##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q/A
 (Amendment
No. 1)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 000-32469
 THE PRINCETON REVIEW, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    22-3727603(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer Identification No.)2315 Broadway New York, New York
    
    10024(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (212) 874-8282
  þ o
  o þ o
  o þ




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##### Table of Contents



EXPLANATORY NOTE
 
  
      1




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##### 



TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATION

4Item 1. Condensed Consolidated Financial Statements

4Condensed Consolidated Balance Sheets

4Condensed Consolidated Statements of Operations

5Condensed Consolidated Statements of Cash Flows

6Notes to Condensed Consolidated Financial Statements

7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

18Item 3. Quantitative and Qualitative Disclosures about Market Risk

23Item 4. Controls and Procedures

24PART II. OTHER INFORMATION

25Item 1. Legal Proceedings

25Item 1A. Risk Factors

25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

25Item 3. Defaults Upon Senior Securities

25Item 4. Submission of Matters to a Vote of Security Holders

25Item 5. Other Information

27Item 6. Exhibits

27SIGNATURES

28EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONS
  
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 (in thousands, except share data)
As Restated
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETS:Current assets:Cash and cash equivalents
    
    $
    7,327
    
    
    $
    8,002Accounts receivable, net of allowance of $1,021 in 2006 and $1,601 in 2005
    
    
    23,647
    
    
    
    22,493Accounts receivable-related parties
    
    
    1,630
    
    
    
    1,591Other receivables, principally related parties
    
    
    2,053
    
    
    
    813Inventory
    
    
    3,094
    
    
    
    2,798Prepaid expenses
    
    
    1,660
    
    
    
    2,229Other current assets
    
    
    1,785
    
    
    
    1,307Total current assets
    
    
    41,196
    
    
    
    39,233Furniture, fixtures, equipment and software development, net
    
    
    15,108
    
    
    
    16,155Goodwill
    
    
    31,506
    
    
    
    31,506Investment in affiliates
    
    
    1,889
    
    
    
    1,938Other intangibles, net
    
    
    12,946
    
    
    
    13,371Other assets
    
    
    4,873
    
    
    
    3,168Total assets
    
    $
    107,518
    
    
    $
    105,371LIABILITIES & STOCKHOLDERS EQUITY:Current liabilities:Line of credit
    
    $
    10,000
    
    
    $
    Accounts payable
    
    
    4,645
    
    
    
    10,449Accrued expenses
    
    
    11,374
    
    
    
    10,826Current maturities of long-term debt
    
    
    2,761
    
    
    
    1,530Deferred income
    
    
    21,827
    
    
    
    16,548Total current liabilities
    
    
    50,607
    
    
    
    39,353Deferred rent
    
    
    2,473
    
    
    
    2,327Long-term debt
    
    
    896
    
    
    
    2,845Fair value of derivatives and warrant
    
    
    111
    
    
    
    393Series B-1 Preferred Stock, $0.01 par value; 10,000 shares authorized;
6,000 shares issued and outstanding at June 30, 2006 and
10,000 shares issued and outstanding at December 31, 2005
    
    
    6,000
    
    
    
    10,000Stockholders equityPreferred stock, $0.01 par value; 4,990,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 100,000,000 shares authorized; 27,574,512 and 27,572,172
    
    
    276
    
    
    
    276issued and outstanding at June 30, 2006 and December 31, 2005, respectively
    
    
    Additional paid-in capital
    
    
    116,590
    
    
    
    116,279Accumulated deficit
    
    
    (69,132
    )
    
    
    (65,823
    )Accumulated other comprehensive loss
    
    
    (303
    )
    
    
    (279
    )Total stockholders equity
    
    
    47,431
    
    
    
    50,453Total liabilities and stockholders equity
    
    $
    107,518
    
    
    $
    105,371
  4




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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
 (unaudited)
 (in thousands, except per share data)
 As Restated
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenueTest Preparation Services
    
    $
    21,682
    
    
    $
    20,630
    
    
    $
    46,745
    
    
    $
    43,528K-12 Services
    
    
    9,828
    
    
    
    7,122
    
    
    
    16,701
    
    
    
    15,041Admissions Services
    
    
    2,517
    
    
    
    2,045
    
    
    
    5,691
    
    
    
    4,839Total revenue
    
    
    34,027
    
    
    
    29,797
    
    
    
    69,137
    
    
    
    63,408Cost of revenueTest Preparation Services
    
    
    7,448
    
    
    
    6,458
    
    
    
    15,265
    
    
    
    13,475K-12 Services
    
    
    4,830
    
    
    
    2,935
    
    
    
    9,584
    
    
    
    7,003Admissions Services
    
    
    1,496
    
    
    
    1,009
    
    
    
    2,786
    
    
    
    1,783Total cost of revenue
    
    
    13,774
    
    
    
    10,402
    
    
    
    27,635
    
    
    
    22,261Gross Profit
    
    
    20,253
    
    
    
    19,395
    
    
    
    41,502
    
    
    
    41,147Operating expenses
    
    
    21,018
    
    
    
    19,772
    
    
    
    44,137
    
    
    
    41,335Loss from operations
    
    
    (765
    )
    
    
    (377
    )
    
    
    (2,635
    )
    
    
    (188
    )Interest income (expense)
    
    
    (192
    )
    
    
    3
    
    
    
    (222
    )
    
    
    (266
    )Other income
(expense)
    
    
    (156
    )
    
    
    32
    
    
    
    (96
    )
    
    
    542Equity in the income (loss) of affiliates
    
    
    16
    
    
    
    (94
    )
    
    
    (51
    )
    
    
    (161
    )Loss before income taxes
    
    
    (1,097
    )
    
    
    (436
    )
    
    
    (3,004
    )
    
    
    (73
    )(Provision) benefit for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (1,097
    )
    
    
    (436
    )
    
    
    (3,004
    )
    
    
    (73
    )Dividends and accretion on Series B-1 Preferred Stock
    
    
    (147
    )
    
    
    (701
    )
    
    
    (305
    )
    
    
    (1,259
    )Loss attributed to common stockholders
    
    $
    (1,244
    )
    
    $
    (1,137
    )
    
    $
    (3,309
    )
    
    $
    (1,332
    )Basic and diluted loss per share
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.12
    )
    
    $
    (0.05
    )Weighted average shares used in computing loss per share
    
    
    27,574
    
    
    
    27,570
    
    
    
    27,574
    
    
    
    27,570
  5




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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 As Restated
 
 Six Months Ended June 30,2006
    
    
    2005Cash flows provided by (used for) operating activities:Net income (loss)
    
    $
    (3,004
    )
    
    $
    (73
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    1,190
    
    
    
    834Amortization
    
    
    3,413
    
    
    
    2,783Bad debt expense
    
    
    562
    
    
    
    145Write-off of deferred financing costs
    
    
    
    
    
    
    117Write-off of inventory
    
    
    265
    
    
    
    Deferred rent
    
    
    146
    
    
    
    610Stock based compensation
    
    
    300
    
    
    
    Other, net
    
    
    (450
    )
    
    
    (447
    )Net change in operating assets and liabilities:Accounts receivable
    
    
    (2,996
    )
    
    
    3,569Inventory
    
    
    (560
    )
    
    
    Prepaid expenses
    
    
    569
    
    
    
    177Other assets
    
    
    (2,306
    )
    
    
    40Accounts payable and accrued expenses
    
    
    (5,256
    )
    
    
    (3,251
    )Deferred income
    
    
    5,280
    
    
    
    (3,031
    )Net cash used for operating activities
    
    
    (2,847
    )
    
    
    1,473Cash provided by (used for) investing activities:Purchases of furniture, fixtures, equipment and software development
    
    
    (2,121
    )
    
    
    (3,946
    )Additions to capitalized K-12 content, capitalized course costs
    
    
    (1,010
    )
    
    
    (2,266
    )Payment of related party loan
    
    
    345
    
    
    
    Note receivable
    
    
    266
    
    
    
    250Loan receivable
    
    
    250
    
    
    
    Net cash provided by (used for) investing activities
    
    
    (2,270
    )
    
    
    (5,962
    )Cash flows provided by (used for) financing activities:Redemption of Series B-1 Preferred Stock
    
    
    (4,377
    )
    
    
    Proceeds (payments) from revolving credit facility
    
    
    10,000
    
    
    
    (2,000
    )Payment of credit facility deferred financing costs
    
    
    (168
    )
    
    
    Capital lease payments
    
    
    (402
    )
    
    
    (347
    )Dividends on Series B-1 Preferred Stock
    
    
    (305
    )
    
    
    (251
    )Notes payable related to acquisitions
    
    
    (317
    )
    
    
    (656
    )Proceeds from exercise of options
    
    
    11
    
    
    
    7Net cash provided by (used for) financing activities
    
    
    4,442
    
    
    
    (3,247
    )Net decrease in cash and cash equivalents
    
    
    (675
    )
    
    
    (7,736
    )Cash and cash equivalents, beginning of period
    
    
    8,002
    
    
    
    19,197Cash and cash equivalents, end of period
    
    $
    7,327
    
    
    $
    11,461
 
  6




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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 
 Notes to Condensed
Consolidated Financial Statements (As Restated)
 (unaudited)
 1. Basis of Presentation
   Products and Services
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)RevenueServices
    
    $
    26,416
    
    
    $
    24,055
    
    
    $
    57,847
    
    
    $
    53,610Products
    
    
    5,563
    
    
    
    3,574
    
    
    
    7,089
    
    
    
    5,565Other
    
    
    2,048
    
    
    
    2,168
    
    
    
    4,201
    
    
    
    4,233Total revenue
    
    $
    34,027
    
    
    $
    29,797
    
    
    $
    69,137
    
    
    $
    63,408Cost of RevenueServices
    
    $
    11,457
    
    
    $
    9,520
    
    
    $
    24,317
    
    
    $
    19,806Products
    
    
    2,131
    
    
    
    733
    
    
    
    2,997
    
    
    
    2,158Other
    
    
    186
    
    
    
    149
    
    
    
    321
    
    
    
    297Total cost of revenue
    
    $
    13,774
    
    
    $
    10,402
    
    
    $
    27,635
    
    
    $
    22,261
  Stock-Based Compensation
 Accounting
for Stock Issued to Employees Accounting for Stock-Based Compensation Share-Based Payment
  7




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Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005(In thousands, except per share amounts)As restatedLoss attributed to common stockholders, as reported
    
    $
    (1,137
    )
    
    $
    (1,332
    )Total stock-based employee compensation expense determined
under fair-value based method for all awards
    
    
    (445
    )
    
    
    (954
    )Pro forma net loss attributed to common stockholders
    
    $
    (1,582
    )
    
    $
    (2,286
    )Net loss per share:Basic and diluted, as reported
    
    $
    (0.04
    )
    
    $
    (0.05
    )Basic and diluted, pro forma
    
    $
    (0.06
    )
    
    $
    (0.08
    )
 
 Adoption of New Accounting Pronouncements
 Accounting Changes and Error Corrections  a
Replacement of APB Opinion No. 20 and FASB Statement No. 3
  
    
    Financial Accounting Standards Board (FASB) Staff Position FAS 13-1, Accounting for
Rental Costs Incurred during a Construction Period(October 2005);
    
    FASB Staff Position FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments (November 2005);
    
    FASB Staff Position FIN 45-3, Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners (November 2005); and,
    
    FASB SFAS No. 155, Accounting for Certain Hybrid Financial Instruments  an amendment of
FASB Statements No. 133 and 140 (February 2006).
  Use of Estimates
  8




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##### Table of Contents



Reclassifications
  2. Restatement of Financial Statements
   
 
    
    Holder Conversion Option  The Preferred Stock
is convertible into the Companys common stock at the option of
the holder at any time. The initial conversion price was
$11.00 per common share, but was decreased to $8.0860 per common
share due to a delay in the effectiveness of the registration
statement relating to the Companys common stock issuable upon
conversion of the Preferred Stock and the subsequent failure to keep
the registration statement effective in accordance with the agreement
with the Holder. The Company may be required to further reduce the conversion
price upon certain events such as the issuance of common stock at a
price below the conversion price or if the Company fails to keep the
registration statement current.
 
 
    
    Make Whole Provision  In the event that the Company is party to
one of several transactions classified as a business
combination, upon consummation of the transaction, the Holder is
entitled to receive (at the Holders election)
 a)
    
    the consideration to which the Holder would have been entitled had it converted
the Preferred Stock into common stock immediately prior to consummation,b)
    
    the consideration to which the Holder would have been entitled had it redeemed
the Preferred Stock for common stock immediately prior to consummation, orc)
    
    cash, initially equal to 160% of the aggregate redemption amount of the
Preferred Stock less 5% of the redemption amount for each full year the Preferred Stock
was outstanding.
 
  
 Embedded Derivatives
 Accounting for Derivatives and
Hedging Activities
   9




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Warrant
 
 Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
 
 
  
 
  
 
  
  
  
  As PreviouslyThree
Months ended June 30, 2006(in thousands, except per share data)
    
    Reported
    
    As RestatedOther income (expense)
    
    $
    (377
    )
    
    $
    (156
    )Net loss
    
    
    (1,318
    )
    
    
    (1,097
    )Net loss attributable to common stockholders
    
    
    (1,465
    )
    
    
    (1,244
    )
 As PreviouslyThree
Months ended June 30, 2005(in thousands, except per share data)
    
    Reported
    
    As RestatedOther income (expense)
    
    $
    
    
    
    $
    32Net loss
    
    
    (468
    )
    
    
    (436
    )Dividends and accretion on Series B-1 Preferred Stock
    
    
    (198
    )
    
    
    (701
    )Net loss attributable to common stockholders
    
    
    (666
    )
    
    
    (1,137
    )Loss per common share  basic
    
    $
    (0.02
    )
    
    $
    (0.04
    )Loss per common share  diluted
    
    $
    (0.02
    )
    
    $
    (0.04
    )
 As PreviouslySix Months ended June 30, 2006(in thousands, except per share data)
    
    Reported
    
    As RestatedOther income (expense)
    
    $
    (377
    )
    
    $
    (96
    )Net loss
    
    
    (3,285
    )
    
    
    (3,004
    )Net loss attributable to common stockholders
    
    
    (3,590
    )
    
    
    (3,309
    )Loss per
common share  basic and diluted
    
    $
    (0.13
    )
    
    $
    (0.12
    )
 As PreviouslySix Months ended June 30, 2005(in thousands, except per share data)
    
    Reported
    
    As RestatedOther income (expense)
    
    $
    
    
    
    $
    542Net loss
    
    
    (615
    )
    
    
    (73
    )Dividends and accretion on Series B-1 Preferred Stock
    
    
    (393
    )
    
    
    (1,259
    )Net loss attributable to common stockholders
    
    
    (1,008
    )
    
    
    (1,332
    )Loss per
common share  basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.05
    )
 10




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As PreviouslyAs of June 30, 2006(in thousands)
    
    Reported
    
    As RestatedDerivative instruments  noncurrent liability
    
    $
    
    
    
    $
    111Total
long-term liabilities
    
    
    3,369
    
    
    
    3,480Accumulated deficit
    
    
    (69,020
    )
    
    
    (69,132
    )Total stockholders equity
    
    
    47,542
    
    
    
    47,431
 As PreviouslyAs of December 31, 2005(in thousands)
    
    Reported
    
    As RestatedDerivative instruments  noncurrent liability
    
    $
    
    
    
    $
    393Total
long-term liabilities
    
    
    5,172
    
    
    
    5,565Accumulated deficit
    
    
    (65,430
    )
    
    
    (65,823
    )Total stockholders equity
    
    
    50,846
    
    
    
    50,453
 
 As PreviouslySix Months ended June 30, 2006(in thousands)
    
    Reported
    
    As RestatedCash flow from operating activities:Net loss
    
    $
    (3,285
    )
    
    $
    (3,004
    )Other, net
    
    
    (169
    )
    
    
    (145
    )
 
 As PreviouslySix Months ended June 30, 2005(in thousands)
    
    Reported
    
    As RestatedCash flow from operating activities:Net loss
    
    $
    (615
    )
    
    $
    (73
    )Other, net
    
    
    95
    
    
    
    (447
    )
 
   
 3. Stock-Based Compensation
 Stock Incentive Plan
  Stock Options
   11




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##### Table of Contents



Six Months Ended June 30,Assumptions
    
    2006
    
    2005Expected volatility
    
    
    43
    %
    
    
    58
    %Expected dividends
    
    
    0
    %
    
    
    0
    %Expected term (in years)
    
    
    5.0
    
    
    
    5.0Risk-free rate
    
    
    5.00
    %
    
    
    4.50
    %
  Weighted-Average
    
    
    AggregateWeighted-
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Average
    
    
    Contractual
    
    
    ValueOutstanding
    
    
    Exercise Price
    
    
    Term
    
    
    ($000)Outstanding at January 1, 2006
    
    
    3,298,494
    
    
    $
    6.99Granted at Market
    
    
    120,400
    
    
    $
    6.20Forfeited
    
    
    (80,195
    )
    
    $
    7.67Exercised
    
    
    (2,340
    )
    
    $
    4.12Outstanding at June 30, 2006
    
    
    3,336,359
    
    
    $
    6.95
    
    
    
    6.02
    
    
    $
    631Exercisable at June 30, 2006
    
    
    2,838,933
    
    
    $
    7.06
    
    
    
    5.53
    
    
    $
    618
     Performance Stock Awards
    Restricted Stock Awards
  12




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4. Line of Credit
  Credit Agreement
        5. Series B-1 Preferred Stock
  13




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##### Table of Contents



a)
    
    the consideration to which the holder would have been entitled had it converted
the Series B-1 Preferred Stock into common stock immediately prior to consummation,b)
    
    the consideration to which the holder would have been entitled had it redeemed
the Series B-1 Preferred Stock for common stock immediately prior to consummation, orc)
    
    cash, initially equal to 160% of the aggregate redemption
amount of the Series B-1 Preferred
Stock less 5% of the redemption amount for each full year the Series
B-1 Preferred Stock was
outstanding.
 
  Redemptions
   14




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##### Table of Contents



6. Segment Information
     
 Three Months Ended June 30, 2006(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    21,682
    
    
    $
    9,828
    
    
    $
    2,517
    
    
    $
    
    
    
    $
    34,027Operating expense (including depreciation
and amortization)
    
    
    10,819
    
    
    
    4,730
    
    
    
    1,744
    
    
    
    3,725
    
    
    
    21,018Operating income (loss)
    
    
    3,431
    
    
    
    268
    
    
    
    (724
    )
    
    
    (3,740
    )
    
    
    (765
    )Depreciation and amortization
    
    
    534
    
    
    
    947
    
    
    
    478
    
    
    
    531
    
    
    
    2,490Other
income (expense) (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (140
    )
    
    
    (140
    )Segment EBITDA
    
    $
    3,965
    
    
    $
    1,215
    
    
    $
    (246
    )
    
    $
    (3,349
    )
    
    $
    1,585Total segment assets
    
    $
    48,199
    
    
    $
    27,795
    
    
    $
    9,660
    
    
    $
    21,864
    
    
    $
    107,518Segment goodwill
    
    $
    31,006
    
    
    $
    
    
    
    $
    500
    
    
    $
    
    
    
    $
    31,506Expenditures for long lived assets
    
    $
    50
    
    
    $
    10
    
    
    $
    
    
    
    $
    630
    
    
    $
    690
 
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##### Table of Contents



Three Months Ended June 30, 2005(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    20,630
    
    
    $
    7,122
    
    
    $
    2,045
    
    
    $
    
    
    
    $
    29,797Operating expense (including depreciation
and amortization)
    
    
    9,837
    
    
    
    3,479
    
    
    
    1,866
    
    
    
    4,590
    
    
    
    19,772Operating income (loss)
    
    
    4,335
    
    
    
    708
    
    
    
    (830
    )
    
    
    (4,590
    )
    
    
    (377
    )Depreciation and amortization
    
    
    443
    
    
    
    693
    
    
    
    434
    
    
    
    311
    
    
    
    1,881Other
income (expense) (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    (62
    )Segment EBITDA
    
    $
    4,778
    
    
    $
    1,401
    
    
    $
    (396
    )
    
    $
    (4,341
    )
    
    $
    1,442Total segment assets
    
    $
    33,294
    
    
    $
    15,694
    
    
    $
    13,098
    
    
    $
    36,101
    
    
    $
    98,187Segment goodwill
    
    $
    31,011
    
    
    $
    
    
    
    $
    500
    
    
    $
    
    
    
    $
    31,511Expenditures for long lived assets
    
    $
    205
    
    
    $
    1,633
    
    
    $
    579
    
    
    $
    1,042
    
    
    $
    3,459
 
 
 Six Months Ended June 30, 2006(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    46,745
    
    
    $
    16,701
    
    
    $
    5,691
    
    
    $
    
    
    
    $
    69,137Operating expense (including depreciation and
amortization)
    
    
    23,304
    
    
    
    8,851
    
    
    
    3,994
    
    
    
    7,988
    
    
    
    44,137Operating income (loss)
    
    
    8,177
    
    
    
    (1,735
    )
    
    
    (1,089
    )
    
    
    (7,988
    )
    
    
    (2,635
    )Depreciation and amortization
    
    
    1,038
    
    
    
    1,759
    
    
    
    964
    
    
    
    841
    
    
    
    4,602Other
income (expense) (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (146
    )
    
    
    (146
    )Segment EBITDA
    
    $
    9,215
    
    
    $
    24
    
    
    $
    (125
    )
    
    $
    (7,293
    )
    
    $
    1,821Expenditures for long lived assets
    
    $
    405
    
    
    $
    1,070
    
    
    $
    225
    
    
    $
    1,431
    
    
    $
    3,131
 
 
 Six Months Ended June 30, 2005(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    43,528
    
    
    $
    15,041
    
    
    $
    4,839
    
    
    $
    
    
    
    $
    63,408Operating expense (including depreciation and
amortization)
    
    
    19,609
    
    
    
    8,328
    
    
    
    4,420
    
    
    
    8,978
    
    
    
    41,335Operating income (loss)
    
    
    10,442
    
    
    
    (290
    )
    
    
    (1,362
    )
    
    
    (8,978
    )
    
    
    (188
    )Depreciation and amortization
    
    
    911
    
    
    
    1,279
    
    
    
    822
    
    
    
    605
    
    
    
    3,617Other
income (expense) (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382
    
    
    
    382Segment EBITDA
    
    $
    11,353
    
    
    $
    989
    
    
    $
    (540
    )
    
    $
    (7,991
    )
    
    $
    3,811Expenditures for long lived assets
    
    $
    225
    
    
    $
    3,788
    
    
    $
    975
    
    
    $
    1,224
    
    
    $
    6,212
 
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Reconciliation of operating income (loss) to net income (loss) (in thousands):
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005As restatedTotal income (loss) from reportable segments
    
    $
    (765
    )
    
    $
    (377
    )
    
    $
    (2,635
    )
    
    $
    (188
    )Unallocated amounts:Interest income (expense)
    
    
    (192
    )
    
    
    3
    
    
    
    (222
    )
    
    
    (266
    )Other income (expense)
    
    
    (156
    )
    
    
    32
    
    
    
    (96
    )
    
    
    542Equity in loss of affiliate
    
    
    16
    
    
    
    (94
    )
    
    
    (51
    )
    
    
    (161
    )Net income (loss)
    
    $
    (1,097
    )
    
    $
    (436
    )
    
    $
    (3,004
    )
    
    $
    (73
    )
 7. Loss Per Share
 Earnings per Share
  8. Comprehensive Income (Loss)
  
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)As restatedNet income (loss) attributable to common stockholders
    
    $
    (1,244
    )
    
    $
    (1,137
    )
    
    $
    (3,309
    )
    
    $
    (1,332
    )Foreign currency translation adjustment
    
    
    (5
    )
    
    
    (16
    )
    
    
    (25
    )
    
    
    (21
    )Total comprehensive (loss) income
    
    $
    (1,249
    )
    
    $
    (1,153
    )
    
    $
    (3,334
    )
    
    $
    (1,353
    )
 
 9. Restructuring
  17




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
     Share-Based Payment.
  Restatement of Financial Statements
  18




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Results of Operations
 Comparison of Three Months Ended June 30, 2006 and 2005
 Revenue
     Cost of Revenue
    19




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Operating Expenses
  
    
    Test Preparation Services operating expenses increased by $1.1 million, or 11.2%, from
$9.7 million in 2005 to $10.9 million in 2006. Salaries and related costs, primarily one
time bonus payments, and SES sales commission increased approximately $315,000, corporate
administrative support allocations increased approximately $265,000 and there was a
restructuring charge of approximately $237,000 that was recorded.
    
    K-12 Services increased by $1.3 million, or 40.2%, from $3.4 million in 2005 to $4.7
million in 2006. Salaries and related expense increased approximately $1.0 million related
primarily to the impact of new employees that were hired during the second half of 2005. In
addition, corporate administrative support allocations increased approximately $304,000
primarily related to legal and technical support. In addition there was a restructuring
charge of approximately $150,000 that was recorded.
    
    Admissions Services were relatively unchanged at $1.7 million. A restructuring charge of
approximately $40,000 was recorded.
    
    Corporate decreased by $1.2 million or 24.1%, from $4.9 million in 2005 to $3.7 million
in 2006. Salaries and related costs decreased approximately $945,000 primarily related to
lower bonus accruals, contract employees and third party consulting expense. In addition,
professional fees decreased by approximately $800,000 primarily related to lower accounting,
legal and technology support charges. Offsetting these reductions was a restructuring charge
of $397,000, depreciation expense of approximately $233,000 primarily related to the new
Oracle ERP solution and annual franchise taxes of approximately $131,000.
 
 Other
Income (Expense)
 
  Dividends and Accretion on Series B-1 Preferred Stock
  Comparison of Six Months Ended June 30, 2006 and 2005
 Revenue
   20




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##### Table of Contents



Cost of Revenue.
     Operating Expenses
  
    
    Test Preparation Services increased by approximately $4.0 million, or 20.1%, from $19.4
million in 2005 to $23.3 million in 2006. Salaries and related costs increased by
approximately $937,000 as a result of the timing of the hiring of new employees, part time
support costs, bonus payments and third party SES commissions. Bad debt expense increased
approximately $365,000 primarily related to the write-off of a institutional contract,
advertising costs increased approximately $228,000, software maintenance increased by
approximately $200,000, professional fees increased by approximately $203,000 and, corporate
allocations increased approximately $705,000 related to recruiting, facilities and
technology charges. A restructuring charge of approximately $237,000 was recorded.
    
    K-12 Services increased by $734,000, or 9.0%, from $8.1 million in 2005 to $8.8 million
in 2006. Salaries and related costs increased by approximately $1.3 million related to 2005
second half hires and restructuring costs of approximately $150,000 were recorded.
Offsetting this increase was a decrease in software maintenance expense of approximately
$335,000.
    
    Admissions Services decreased by $213,000, or 5.1%, from $4.2 million in 2005 to $4.0
million in 2006. This decrease is primarily the result of a reduction in salary and related
costs of approximately $211,000. Restructuring costs of approximately $40,000 were recorded.
    
    Corporate decreased by $1.6 million or 16.9%, from $9.6 million in 2005 to $8.0 million
in 2006. Professional service fees decreased by approximately $1.4 million and salaries and
related costs decreased by approximately $620,000 primarily related to current year bonus
accruals. Restructuring costs of approximately $397,000 were recorded.
 Other income (expense)
  21




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Income Taxes
  Dividends and Accretion on Series B-1 Preferred Stock
  Liquidity and Capital Resources
       22




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Seasonality in Results of Operations
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   23




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Item 4. Controls and Procedures
  Scope of the Controls Evaluation
   Conclusions
  Changes in Internal Control over Financial Reporting
   
 
 24




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
      
 Item 1A. Risk Factors
 Political hostility to No Child Left Behind mandates may curtail SES program opportunities.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
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For
    
    WithheldRichard Katzman
    
    
    23,699,637
    
    
    
    3,147,811Sheree T. Speakman
    
    
    22,066,248
    
    
    
    4,781,200
   For
    
    
    26,830,410Against
    
    
    8,070Abstain
    
    
    8,467
 26




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber
    
    
    
    Description10.47
    
    
    
    First Amendment to Credit Agreement, dated May 25, 2006, by and among The Princeton Review, Inc., Princeton
Review Operations L.L.C., the lender party thereto and Golub Capital Incorporated, as Administrative Agent
(incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-32469),
filed with the Securities and Exchange Commission on June 1,
2006.) (*)31.1
    
    
    
    Certification Pursuant to
Rule 13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (**)31.2
    
    
    
    Certification Pursuant to
Rule 13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (**)32.1
    
    

    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. (**)
 
 (*)
    
    Previously filed with original
Quarterly Report on SEC Form 10-Q.(**)
    
    Filed herewith.
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SIGNATURES
  THE PRINCETON REVIEW, INC.By:
    
    /s/ STEPHEN MELVINStephen MelvinChief Financial Officer and Treasurer(Duly Authorized Officer and PrincipalFinancial and Accounting Officer)March
23, 2007
 28