with its direct or indirect parent  corporation, New Horizons Worldwide, Inc., on the one hand; GBWH Nashville,  LLC, a Tennessee limited liability company; and David L. Weinstein, Robert J.  Hussey, III, Stanley Graber and Joel W. Brown, each a natural person.                      |   | (JJ)   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| 10.40* |     | Asset Purchase Agreement, dated April 28, 2006, by  and among: New Horizons Computer Learning Center of Atlanta, Inc., a Delaware  corporation, together with its direct or indirect parent corporation, New  Horizons Worldwide, Inc., on the one hand; GBWH Atlanta, LLC, a Georgia  limited liability company; and David L. Weinstein, Robert J. Hussey, III,  Stanley Graber and Joel W. Brown, each a natural person.                            |   | (JJ)   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| 10.41* |     | Asset Purchase Agreement, dated March 17, 2006, by  and among; and between New Horizons Computer Learning Center of Hartford,  Inc., a Delaware corporation, and NHCLC-Hartford, L.L.C., a Delaware limited  liability company.                                                                                                                                                                                                                       |   | (JJ)   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| 10.42* |     | Asset Purchase Agreement, dated July 31, 2006 by and  between New Horizons Computer Learning Center of Albuquerque, Inc., a  Delaware corporation on the one hand, and R.A.R.E. Technologies, LLC, a New  Mexico limited liability company and Robin Dennehey, Eric Lopez, Rick  Dennehey and Audra Lopez, each an individual.                                                                                                                        |   | (KK)   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| 31.1#  |     | Rule 13a - 14(a) Certification of the Company’s Chief  Executive Officer                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| 31.2#  |     | Rule 13a - 14(a) Certification of the Company’s  Chief Financial Officer                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| 32.1#  |     | Section 1350 Certification of the Company’s Chief  Executive Officer                                                                                                                                                                                                                                                                                                                                                                             |   |   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| 32.2#  |     | Section 1350 Certification of the Company’s Chief  Financial Officer                                                                                                                                                                                                                                                                                                                                                                             |   |   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
|   | * * | *# Filed herewith.*                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|   | * * | * *                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
|   | * * | *** Management contract or compensatory plan or  arrangement.*                                                                                                                                                                                                                                                                                                                                                                                        |   |   |
|   | * * | * *                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
|   | * * | * Information redacted pursuant to SEC rules and  regulations.                                                                                                                                                                                                                                                                                                                                                                                        |   |   |

 

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(A)          Incorporated herein by reference tothe appropriate exhibit to the Company’s Registration Statement on Form S-1(File No. 33-28798).

(B)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Registration Statement on Form S-8(File No. 333-56585).

(C)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Annual Report on Form 10-K for theyear ended December 31, 1997.

(D)          Incorporated herein by reference tothe appropriate exhibit to the Company’s Quarterly Report on Form 10-Q for thequarterly period ended March 31, 1998.

(E)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Annual Report on Form 10-K for theyear ended December 31, 1998.

(F)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Quarterly Report on Form 10-Q for thequarterly period ended September 30, 1999.

(G)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Annual Report on Form 10-K for theyear ended December 31, 1999.

(H)          Incorporated herein by reference tothe appropriate exhibit to the Company’s Quarterly Report on Form 10-Q for thequarterly period ended June 30, 2000.

(I)            Incorporated herein by reference tothe appropriate exhibit to the Company’s Quarterly Report on Form 10-Q for thequarterly period ended June 30, 2001.

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(J)            Incorporated herein by reference tothe appropriate exhibit to the Company’s Quarterly Report on Form 10-Q for thequarterly period ended March 31, 2002.

(K)          Incorporated herein by reference tothe appropriate exhibit to the Company’s Quarterly Report on Form 10-Q for thequarterly period ended June 30, 2002.

(L)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Quarterly Report on Form 10-Q for thequarterly period ended September 30, 2002.

(M)         Incorporated herein by reference to theappropriate exhibit to the Company’s Annual Report on Form 10-K for the yearended December 31, 2002.

(N)          Incorporated herein by reference tothe appropriate exhibit to the Company’s Annual Report on Form 10-K for theyear ended December 31, 2003.

(O)          Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K datedDecember 29, 2004.

(P)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K datedFebruary 7, 2005.

(Q)          Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K dated July21, 2005.

(R)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K dated July27, 2005.

(S)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K datedAugust 1, 2005.

(T)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K datedAugust 3, 2005.

(U)          Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K datedAugust 8, 2005.

(V)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K datedAugust 22, 2005.

(W)         Incorporated herein by reference to theappropriate exhibit to the Company’s Current Report on Form 8-K dated August30, 2005.

(X)          Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K datedSeptember 15, 2005.

(Y)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K datedOctober 3, 2005.

(Z)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Current Report on Form 8-K datedOctober 7, 2005.

(AA)       Incorporated herein by reference to theappropriate exhibit to the Company’s Current Report on Form 8-K dated November8, 2005.

(BB)        Incorporated herein by reference to theappropriate exhibit to the Company’s Current Report on Form 8-K dated November16, 2005.

(CC)        Incorporated herein by reference to theappropriate exhibit to the Company’s Current Report on Form 8-K dated November18, 2005.

(DD)       Incorporated herein by reference to theappropriate exhibit to the Company’s Current Report on Form 8-K dated December15, 2005.

(EE)         Incorporated herein by reference to theappropriate exhibit to the Company’s Current Report on Form 8-K dated January20, 2006.

(FF)         Incorporated herein by reference to theappropriate exhibit to the Company’s Current Report on Form 8-K dated February8, 2006.

(GG)        Incorporated herein by reference to theappropriate exhibit to the Company’s Current Report on Form 8-K dated July 11,2006.

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 (HH)      Incorporatedherein by reference to the appropriate exhibit to the Company’s Current Reporton Form 8-K dated July 25, 2006.

(II)           Incorporated herein by reference tothe appropriate exhibit to the Company’s Quarterly Report on Form 10-Q for thequarter ended March 31, 2006.

(JJ)          Incorporated herein by reference tothe appropriate exhibit to the Company’s Quarterly Report on Form 10-Q for thequarter ended June 30, 2006.

(KK)       Incorporated herein by reference to theappropriate exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterended September 30, 2006.

 

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