##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q







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

For the quarterly period ended June 30, 2008

OR



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

For the transition period from              to

Commission file number 000-32469





THE PRINCETON REVIEW, INC.

(Exact name of registrant as specified
in its charter)







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

Registrants telephone number, including area code:

(212) 874-8282





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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                                              |  |   |  |                           |  |  
|--------------------------------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer                       |  |  ̈ |  | Accelerated filer         |  | x
|                                              |  |   | 
|Non-accelerated filer                         |  |  ̈ |  | Smaller reporting company |  |  ̈
|(Do not check if a smaller reporting company) |  |   |  |                          

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

The registrant had 33,672,588 shares of $0.01 par value common stock outstanding at August 4, 2008.









---

##### Table of Contents

TABLE OF CONTENTS



|           |  |                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                       |  | Page
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |     
|Item 1.    |  | Condensed Consolidated Financial Statements                                           |  | 3   
|           |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|           |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|           |  | Consolidated Statement of Stockholders Equity                                        |  | 5   
|           |  | Consolidated Statements of Cash Flows                                                 |  | 6   
|           |  | Notes to Condensed Consolidated Financial Statements                                  |  | 7   
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 22  
|Item 4.    |  | Controls and Procedures                                                               |  | 22  
|PART II.   |  | OTHER INFORMATION                                                                     |  |     
|Item 1.    |  | Legal Proceedings                                                                     |  | 23  
|Item 1A.   |  | Risk Factors                                                                          |  | 23  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 24  
|Item 6.    |  | Exhibits                                                                              |  | 24  
|SIGNATURES |  | 25                                                                                   



|                  |  |                                                                            
|----------------- |  | ---------------------------------------------------------------------------
|                  | 
|Exhibit 10.5     |  | Summary of Cash and Equity Compensation practices for Nonemployee Directors
|                  | 
|Exhibit 31.1     |  | Certification                                                              
|                  | 
|Exhibit 31.2     |  | Certification                                                              
|                  | 
|Exhibit 31.3     |  | Certification                                                              



2



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Condensed Consolidated Financial Statements
|------- | -------------------------------------------

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Condensed Consolidated
Balance Sheets

(unaudited)

(in thousands, except share and per share data)



|                                                                                                                                    |  |              |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                    |  | June 30,2008 |          |   | December 31,2007 |  
|ASSETS                                                                                                                              |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                     |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                           |  | $            | 28,674   |   |                  | $ | 25,281   |  
|Restricted cash and cash equivalents                                                                                                |  |              | 944      |   |                  |   | 905      |  
|Accounts receivable, net of allowance of $1,991 and $2,835, respectively                                                            |  |              | 14,704   |   |                  |   | 25,327   |  
|Other receivables, principally related parties                                                                                      |  |              | 1,926    |   |                  |   | 4,061    |  
|Inventory                                                                                                                           |  |              | 2,760    |   |                  |   | 2,583    |  
|Prepaid expenses                                                                                                                    |  |              | 1,065    |   |                  |   | 1,836    |  
|Other current assets                                                                                                                |  |              | 1,131    |   |                  |   | 831      |  
|                                                                                                                                    |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                |  |              | 51,204   |   |                  |   | 60,824   |  
|Furniture, fixtures, equipment and software development, net                                                                        |  |              | 17,556   |   |                  |   | 17,848   |  
|Goodwill                                                                                                                            |  |              | 61,852   |   |                  |   | 33,627   |  
|Investment in affiliates                                                                                                            |  |              | 277      |   |                  |   | 633      |  
|Other intangibles, net                                                                                                              |  |              | 21,535   |   |                  |   | 9,984    |  
|Other assets                                                                                                                        |  |              | 1,081    |   |                  |   | 1,132    |  
|                                                                                                                                    |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                        |  | $            | 153,505  |   |                  | $ | 124,048  |  
|                                                                                                                                    |  |              |          |   |                  |   |          |  
|                                                                                                                                    |  |             
|LIABILITIES & STOCKHOLDERS EQUITY                                                                                                  |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                                                    |  |              | 477      |   |                  |   | 2,736    |  
|Accrued expenses                                                                                                                    |  |              | 12,577   |   |                  |   | 19,476   |  
|Current maturities of long-term debt                                                                                                |  |              | 960      |   |                  |   | 1,020    |  
|Deferred revenue                                                                                                                    |  |              | 20,364   |   |                  |   | 20,906   |  
|                                                                                                                                    |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                           |  |              | 34,378   |   |                  |   | 44,138   |  
|Deferred rent                                                                                                                       |  |              | 2,827    |   |                  |   | 2,730    |  
|Long-term debt                                                                                                                      |  |              | 790      |   |                  |   | 1,110    |  
|Other liabilities                                                                                                                   |  |              | 770      |   |                  |   | 830      |  
|Deferred tax liability                                                                                                              |  |              | 4,755    |   |                  |   | 4,385    |  
|Series C Preferred Stock, $0.01 par value; 60,000 shares authorized; 60,000 shares issued and outstanding                           |  |              | 60,249   |   |                  |   | 57,951   |  
|Stockholders equity                                                                                                                |  |              |          |   |                  |   |          |  
|Preferred stock, $0.01 par value; 4,930,000 shares authorized, none issued and outstanding                                          |  |              |         |   |                  |   |         |  
|Common stock, $0.01 par value; 100,000,000 shares authorized; 32,939,173 and 28,294,361 shares issued and outstanding,
respectively |  |              | 329      |   |                  |   | 283      |  
|Additional paid-in capital                                                                                                          |  |              | 158,536  |   |                  |   | 121,440  |  
|Accumulated deficit                                                                                                                 |  |              | (108,861 | ) |                  |   | (108,549 | )
|Accumulated other comprehensive loss                                                                                                |  |              | (268     | ) |                  |   | (270     | )
|                                                                                                                                    |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                          |  |              | 49,736   |   |                  |   | 12,904   |  
|                                                                                                                                    |  |              |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                          |  | $            | 153,505  |   |                  | $ | 124,048  |  
|                                                                                                                                    |  |              |          |   |                  |   |          |  

The accompanying notes are an integral part of the condensed consolidated financial statements.



3



---

##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)



|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------- | ---- | -------------------------- | ------ | ---- | ------------------------ | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                  |      | Three Months EndedJune 30, |        |      | Six Months EndedJune 30, |  
|                                                                  | 2008 |                            |        | 2007 |                          |   | 2008   |   |  | 2007 |       
|Revenue                                                           |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Test Preparation Services                                         |      | $                          | 28,272 |      |                          | $ | 25,074 |   |  | $    | 51,422 |   |  | $ | 45,937 |  
|SES Services                                                      |      |                            | 5,780  |      |                          |   | 2,457  |   |  |      | 18,372 |   |  |   | 8,684  |  
|K-12 Services                                                     |      |                            | 5,476  |      |                          |   | 8,854  |   |  |      | 11,105 |   |  |   | 21,935 |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Total revenue                                                     |      |                            | 39,528 |      |                          |   | 36,385 |   |  |      | 80,899 |   |  |   | 76,556 |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|                                                                  |      |                            |        |     
|Cost of revenue                                                   |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Test Preparation Services                                         |      |                            | 8,970  |      |                          |   | 8,133  |   |  |      | 17,858 |   |  |   | 16,500 |  
|SES Services                                                      |      |                            | 2,392  |      |                          |   | 787    |   |  |      | 8,055  |   |  |   | 3,632  |  
|K-12 Services                                                     |      |                            | 1,994  |      |                          |   | 5,514  |   |  |      | 4,679  |   |  |   | 12,443 |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Total cost of revenue                                             |      |                            | 13,356 |      |                          |   | 14,434 |   |  |      | 30,592 |   |  |   | 32,575 |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Gross profit                                                      |      |                            | 26,172 |      |                          |   | 21,951 |   |  |      | 50,307 |   |  |   | 43,981 |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|                                                                  |      |                            |        |     
|Operating expenses                                                |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Selling, general and administrative                               |      |                            | 22,769 |      |                          |   | 21,713 |   |  |      | 47,017 |   |  |   | 44,364 |  
|Restructuring                                                     |      |                            | 2,567  |      |                          |   |       |   |  |      | 3,090  |   |  |   |       |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Total operating expenses                                          |      |                            | 25,336 |      |                          |   | 21,713 |   |  |      | 50,107 |   |  |   | 44,364 |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from operations                                     |      |                            | 836    |      |                          |   | 238    |   |  |      | 200    |   |  |   | (383   | )
|Interest income (expense), net                                    |      |                            | 29     |      |                          |   | (497   | ) |  |      | 127    |   |  |   | (841   | )
|Other income (expense), net                                       |      |                            | (2     | )    |                          |   | (3,687 | ) |  |      | (40    | ) |  |   | (3,763 | )
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from continuing operations before income taxes      |      |                            | 863    |      |                          |   | (3,946 | ) |  |      | 287    |   |  |   | (4,987 | )
|(Provision) benefit for income taxes                              |      |                            | (556   | )    |                          |   | 129    |   |  |      | (634   | ) |  |   | 137    |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from continuing operations                          |      |                            | 307    |      |                          |   | (3,817 | ) |  |      | (347   | ) |  |   | (4,850 | )
|Discontinued operations                                           |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from discontinued operations                        |      |                            | (92    | )    |                          |   | (246   | ) |  |      | 35     |   |  |   | 952    |  
|Gain from disposal of discontinued operations                     |      |                            |       |      |                          |   |       |   |  |      |       |   |  |   | 4,539  |  
|(Provision) benefit for income taxes                              |      |                            | 51     |      |                          |   | (394   | ) |  |      |       |   |  |   | (572   | )
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from discontinued operations                        |      |                            | (41    | )    |                          |   | (640   | ) |  |      | 35     |   |  |   | 4,919  |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Net income (loss)                                                 |      |                            | 266    |      |                          |   | (4,457 | ) |  |      | (312   | ) |  |   | 69     |  
|Dividends and accretion on Preferred Stock                        |      |                            | (1,150 | )    |                          |   | (104   | ) |  |      | (2,298 | ) |  |   | (207   | )
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) attributed to common stockholders                   |      | $                          | (884   | )    |                          | $ | (4,561 | ) |  | $    | (2,610 | ) |  | $ | (138   | )
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Earnings (loss) per share                                         |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Basic and diluted                                                 |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from continuing operations                          |      | $                          | (0.03  | )    |                          | $ | (0.14  | ) |  | $    | (0.08  | ) |  | $ | (0.18  | )
|Income (loss) from discontinued operations                        |      |                            | 0.00   |      |                          |   | (0.02  | ) |  |      | 0.00   |   |  |   | 0.18   |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Net income (loss) attributed to common stockholders               |      | $                          | (0.03  | )    |                          | $ | (0.16  | ) |  | $    | (0.08  | ) |  | $ | 0.00   |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Weighted average shares used in computing income (loss) per share |      |                            | 32,918 |      |                          |   | 27,890 |   |  |      | 31,202 |   |  |   | 27,837 |  
|                                                                  |      |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  

The accompanying notes are an integral part of the condensed consolidated financial statements.



4



---

##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders Equity

(unaudited)

(in thousands)



|                                                                      |              |                                        |                          |   |     |                    |   |         |                                            |  |   |                          |   |  |   |      |   |  |   |        |  
|--------------------------------------------------------------------- | ------------ | -------------------------------------- | ------------------------ | - | --- | ------------------ | - | ------- | ------------------------------------------ |  | - | ------------------------ | - |  | - | ---- | - |  | - | ------ | -
|                                                                      |              | For the six months ended June 30, 2008 |                         
|                                                                      |              | Stockholders Equity                   |                         
|                                                                      | Common Stock |                                        | AdditionalPaid-inCapital |   |     | AccumulatedDeficit |   |         | AccumulatedOtherComprehensiveIncome (loss) |  |   | TotalStockholdersEquity |  
|                                                                      | Shares       |                                        | Amount                   |   |     |                    |  
|Balance at December 31, 2007                                          |              | 28,294                                 |                          | $ | 283 |                    | $ | 121,440 |                                            |  | $ | (108,549                 | ) |  | $ | (270 | ) |  | $ | 12,904 |  
|Exercise of stock options                                             |              | 322                                    |                          |   | 3   |                    |   | 2,243   |                                            |  |   |                         |   |  |   |     |   |  |   | 2,246  |  
|Vesting of restricted stock                                           |              | 98                                     |                          |   | 1   |                    |   | 240     |                                            |  |   |                         |   |  |   |     |   |  |   | 241    |  
|Stock-based compensation                                              |              |                                       |                          |   |    |                    |   | 1,573   |                                            |  |   |                         |   |  |   |     |   |  |   | 1,573  |  
|Dividends and accretion of issuance costs on Series C Preferred Stock |              |                                       |                          |   |    |                    |   | (2,298  | )                                          |  |   |                         |   |  |   |     |   |  |   | (2,298 | )
|Shares issued in conjunction with acquisition                         |              | 4,225                                  |                          |   | 42  |                    |   | 35,338  |                                            |  |   |                         |   |  |   |     |   |  |   | 35,380 |  
|Comprehensive loss                                                    |              |                                        |                          |   |     |                    |   |         |                                            |  |   |                          |   |  |   |      |   |  |   |        |  
|Net loss                                                              |              |                                       |                          |   |    |                    |   |        |                                            |  |   | (312                     | ) |  |   |     |   |  |   | (312   | )
|Foreign currency gain                                                 |              |                                       |                          |   |    |                    |   |        |                                            |  |   |                         |   |  |   | 2    |   |  |   | 2      |  
|                                                                      |              |                                        |                          |   |     |                    |   |         |                                            |  |   |                          |   |  |   |      |   |  |   |        |  
|Comprehensive loss                                                    |              |                                       |                          |   |    |                    |   |        |                                            |  |   | (312                     | ) |  |   | 2    |   |  |   | (310   | )
|                                                                      |              |                                        |                          |   |     |                    |   |         |                                            |  |   |                          |   |  |   |      |   |  |   |        |  
|Balance at June 30, 2008                                              |              | 32,939                                 |                          | $ | 329 |                    | $ | 158,536 |                                            |  | $ | (108,861                 | ) |  | $ | (268 | ) |  | $ | 49,736 |  
|                                                                      |              |                                        |                          |   |     |                    |   |         |                                            |  |   |                          |   |  |   |      |   |  |   |        |  

The accompanying notes are an integral part of the condensed consolidated financial statements.



5



---

##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)



|                                                                                         |      |                                  |         |      |  |   |         |  
|---------------------------------------------------------------------------------------- | ---- | -------------------------------- | ------- | ---- |  | - | ------- | -
|                                                                                         |      | For the Six MonthsEnded June 30, |        
|                                                                                         | 2008 |                                  |         | 2007 | 
|Cash flows provided by (used for) operating activities:                                  |      |                                  |         |      |  |   |         |  
|Loss from continuing operations                                                          |      | $                                | (347    | )    |  | $ | (4,850  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |      |                                  |         |      |  |   |         |  
|Depreciation                                                                             |      |                                  | 1,358   |      |  |   | 1,464   |  
|Amortization                                                                             |      |                                  | 2,500   |      |  |   | 2,766   |  
|Bad debt expense                                                                         |      |                                  | (177    | )    |  |   | 1,151   |  
|Change in fair value of derivatives                                                      |      |                                  |        |      |  |   | 3,826   |  
|Disposal of furniture, fixtures, equipment                                               |      |                                  | 843     |      |  |   |        |  
|Disposal of software development                                                         |      |                                  | 50      |      |  |   |        |  
|Deferred income tax liability                                                            |      |                                  | 370     |      |  |   | 341     |  
|Deferred rent                                                                            |      |                                  | (33     | )    |  |   | (38     | )
|Stock based compensation                                                                 |      |                                  | 1,573   |      |  |   | 2,005   |  
|Other long term liabilities                                                              |      |                                  | (60     | )    |  |   |        |  
|Gain on the sale of investment in affiliate                                              |      |                                  | (44     | )    |  |   |        |  
|Net change in operating assets and liabilities:                                          |      |                                  |         |      |  |   |         |  
|Accounts receivable                                                                      |      |                                  | 13,832  |      |  |   | 8,500   |  
|Inventory                                                                                |      |                                  | (176    | )    |  |   | 541     |  
|Prepaid expenses                                                                         |      |                                  | 890     |      |  |   | 585     |  
|Other assets                                                                             |      |                                  | (152    | )    |  |   | 1,621   |  
|Accounts payable and accrued expenses                                                    |      |                                  | (10,502 | )    |  |   | (11,656 | )
|Deferred revenue                                                                         |      |                                  | (2,852  | )    |  |   | (4,910  | )
|                                                                                         |      |                                  |         |      |  |   |         |  
|Net cash provided by operating activities                                                |      |                                  | 7,073   |      |  |   | 1,346   |  
|                                                                                         |      |                                  |         |      |  |   |         |  
|Cash used for investing activities:                                                      |      |                                  |         |      |  |   |         |  
|Purchases of furniture, fixtures, equipment                                              |      |                                  | (1,118  | )    |  |   | (561    | )
|Purchases of software development                                                        |      |                                  | (1,110  | )    |  |   | (4,344  | )
|Additions to capitalized K-12 content, capitalized course costs                          |      |                                  |        |      |  |   | (42     | )
|Restricted cash and cash equivalents                                                     |      |                                  | (39     | )    |  |   | (1,873  | )
|Proceeds from sale of investment in affiliate                                            |      |                                  | 400     |      |  |   |        |  
|Purchases of franchises, net of acquired cash                                            |      |                                  | (3,526  | )    |  |   |        |  
|                                                                                         |      |                                  |         |      |  |   |         |  
|Net cash used for investing activities                                                   |      |                                  | (5,393  | )    |  |   | (6,820  | )
|                                                                                         |      |                                  |         |      |  |   |         |  
|Cash flows provided by (used for) financing activities:                                  |      |                                  |         |      |  |   |         |  
|Capital lease payments                                                                   |      |                                  | (164    | )    |  |   | (392    | )
|Dividends on Series B-1 Preferred Stock                                                  |      |                                  |        |      |  |   | (207    | )
|Notes payable related to acquisitions                                                    |      |                                  | (443    | )    |  |   | (313    | )
|Proceeds from exercise of options                                                        |      |                                  | 2,246   |      |  |   | 279     |  
|                                                                                         |      |                                  |         |      |  |   |         |  
|Net cash provided by (used for) financing activities                                     |      |                                  | 1,639   |      |  |   | (633    | )
|                                                                                         |      |                                  |         |      |  |   |         |  
|Total cash flows provided by (used for) continuing operations                            |      |                                  | 3,319   |      |  |   | (6,107  | )
|                                                                                         |      |                                  |         |      |  |   |         |  
|Cash flows from discontinued operations                                                  |      |                                  |         |      |  |   |         |  
|Income from discontinued operations                                                      |      |                                  | 35      |      |  |   | 380     |  
|Gain on disposal of discontinued operations                                              |      |                                  |        |      |  |   | (4,539  | )
|Other adjustments to reconcile net income to net cash provided by operating activities   |      |                                  | 39      |      |  |   | 1,750   |  
|                                                                                         |      |                                  |         |      |  |   |         |  
|Net cash provided by (used for) operating activities                                     |      |                                  | 74      |      |  |   | (2,409  | )
|                                                                                         |      |                                  |         |      |  |   |         |  
|Cash received from disposal of discontinued operations                                   |      |                                  |        |      |  |   | 7,000   |  
|                                                                                         |      |                                  |         |      |  |   |         |  
|Net cash provided by investing activities                                                |      |                                  |        |      |  |   | 7,000   |  
|                                                                                         |      |                                  |         |      |  |   |         |  
|Net cash provided by discontinued operations                                             |      |                                  | 74      |      |  |   | 4,591   |  
|                                                                                         |      |                                  |         |      |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                         |      |                                  | 3,393   |      |  |   | (1,516  | )
|Cash and cash equivalents, beginning of period                                           |      |                                  | 25,281  |      |  |   | 10,334  |  
|                                                                                         |      |                                  |         |      |  |   |         |  
|Cash and cash equivalents, end of period                                                 |      | $                                | 28,674  |      |  | $ | 8,818   |  
|                                                                                         |      |                                  |         |      |  |   |         |  

The accompanying notes are an integral part of the condensed consolidated financial statements.



6



---

##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

(unaudited)

Notes to Condensed
Consolidated Financial Statements

1. Basis of Presentation

The unaudited condensed consolidated financial statements of The Princeton Review, Inc., and its wholly-owned subsidiaries, The Princeton Review Canada Inc., Princeton Review Operations, L.L.C., and, effective
March 7, 2008, Test Services, Inc., (together, the Company or Princeton Review) included herein have been prepared in accordance with generally accepted accounting principles (GAAP). In the opinion of
management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected.

Certain information and footnote disclosures normally included in the Companys annual consolidated financial statements have been condensed or
omitted and, accordingly, the accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in the Companys Annual Report on Form 10-K, filed with the United States
Securities and Exchange Commission for the year ended December 31, 2007.

Products and Services

The following table summarizes the Companys revenue and cost of revenue for the three and six month periods ended June 30, 2008 and 2007:



|                      |                |                            |        |                          |      |        |      |   |        |  |   |       
|--------------------- | -------------- | -------------------------- | ------ | ------------------------ | ---- | ------ | ---- | - | ------ |  | - | ------
|                      |                | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                      | 2008           |                            | 2007   |                          | 2008 |        | 2007
|                      | (In thousands)
|Revenue               |                |                            |        |                          |      |        |      |   |        |  |   |       
|Services              |                | $                          | 35,160 |                          | $    | 31,182 |      | $ | 73,396 |  | $ | 68,078
|Products              |                |                            | 1,837  |                          |      | 1,989  |      |   | 3,780  |  |   | 3,582 
|Other                 |                |                            | 2,531  |                          |      | 3,214  |      |   | 3,723  |  |   | 4,896 
|                      |                |                            |        |                          |      |        |      |   |        |  |   |       
|Total revenue         |                | $                          | 39,528 |                          | $    | 36,385 |      | $ | 80,899 |  | $ | 76,556
|                      |                |                            |        |                          |      |        |      |   |        |  |   |       
|                      |                |                            |        |                         
|Cost of Revenue       |                |                            |        |                          |      |        |      |   |        |  |   |       
|Services              |                | $                          | 12,673 |                          | $    | 13,647 |      | $ | 29,214 |  | $ | 31,204
|Products              |                |                            | 380    |                          |      | 487    |      |   | 843    |  |   | 1,035 
|Other                 |                |                            | 303    |                          |      | 300    |      |   | 535    |  |   | 336   
|                      |                |                            |        |                          |      |        |      |   |        |  |   |       
|Total cost of revenue |                | $                          | 13,356 |                          | $    | 14,434 |      | $ | 30,592 |  | $ | 32,575
|                      |                |                            |        |                          |      |        |      |   |        |  |   |       

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

Seasonality in Results of Operations

The Company experiences, and is expected to continue to experience, seasonal
fluctuations in its revenue because the markets in which the Company operates are subject to seasonal fluctuations based on the scheduled dates for standardized admissions tests and the typical school year. These fluctuations could result in
volatility or adversely affect the Companys stock price. The Company typically generates the largest portion of its test preparation revenue in the third quarter. However, as Supplemental Educational Services (SES) revenue grows,
the Company expects this revenue to be concentrated in the fourth and first quarters to more closely correspond to the after school programs greatest activity during the school year. The K-12 Services division may also experience seasonal
fluctuations in revenue, which is dependent on the school year, and it is expected that the revenue from new school sales during the year will be recognized primarily in the third quarter and fourth quarter of the calendar year.



7



---

##### Table of Contents

New Accounting Pronouncements

In April 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets(FSP No. 142-3), which amends
the factors that should be considered when developing renewal or extension assumptions used to determine the useful life of an intangible asset under Statement of Financial Accounting Standards No. 142 (SFAS No. 142), Goodwill and
Other Intangible Assets, in order to improve consistency between SFAS No. 142 and the period of expected cash flows to measure the fair value of the asset under Statement of Financial Accounting Standards No. 141 (revised 2007), Business
Combinations and other U.S. generally accepted accounting practices. This FASB Staff Position is effective for fiscal periods beginning on or after December 15, 2008. The adoption of FSP No. 142-3 is not expected to have a material impact on the
Companys financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133(SFAS No. 161), which expands disclosures to include information about the fair value of derivatives, related credit risks and a
companys strategies and objectives for using derivatives. This statement is effective for fiscal periods beginning on or after November 15, 2008. The adoption of SFAS No. 161 is not expected to have a material impact on the Companys
financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business
Combinations, (SFAS No. 141(R)). SFAS No. 141(R) replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and
liabilities assumed in the transaction, the fair value of certain contingent assets and liabilities acquired on the acquisition date and the fair value of contingent consideration on the acquisition date, with any changes in that fair value to be
recognized in earnings until settled. SFAS No. 141(R) also requires the expensing of most transaction and restructuring costs and generally requires the reversal of valuation allowances related to acquired deferred tax assets and the recognition of
changes to acquired income tax uncertainties in earnings. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the provisions of SFAS No. 141(R) to
determine the potential impact, if any, that the adoption will have on its financial position, results of operation, or liquidity.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting
and reporting standards for the non-controlling interest in a subsidiary and for the retained interest and gain or loss when a subsidiary is deconsolidated. This statement is effective for financial statements issued for fiscal years beginning on or
after December 15, 2008. The adoption of SFAS No. 160 is not expected to have a material impact on the Companys financial statements.

Use of
Estimates

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

Reclassifications

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

2. Acquisitions

On March 7, 2008, the Company acquired Test Services, Inc. (TSI), the owner of ten The Princeton Review franchises, by means of a merger
of a newly created subsidiary of The Princeton Review with and into TSI. Under the terms of the Agreement and Plan of Merger with TSI and Alta Colleges, Inc., the parent corporation of TSI, TSI became a wholly owned subsidiary of The Princeton
Review. As consideration to Alta Colleges, Inc. for the acquisition, the Company paid $4.6 million in cash and issued 4,225,000 shares of common stock, which were valued at $35.4 million based on the average trading price of The Princeton
Reviews common stock during the period from two days before and through two days after the transaction was announced. The number of shares issued in the transaction is subject to adjustment on the first anniversary of the acquisition if the
total value of the merger consideration decreases below $36 million (as a result of a decline in the trading price of Princeton Reviews common stock). Alta Colleges, Inc. has been granted registration rights for the shares of common stock
issued in this transaction in certain future registration statements of the Company. After this transaction, Alta Colleges, Inc. owns approximately 13.5% and 10.0% of the basic and diluted shares outstanding, respectively.

The acquisition was part of an ongoing effort by the Company to consolidate operations by repurchasing its domestic franchises. The results of TSI have
been included in the Companys consolidated financial statements since March 7, 2008, the date of acquisition. As a result of the transaction, the Company has recorded $28.2 million of goodwill and $13.1 million of other intangibles, all
of which was allocated to the Test Preparation Services Division. The intangibles consist of franchise marketing rights, which will be amortized over their estimated seventeen year useful life and are not expected to be deductible for income taxes.
The purchase accounting estimates will be finalized during the quarter ending September 30, 2008. The goodwill arises as a result of the Companys expected ability to capitalize back office synergies and leverage existing and new marketing
opportunities across a larger revenue base.



8



---

##### Table of Contents

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of
acquisition (in thousands).



|                              |  |               |        |  
|----------------------------- |  | ------------- | ------ | -
|                              |  | March 7, 2008 |       
|Cash paid                     |  | $             | 4,600  |  
|Equity issued                 |  |               | 35,380 |  
|Transaction costs             |  |               | 593    |  
|                              |  |               |        |  
|Total consideration issued    |  |               | 40,573 |  
|                              |  |               |        |  
|Cash                          |  |               | 2,206  |  
|Other assets, net             |  |               | 1,298  |  
|Other intangibles             |  |               | 13,092 |  
|                              |  |               |        |  
|Fair value of assets acquired |  |               | 16,596 |  
|                              |  |               |        |  
|Liabilities assumed           |  |               | (4,209 | )
|                              |  |               |        |  
|Net assets acquired           |  |               | 12,387 |  
|                              |  |               |        |  
|Goodwill                      |  | $             | 28,186 |  
|                              |  |               |        |  

Operating results for TSI have been reflected in the Companys consolidated financial
statements from the date of acquisition. The following unaudited pro forma consolidated financial information has been prepared as if the acquisition had taken place at the beginning of each fiscal year presented. The following unaudited pro forma
information is not necessarily indicative of the results of operations in future periods or results that would have been achieved had the acquisition taken place at the beginning of the periods presented.

Pro Forma

|                                                      |                |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------- | -------------- | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                      |                | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                      | (In thousands) |                           
|                                                      |                | 2008                       |        |   | 2007                     |   |        | 2008 |  |   | 2007   |  
|Net Revenues                                          |                | $                          | 39,528 |   |                          | $ | 39,506 |      |  | $ | 83,537 |   |  | $ | 83,296 |  
|Income (loss) from continuing operations              |                |                            | 307    |   |                          |   | (3,458 | )    |  |   | 729    |   |  |   | (3,373 | )
|Income (loss) from discontinued operations            |                |                            | (41    | ) |                          |   | (640   | )    |  |   | 35     |   |  |   | 4,919  |  
|Dividends and accretion on preferred stock            |                |                            | (1,150 | ) |                          |   | (104   | )    |  |   | (2,298 | ) |  |   | (207   | )
|                                                      |                |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) attributable to common shareholders     |                |                            | (884   | ) |                          |   | (4,202 | )    |  |   | (1,534 | ) |  |   | 1,339  |  
|                                                      |                |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Pro forma basic and diluted income (loss) per share   |                |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations              |                | $                          | (0.03  | ) |                          | $ | (0.11  | )    |  | $ | (0.05  | ) |  | $ | (0.11  | )
|Income (loss) from discontinued operations            |                |                            | 0.00   |   |                          |   | (0.02  | )    |  |   | 0.00   |   |  |   | 0.15   |  
|                                                      |                |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net Income (loss) attributable to common shareholders |                |                            | (0.03  | ) |                          |   | (0.13  | )    |  |   | (0.05  | ) |  |   | 0.04   |  
|                                                      |                |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

3. Disposal of Assets

On February 16, 2007, the Company completed its sale of certain assets of the Companys Admissions Services Division to Embark Corp. (Embark) for a purchase price of $7.0 million. The assets
related to the Companys business of providing electronic application and project management tools to schools and higher education institution customers (the Admissions Tech Business). The Company is entitled to an earn-out of up to
an additional $1.25 million based upon certain achievements of the Admissions Tech Business in 2007. The Company recorded $240,000 of the earn-out in 2007 as part of the gain from disposal of discontinued operations, which is expected to be
paid by December 31, 2008. The Company recorded a gain on the sale of these assets in the amount of $4.8 million, including this $240,000 earn-out payment.

During the three and six month periods ended June 30, 2008, the Company had cash flows of ($54,000) and $74,000 respectively, related to assets not sold to Embark as part of the transaction. These amounts were
due to an increase in the bad debt reserve and the disposal of fixed assets during the second quarter of 2008 and the collection of outstanding receivables in the first quarter of 2008.



9



---

##### Table of Contents

The following table includes certain summary income statement information related to the Admissions Tech
Business, reflected as discontinued operations for the periods presented:



|                                              |                |                            |     |   |                          |   |      |      |  |   |      |   |  |   |       |  
|--------------------------------------------- | -------------- | -------------------------- | --- | - | ------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ----- | -
|                                              |                | Three Months EndedJune 30, |     |   | Six Months EndedJune 30, |  
|                                              | (In thousands) |                           
|                                              |                | 2008                       |     |   | 2007                     |   |      | 2008 |  |   | 2007 |  
|Revenues                                      |                | $                          |    |   |                          | $ | (48  | )    |  | $ |     |   |  | $ | 2,406 |  
|Cost of revenues                              |                |                            |    |   |                          |   | 55   |      |  |   |     |   |  |   | 392   |  
|                                              |                |                            |     |   |                          |   |      |      |  |   |      |   |  |   |       |  
|Gross margin                                  |                |                            |    |   |                          |   | (103 | )    |  |   |     |   |  |   | 2,014 |  
|Operating expenses(a)                         |                |                            | 92  |   |                          |   | 143  |      |  |   | (35  | ) |  |   | 1,062 |  
|Income (loss) before income taxes             |                |                            | (92 | ) |                          |   | (246 | )    |  |   | 35   |   |  |   | 952   |  
|Gain from disposal of discontinued operations |                |                            |    |   |                          |   |     |      |  |   |     |   |  |   | 4,539 |  
|(Provision) benefit for income taxes          |                |                            | 51  |   |                          |   | (394 | )    |  |   |     |   |  |   | (572  | )
|                                              |                |                            |     |   |                          |   |      |      |  |   |      |   |  |   |       |  
|Income (loss) from discontinued operations    |                | $                          | (41 | ) |                          | $ | (640 | )    |  | $ | 35   |   |  | $ | 4,919 |  
|                                              |                |                            |     |   |                          |   |      |      |  |   |      |   |  |   |       |  



|(a) | Excludes corporate overhead expense previously allocated to the Admissions Tech Business in accordance with Emerging Issues Task Force Issue No. 87-24, Allocation of
Interest Expense to Discontinued Operations. The amount of corporate overhead expense added back to the Companys continuing operations totaled $0 for the three months ended June 30, 2008 and 2007 and $0 and $69,800 for the six
months ended June 30, 2008 and 2007, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There were no net assets related to the discontinued operations as
of June 30, 2008.

4. Stock-Based Compensation

FAS 123(R) requires the recognition of the fair value of stock-based compensation in the Companys statements of operations. Stock-based compensation expense primarily relates to stock options and restricted
stock under the Companys 2000 Stock Incentive Plan. Compensation expense is recognized on a straight-line method over the requisite service period. Performance-based stock compensation expense is recognized over the service period if the
achievement of performance criteria is considered probable by the Company. The fair value of stock options are estimated using the Black-Scholes option pricing formula which uses the following assumptions in its fair value calculation at the date of
grant for the three and six month periods ended June 30, 2008:



|                         |      |                            |   |      |                          |   |      |      |   |      |      |  
|------------------------ | ---- | -------------------------- | - | ---- | ------------------------ | - | ---- | ---- | - | ---- | ---- | -
|                         |      | Three Months EndedJune 30, |   |      | Six Months EndedJune 30, |  
|                         | 2008 |                            |   | 2007 |                          |   | 2008 |      |   | 2007 |     
|Expected life (years)    |      | 5.0                        |   |      | 5.0                      |   |      | 5.0  |   |      | 5.0  |  
|Expected forfeiture rate |      | 15.0                       | % |      | 15.0                     | % |      | 15.0 | % |      | 15.0 | %
|Risk-free interest rate  |      | 3.1                        | % |      | 5.0                      | % |      | 2.6  | % |      | 5.0  | %
|Volatility               |      | 38.9                       | % |      | 34.4                     | % |      | 36.5 | % |      | 34.4 | %

Information concerning all stock option activity for the six months ended June 30, 2008 is
summarized as follows:



|                                            |  |                                             |   |  |                                          |      |                                                     |      |                                        |   |      
|------------------------------------------- |  | ------------------------------------------- | - |  | ---------------------------------------- | ---- | --------------------------------------------------- | ---- | -------------------------------------- | - | -----
|                                            |  | Shares ofCommon StockAttributable toOptions |   |  | Weighted-AverageExercise PriceOf Options |      | Weighted-AverageRemainingContractual Term(in years) |      | AggregateIntrinsic Value(in thousands)
|Outstanding at December 31, 2007            |  | 6,349,778                                   |   |  | $                                        | 6.29 |                                                     |      |                                        |   |      
|Granted at market price                     |  | 666,378                                     |   |  | $                                        | 8.01 |                                                     |      |                                        |   |      
|Forfeited                                   |  | (245,146                                    | ) |  | $                                        | 7.12 |                                                     |      |                                        |   |      
|Exercised                                   |  | (322,112                                    | ) |  | $                                        | 6.97 |                                                     |      |                                        | $ | 333  
|Outstanding at June 30, 2008                |  | 6,448,898                                   |   |  | $                                        | 6.41 |                                                     | 7.06 |                                        | $ | 5,268
|Vested or expected to vest at June 30, 2008 |  | 5,595,452                                   |   |  | $                                        | 6.41 |                                                     | 6.75 |                                        | $ | 4,576
|Exercisable at June 30, 2008                |  | 2,823,485                                   |   |  | $                                        | 6.58 |                                                     | 4.40 |                                        | $ | 2,054



10



---

##### Table of Contents

As of June 30, 2008, the total unrecognized compensation cost related to nonvested stock option
awards amounted to approximately $7.8 million, net of estimated forfeitures, that will be recognized over the weighted-average remaining requisite service period of approximately 3.2 years.

Total stock-based compensation expense recorded for the three months ended June 30, 2008 and 2007 was $753,000 and $1.9 million, respectively and
for the six months ended June 30, 2008 and 2007 was $1.6 million and $2.0 million, respectively. Stock-based compensation is recorded as operating expense in the accompanying consolidated statements of operations.

During the three and six month periods ended June 30, 2008, the Board of Directors awarded performance based options for an aggregate of 0 and
200,000 shares of common stock, respectively, under the 2000 Stock Incentive Plan which are included in the table above. The vesting of these options is contingent upon exceeding annual earnings targets for the years ending 2008 through either 2010
or 2011, depending upon the award. For each of the three and six month periods ended June 30, 2008, the Company recorded $60,000 in expense related to performance based options.

A summary of the status of nonvested shares of restricted stock as of June 30, 2008, and changes during the period then ended, is presented below:



|                                                  |  |         |   |  |                                      |     
|------------------------------------------------- |  | ------- | - |  | ------------------------------------ | ----
|                                                  |  | Shares  |   |  | Weighted-AverageGrant DateFair Value
|Nonvested awards outstanding at December 31, 2007 |  | 135,289 |   |  | $                                    | 5.23
|Awards granted                                    |  | 54,648  |   |  |                                      | 7.49
|Awards vested                                     |  | (97,697 | ) |  |                                      | 6.26
|Awards forfeited                                  |  | (30,174 | ) |  |                                      | 5.33
|                                                  |  |         |   |  |                                      |     
|Nonvested awards outstanding at June 30, 2008     |  | 62,066  |   |  |                                      | 5.54
|                                                  |  |         |   |  |                                      |     

On March 6, 2008, the Company granted 29,648 shares of stock to Michael Perik, the
Companys Chief Executive Officer. This award was granted to Mr. Perik in lieu of a cash bonus for the 2007 fiscal year in accordance with the terms of his employment agreement and was accrued in the 2007 financial statements. The award
does not have any restrictions.

On June 30, 2008, the Company granted 25,000 shares of restricted stock to certain of its
non-employee directors having a grant date fair value of $169,000. These restricted stock awards vest on January 30, 2009.

As of
June 30, 2008, the total remaining unrecognized compensation cost related to nonvested restricted stock awards and units amounted to approximately $281,000, which will be recognized over the weighted-average remaining requisite service period
of approximately six months.

5. Line of Credit

Credit Agreement

On April 10, 2006, the Company entered into a Credit Agreement among the Company, Princeton Review
Operations, L.L.C., a wholly owned subsidiary of the Company, Golub Capital CP Funding, LLC and such other lenders who became signatory from time to time, and Golub Capital Incorporated, as Administrative Agent, which, as amended, provided for a
$15.0 million credit facility. On July 24, 2007, the Company repaid the $15.0 million of debt outstanding, including all accumulated interest and other charges, and terminated the credit facility.

6. Redeemable Convertible Preferred Stock

Series C Preferred Stock

On July 23, 2007, the Company entered into a Series C Preferred Stock Purchase Agreement
with Bain Capital Venture Fund 2007, L.P., certain of its affiliates, Prides Capital Fund I, L.P. (Prides) and RGIP, LLC (collectively, the Purchasers), providing for the issuance and sale of $60,000,000 of the Companys
Series C Convertible Preferred Stock (60,000 shares) at a purchase price of $1,000 per share (the Series C Preferred Stock). Each share of Series C Preferred Stock is convertible into shares of the Companys common stock at an
initial conversion price of $6.00 per share, subject to adjustment. Transactions potentially impacting the Companys capital structure have been reviewed and have not triggered a conversion price adjustment as of June 30, 2008. The Series
C Preferred Stock contains a compounding, cumulative 6% per annum dividend payable upon conversion of the Series C Preferred Stock. Following the fourth anniversary of the issuance of the Series C Preferred Stock, the dividend shall no longer
accrue unless declared by the Board of Directors of the Company. Additionally, on or at any time after the eighth anniversary of the issuance of the Series C Preferred Stock, if requested by the holders of at least 10% of the then outstanding
Series C Preferred Stock, each holder of Series C Preferred Stock shall have the right to require the Company to redeem all of such holders Series C Preferred Stock, for cash,



11



---

##### Table of Contents

at a redemption price equal to the original purchase price of the Series C Preferred Stock plus accrued and unpaid dividends. The Company also has the right
to redeem the then outstanding Series C Preferred Stock following the eighth anniversary of the issuance date, for cash, at a redemption price equal to the original purchase price plus accrued and unpaid dividends.

The Series C Preferred Stock, voting separately as a class, is also entitled to elect two directors to the Companys Board of Directors, each of
whom were elected on July 23, 2007.

In addition, the Company entered into an Investor Rights Agreement dated July 23, 2007, by
and among the Company and the Purchasers, pursuant to which the Company granted the Purchasers and Michael J. Perik, the Companys President and Chief Executive Officer, certain demand registration rights for the registration of the resale of
the shares of common stock held by them, including shares issued or issuable upon conversion of Series C Preferred Stock. Any demand for registration must be made for at least 20% of the total shares of such common stock then outstanding, provided,
however, that the aggregate offering price shall not be less than $2,500,000. The Investor Rights Agreement also grants the Purchasers preemptive rights with respect to certain issuances of securities which may be undertaken by the Company in the
future.

Series B-1 Preferred Stock

On July 23, 2007, Prides, as the sole holder of the Companys Series B-1 Preferred Stock, exchanged all of the outstanding shares of the Series B-1 Preferred Stock as partial consideration for the purchase
of the Series C Preferred Stock noted above. As a result, the Company and Prides terminated the agreement, dated May 28, 2004, by and among the Company and Prides, as the assignee of Fletcher International, Ltd. (Fletcher)
pertaining to the Companys outstanding Series B-1 Preferred Stock, and the Series B-1 Preferred Stock and all its related rights, including a right to purchase up to 20,000 shares of additional preferred stock at a price of $1,000 per share
(the Warrant), were cancelled and retired, effective as of the closing of the sale of the Series C Preferred Stock.

Embedded Derivatives and Warrant

Under Statement of Financial Accounting Standards No. 133,
Accounting for Derivatives and Hedging Activities (SFAS 133), certain contractual terms that meet the accounting definition of a derivative must be accounted for separately from the financial instrument in which they are embedded.
The Company has concluded that two separate provisions of the Warrant constitute embedded derivatives.

The Company determined that the
fair value of the combined embedded derivatives and the Warrant at inception was $2.6 million and increased long-term liabilities by $1.7 million for the embedded derivatives and $854,000 for the fair value of the Warrant. In subsequent periods,
these liabilities are accounted for at fair value, with changes in fair value recognized as other income (expense) on the income statement. During the three and six month periods ended June 30, 2007, the Company recognized $3.7 million and $3.8
million, respectively, of other expense related to the final adjustment of the fair value for the embedded derivatives and the Warrant. In addition, the Company recognized a discount to the recorded value of the Series B-1 Preferred Stock resulting
from the allocation of proceeds to the embedded derivatives and the Warrant. This discount was accreted as a preferred stock dividend to increase the recorded balance of the Series B-1 Preferred Stock to its redemption value as of the earliest
possible redemption date (November 28, 2005).

The embedded derivatives and the Warrant were valued at each fiscal quarter-end using a
valuation model that combined the Black-Scholes option pricing approach with other analytics. Key assumptions used in the pricing model were based on the terms and conditions of the embedded derivatives and the Warrant and the actual stock price of
the Companys common stock at each fiscal quarter-end. Adjustments were made to the conversion option value to reflect the impact of potential registration rights violations and the attendant reductions in the conversion price of the underlying
shares. Other assumptions included a volatility rate ranging from 25% to 40%, and a risk-free rate corresponding to the estimated life of the security, based on its likelihood of conversion or redemption. The estimated life ranged from a high of
four years at the inception of the Series B-1 Preferred Stock in June 2004, to just under two years at September 30, 2006.

The value
of one of the provisions constituting an embedded derivative explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a
triggering event was assumed to be very low at issuance, escalating to a 2% probability in year three and beyond. These assumptions were based on managements estimates of the probability of a change of control event occurring.

Since the dividend rate on the Series B-1 Preferred Stock adjusts with changes in market rates due to the LIBOR-Index provision, the key component in the
valuation of the Warrant is the estimated value of the underlying embedded conversion option. Accordingly, similar assumptions to those used to value the compound derivative were used to value the Warrant, including the fiscal quarter-end stock
price, the exercise price of the conversion option adjusted for changes based on the registration rights agreement, an assumed volatility rate ranging from 25% to 40% and risk-free rate based on the estimated life of the Warrant.



12



---

##### Table of Contents

Dividends

For the three and six month periods ended June 30, 2007, cash dividends in the amount of $104,000 and $207,000, respectively, were paid to the Series B-1 Preferred stockholder.

Additionally, the Company is accreting the accrued unpaid dividends and issuance costs related to the Series C Preferred Stock over a four year period,
which are shown as a reduction in income available to common shareholders. The amount recorded for the three and six month periods ended June 30, 2008 was $1.2 million and $2.3 million, respectively.

7. Income Taxes

Pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), the Company has recorded an income tax provision related to continuing operations for the three and six month periods ended June 30, 2008 in the
amount of $556,000 and $634,000, respectively. Additionally, a benefit of $51,000 and $0 for income taxes for the three and six months ended June 30, 2008, respectively, has been recorded as part of the Companys income (loss) from
discontinued operations.

In accordance with SFAS 109, the excess of book value over tax basis of the Companys goodwill balance
represents a taxable temporary difference for which a deferred tax liability should be recognized since the reversal of the liability is indefinite and predicated on a goodwill impairment which may never occur or occur after the Companys net
operating loss carry-forward period expires. The Company recorded an income tax provision related to continuing operations for the three and six month periods ended June 30, 2008 in the amount of $197,000 and $373,000, respectively, related to
the additional deferred tax liability incurred during the period and a provision of $308,000 and $261,000, respectively, related to foreign operations. Additionally, the Company recorded a tax provision of $51,000 and $0 for the three and six months
ended June 30, 2008, respectively, related to the intra-period tax allocation between discontinued operations and continuing operations.

The provision for income taxes for the three and six months ended June 30, 2008 and 2007 was prepared on a discrete quarterly and year to date basis, respectively. For the three and six months ended June 30, 2007, the yearly
effective tax rate was not considered a reliable estimate for the current quarter and year to date provision.

The Company adopted the
provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48), on January 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with FAS No. 109 and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Based on the Companys evaluation,
it has concluded that there are not significant uncertain tax positions requiring recognition in the Companys financial statements. The evaluation was performed for the tax years ended December 31, 2007, 2006, 2005 and 2004, the tax years
which remain subject to examination by major tax jurisdictions as of June 30, 2008.

8. Segment Information

The Company operates in three reportable segments. The operating segments reported below are the segments of the Company for which separate financial
information is available and for which EBITDA is evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.

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

The majority of the Companys revenue is from the Test Preparation Services division, which sells
a range of services, including test preparation, tutoring and academic counseling. Test Preparation Services derives its revenue from Company-operated locations and from royalties from, and product sales to, independently-owned franchises. The
Supplemental Educational Services (SES) division delivers state-aligned research-based academic tutoring instruction to students in schools in need of improvement in school districts throughout the country. The K-12 Services division
earns fees from assessment, intervention materials sales and professional development services it renders to K-12 schools and from its content development work. Additionally, the Test Preparation Services and K-12 Services divisions earn royalties
and other fees from sales of its books published by Random House, a related party.



13



---

##### Table of Contents

The segment results include EBITDA for the periods indicated. As used in this report, EBITDA means
earnings before interest, income taxes, depreciation and amortization. The Company believes that EBITDA, a non-GAAP financial measure, represents a useful measure for evaluating its financial performance because it reflects earnings trends without
the impact of certain non-cash related charges or income. The Companys management uses EBITDA to measure the operating performance of the business. Analysts, investors and rating agencies frequently use EBITDA in the evaluation of companies,
but the Companys presentation of EBITDA is not necessarily comparable to other similarly titled measures of other companies because of potential inconsistencies in the method of calculation. EBITDA is not intended as an alternative to net
income (loss) as an indicator of the Companys operating performance, or as an alternative to any other measure of performance calculated in conformity with GAAP.



|                                                            |                         |                                  |              |  |              |       |           |   |        |       |   |        |   |  |   |         |  
|----------------------------------------------------------- | ----------------------- | -------------------------------- | ------------ |  | ------------ | ----- | --------- | - | ------ | ----- | - | ------ | - |  | - | ------- | -
|                                                            |                         | Three Months Ended June 30, 2008 |             
|                                                            | TestPreparationServices |                                  | SES Services |  | K-12Services |       | Corporate |   |        | Total |  
|                                                            | (In thousands)          |                                 
|Revenue                                                     |                         | $                                | 28,272       |  | $            | 5,780 |           | $ | 5,476  |       | $ |       |   |  | $ | 39,528  |  
|                                                            |                         |                                  |              |  |              |       |           |   |        |       |   |        |   |  |   |         |  
|Operating expense (including depreciation and amortization) |                         |                                  | 12,814       |  |              | 2,329 |           |   | 2,983  |       |   | 7,210  |   |  |   | 25,336  |  
|                                                            |                         |                                  |              |  |              |       |           |   |        |       |   |        |   |  |   |         |  
|Operating income (loss)                                     |                         |                                  | 6,487        |  |              | 1,059 |           |   | 500    |       |   | (7,210 | ) |  |   | 836     |  
|Depreciation and amortization                               |                         |                                  | 635          |  |              | 4     |           |   | 853    |       |   | 575    |   |  |   | 2,067   |  
|Other income (expense)                                      |                         |                                  |             |  |              |      |           |   |       |       |   | (2     | ) |  |   | (2      | )
|                                                            |                         |                                  |              |  |              |       |           |   |        |       |   |        |   |  |   |         |  
|Segment EBITDA                                              |                         | $                                | 7,122        |  |              | 1,063 |           |   | 1,353  |       |   | (6,637 | ) |  |   | 2,901   |  
|                                                            |                         |                                  |              |  |              |       |           |   |        |       |   |        |   |  |   |         |  
|Total segment assets                                        |                         | $                                | 95,405       |  | $            | 7,425 |           | $ | 14,300 |       | $ | 36,375 |   |  | $ | 153,505 |  
|                                                            |                         |                                  |              |  |              |       |           |   |        |       |   |        |   |  |   |         |  
|Segment goodwill                                            |                         | $                                | 61,852       |  | $            |      |           | $ |       |       | $ |       |   |  | $ | 61,852  |  
|                                                            |                         |                                  |              |  |              |       |           |   |        |       |   |        |   |  |   |         |  



|                                                            |                         |                                  |              |  |              |       |  |           |        |   |       |   |        |   |  |   |         |  
|----------------------------------------------------------- | ----------------------- | -------------------------------- | ------------ |  | ------------ | ----- |  | --------- | ------ | - | ----- | - | ------ | - |  | - | ------- | -
|                                                            |                         | Three Months Ended June 30, 2007 |             
|                                                            | TestPreparationServices |                                  | SES Services |  | K-12Services |       |  | Corporate |        |   | Total |  
|                                                            | (In thousands)          |                                 
|Revenue                                                     |                         | $                                | 25,074       |  | $            | 2,457 |  | $         | 8,854  |   |       | $ |       |   |  | $ | 36,385  |  
|                                                            |                         |                                  |              |  |              |       |  |           |        |   |       |   |        |   |  |   |         |  
|Operating expense (including depreciation and amortization) |                         |                                  | 12,083       |  |              | 1,140 |  |           | 3,817  |   |       |   | 4,673  |   |  |   | 21,713  |  
|                                                            |                         |                                  |              |  |              |       |  |           |        |   |       |   |        |   |  |   |         |  
|Operating income (loss)                                     |                         |                                  | 4,858        |  |              | 530   |  |           | (477   | ) |       |   | (4,673 | ) |  |   | 238     |  
|Depreciation and amortization                               |                         |                                  | 573          |  |              | 1     |  |           | 921    |   |       |   | 543    |   |  |   | 2,038   |  
|Other income (expense)                                      |                         |                                  |             |  |              |      |  |           |       |   |       |   | (3,688 | ) |  |   | (3,688  | )
|                                                            |                         |                                  |              |  |              |       |  |           |        |   |       |   |        |   |  |   |         |  
|Segment EBITDA                                              |                         | $                                | 5,431        |  |              | 531   |  |           | 444    |   |       |   | (7,818 | ) |  |   | (1,412  | )
|                                                            |                         |                                  |              |  |              |       |  |           |        |   |       |   |        |   |  |   |         |  
|Total segment assets                                        |                         | $                                | 53,411       |  | $            | 23    |  | $         | 29,413 |   |       | $ | 25,305 |   |  | $ | 108,152 |  
|                                                            |                         |                                  |              |  |              |       |  |           |        |   |       |   |        |   |  |   |         |  
|Segment goodwill                                            |                         | $                                | 31,006       |  | $            |      |  | $         |       |   |       | $ |       |   |  | $ | 31,006  |  
|                                                            |                         |                                  |              |  |              |       |  |           |        |   |       |   |        |   |  |   |         |  



14



---

##### Table of Contents

|                                                            |                         |                                |              |  |              |        |  |           |        |   |       |   |         |   |  |   |         |  
|----------------------------------------------------------- | ----------------------- | ------------------------------ | ------------ |  | ------------ | ------ |  | --------- | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|                                                            |                         | Six Months Ended June 30, 2008 |             
|                                                            | TestPreparationServices |                                | SES Services |  | K-12Services |        |  | Corporate |        |   | Total |  
|                                                            | (In thousands)          |                               
|Revenue                                                     |                         | $                              | 51,422       |  | $            | 18,372 |  | $         | 11,105 |   |       | $ |        |   |  | $ | 80,899  |  
|                                                            |                         |                                |              |  |              |        |  |           |        |   |       |   |         |   |  |   |         |  
|Operating expense (including depreciation and amortization) |                         |                                | 24,164       |  |              | 5,820  |  |           | 6,634  |   |       |   | 13,489  |   |  |   | 50,107  |  
|                                                            |                         |                                |              |  |              |        |  |           |        |   |       |   |         |   |  |   |         |  
|Operating income (loss)                                     |                         |                                | 9,400        |  |              | 4,497  |  |           | (208   | ) |       |   | (13,489 | ) |  |   | 200     |  
|Depreciation and amortization                               |                         |                                | 996          |  |              | 9      |  |           | 1,724  |   |       |   | 1,129   |   |  |   | 3,858   |  
|Other income (expense)                                      |                         |                                |             |  |              |       |  |           | (38    | ) |       |   | (2      | ) |  |   | (40     | )
|                                                            |                         |                                |              |  |              |        |  |           |        |   |       |   |         |   |  |   |         |  
|Segment EBITDA                                              |                         | $                              | 10,396       |  |              | 4,506  |  |           | 1,478  |   |       |   | (12,362 | ) |  |   | 4,018   |  
|                                                            |                         |                                |              |  |              |        |  |           |        |   |       |   |         |   |  |   |         |  
|Total segment assets                                        |                         | $                              | 95,405       |  | $            | 7,425  |  | $         | 14,300 |   |       | $ | 36,375  |   |  | $ | 153,505 |  
|                                                            |                         |                                |              |  |              |        |  |           |        |   |       |   |         |   |  |   |         |  
|Segment goodwill                                            |                         | $                              | 61,852       |  | $            |       |  | $         |       |   |       | $ |        |   |  | $ | 61,852  |  
|                                                            |                         |                                |              |  |              |        |  |           |        |   |       |   |         |   |  |   |         |  



|                                                            |                         |                                |              |  |              |       |           |   |        |       |   |         |   |  |   |         |  
|----------------------------------------------------------- | ----------------------- | ------------------------------ | ------------ |  | ------------ | ----- | --------- | - | ------ | ----- | - | ------- | - |  | - | ------- | -
|                                                            |                         | Six Months Ended June 30, 2007 |             
|                                                            | TestPreparationServices |                                | SES Services |  | K-12Services |       | Corporate |   |        | Total |  
|                                                            | (In thousands)          |                               
|Revenue                                                     |                         | $                              | 45,937       |  | $            | 8,684 |           | $ | 21,935 |       | $ |        |   |  | $ | 76,556  |  
|                                                            |                         |                                |              |  |              |       |           |   |        |       |   |         |   |  |   |         |  
|Operating expense (including depreciation and amortization) |                         |                                | 23,029       |  |              | 2,570 |           |   | 8,189  |       |   | 10,577  |   |  |   | 44,365  |  
|                                                            |                         |                                |              |  |              |       |           |   |        |       |   |         |   |  |   |         |  
|Operating income (loss)                                     |                         |                                | 6,409        |  |              | 2,479 |           |   | 1,305  |       |   | (10,577 | ) |  |   | (384    | )
|Depreciation and amortization                               |                         |                                | 1,097        |  |              | 2     |           |   | 2,033  |       |   | 1,098   |   |  |   | 4,230   |  
|Other income (expense)                                      |                         |                                |             |  |              |      |           |   |       |       |   | (3,763  | ) |  |   | (3,763  | )
|                                                            |                         |                                |              |  |              |       |           |   |        |       |   |         |   |  |   |         |  
|Segment EBITDA                                              |                         | $                              | 7,506        |  |              | 2,481 |           |   | 3,338  |       |   | (13,242 | ) |  |   | 83      |  
|                                                            |                         |                                |              |  |              |       |           |   |        |       |   |         |   |  |   |         |  
|Total segment assets                                        |                         | $                              | 53,411       |  | $            | 23    |           | $ | 29,413 |       | $ | 25,305  |   |  | $ | 108,152 |  
|                                                            |                         |                                |              |  |              |       |           |   |        |       |   |         |   |  |   |         |  
|Segment goodwill                                            |                         | $                              | 31,006       |  | $            |      |           | $ |       |       | $ |        |   |  | $ | 31,006  |  
|                                                            |                         |                                |              |  |              |       |           |   |        |       |   |         |   |  |   |         |  

Reconciliation of Segment EBITDA to income (loss) before income taxes (in thousands):



|                                                             |      |                             |   |      |                           |   |      |        |   |      |        |  
|------------------------------------------------------------ | ---- | --------------------------- | - | ---- | ------------------------- | - | ---- | ------ | - | ---- | ------ | -
|                                                             |      | Three Months Ended June 30, |   |      | Six Months Ended June 30, |  
|                                                             | 2008 |                             |   | 2007 |                           |   | 2008 |        |   | 2007 |       
|Segment EBITDA                                               |      | 2,901                       |   |      | (1,412                    | ) |      | 4,018  |   |      | 83     |  
|Depreciation and amortization                                |      | (2,067                      | ) |      | (2,038                    | ) |      | (3,858 | ) |      | (4,230 | )
|Interest income (expense)                                    |      | 29                          |   |      | (497                      | ) |      | 127    |   |      | (841   | )
|                                                             |      |                             |   |      |                           |   |      |        |   |      |        |  
|Income (loss) from continuing operations before income taxes |      | 863                         |   |      | (3,946                    | ) |      | 287    |   |      | (4,987 | )
|                                                             |      |                             |   |      |                           |   |      |        |   |      |        |  



15



---

##### Table of Contents

9. Income (loss) Per Share

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

A reconciliation of net
income (loss) and the number of shares used in computing basic earnings per share are as follows.



|                                                          |                |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|--------------------------------------------------------- | -------------- | -------------------------- | ------ | ---- | ------------------------ | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                          |                | Three Months EndedJune 30, |        |      | Six Months EndedJune 30, |  
|                                                          | 2008           |                            |        | 2007 |                          |   | 2008   |   |  | 2007 |       
|                                                          | (In thousands) |                           
|Income (loss) from continuing operations                  |                | $                          | 307    |      |                          | $ | (3,817 | ) |  | $    | (347   | ) |  | $ | (4,850 | )
|Income (loss) from discontinued operations                |                |                            | (41    | )    |                          |   | (640   | ) |  |      | 35     |   |  |   | 4,919  |  
|Less preferred dividends and accretion                    |                |                            | (1,150 | )    |                          |   | (104   | ) |  |      | (2,298 | ) |  |   | (207   | )
|                                                          |                |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Net income (loss) attributed to common stockholders       |                | $                          | (884   | )    |                          | $ | (4,561 | ) |  | $    | (2,610 | ) |  | $ | (138   | )
|                                                          |                |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Weighted average common shares outstanding for the period |                |                            | 32,918 |      |                          |   | 27,890 |   |  |      | 31,202 |   |  |   | 27,837 |  
|                                                          |                |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Basic earnings per share:                                 |                |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from continuing operations                  |                | $                          | (0.03  | )    |                          | $ | (0.14  | ) |  | $    | (0.08  | ) |  | $ | (0.18  | )
|Income (loss) from discontinued operations                |                |                            | 0.00   |      |                          |   | (0.02  | ) |  |      | 0.00   |   |  |   | 0.18   |  
|                                                          |                |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  
|Net income (loss) attributed to common shareholders       |                | $                          | (0.03  | )    |                          | $ | (0.16  | ) |  | $    | (0.08  | ) |  | $ | 0.00   |  
|                                                          |                |                            |        |      |                          |   |        |   |  |      |        |   |  |   |        |  

The following shares were excluded from the computation of diluted earnings per common share
because of their antidilutive effect.



|                                                                                   |      |                            |      |                          |      |        |      |      
|---------------------------------------------------------------------------------- | ---- | -------------------------- | ---- | ------------------------ | ---- | ------ | ---- | -----
|                                                                                   |      | Three Months EndedJune 30, |      | Six Months EndedJune 30,
|                                                                                   | 2008 |                            | 2007 |                          | 2008 |        | 2007
|Net effect of dilutive stock options and awards-based on the treasury stock method |      | 653                        |      | 171                      |      | 688    |      | 160  
|Effect of convertible preferred stock-based on the if-converted method             |      | 10,486                     |      | 1,117                    |      | 10,374 |      | 1,116
|                                                                                   |      |                            |      |                          |      |        |      |      
|                                                                                   |      | 11,139                     |      | 1,288                    |      | 11,062 |      | 1,276
|                                                                                   |      |                            |      |                          |      |        |      |      

10. Restructuring

The Company announced and commenced a restructuring initiative in the third quarter ended September 30, 2007, continuing into the second quarter ending June 30, 2008. The costs incurred related to the
loss of a significant customer, the relocation of the Companys finance and some legal operations from New York, New York to offices located near Boston, Massachusetts, and the consolidation of the remaining New York offices. The
relocation was undertaken in order to improve the financial reporting process and to continue remediation efforts related to material weaknesses previously reported by the Company in its Annual Report on Form 10-K for the fiscal year ended
December 31, 2007, as filed with the Securities and Exchange Commission.

In the fourth quarter ended December 31, 2007 the
Company determined to exit a portion of a leased property, but did not cease use of the property until the second quarter of 2008. In accordance with Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, a charge of $1.1 million was recorded in the second quarter of 2008 when the Company ceased use of the property.

For the three and six month periods ended June 30, 2008, the Company incurred additional restructuring expenses, which were not accrued for at December 31, 2007, in the amount of $2.6 million and $3.1 million, respectively. The
costs consisted of compensation expense related to termination or employee severance directly associated with the restructuring.

The
following table sets forth the components of the restructuring charge and payments made against the reserve for the six months ended June 30, 2008 (in thousands):



16



---

##### Table of Contents

|                                                   |  |                                   |        |  
|-------------------------------------------------- |  | --------------------------------- | ------ | -
|                                                   |  | Severance andTermination Benefits |       
|Accrued restructuring balance at December 31, 2007 |  | $                                 | 4,308  |  
|Add: Restructuring provision                       |  |                                   | 3,090  |  
|Less: Cash paid                                    |  |                                   | (5,473 | )
|Disposal of fixed assets                           |  |                                   | (877   | )
|                                                   |  |                                   |        |  
|Accrued restructuring balance at June 30, 2008     |  | $                                 | 1,048  |  
|                                                   |  |                                   |        |  

11. Related Party Transactions

During 2006 and 2007, the Company entered into agreements with Achievement Technologies, Inc. (ATI) and its successor corporation, US Skills,
LLC (US Skills), under which ATI paid $584,000 to the Company in 2006 and US Skills paid $500,000 to the Company in 2007 for the use of certain licenses of the Companys technology. Michael Perik, who has a controlling ownership
interest in both ATI and US Skills, was appointed the Companys Chief Executive Officer, President and a director on July 22, 2007.

Effective April 2008, the Company entered into an additional agreement with US Skills to license to US Skills the Companys K-12 assessment platform and to develop certain software to integrate the Companys K-12 assessment
platform with a third partys application, all in connection with specified sublicenses by US Skills of such applications. Under the agreement, US Skills is obligated to pay the Company a development fee of $440,000 and license fees of $240,000
for the period ending June 30, 2009. Additionally, the Company assumed responsibility for certain project management and administrative functions on behalf of US Skills for which the company is reimbursed by US Skills. The agreement also
provides for an equal sharing of all net revenues from the sublicensing by US Skills of the Companys K-12 assessment platform and the third partys application, after certain payments by US Skills to each of the Company and the third
party.

In accordance with FIN 46(R), Consolidation of Variable Interest Entities, the Company evaluated whether its interest and
relationships with U.S. Skills would require that the Company consolidate U.S. Skills. The Company determined that the provisions of FIN 46(R) do not require that it consolidate U.S. Skills.

12. Subsequent Events

Acquisition of The Princeton
Review of Orange County, Inc.

In July 2008, the Company acquired The Princeton Review of Orange County, Inc., the owner of
several Princeton Review franchises in Southern California and licensing rights in Utah, New Mexico and the southern California counties of Los Angeles, Riverside, San Bernadino, Santa Barbara, Ventura, Fresno, Kern and San Luis Obispo. The
aggregate purchase price of $31 million consisted of $25.4 million in cash and the issuance of 719,147 shares of the Companys common stock.

Wells Fargo Foothill, LLC Credit Agreement

In July 2008, the Company and certain of its subsidiaries entered into a
credit agreement (the Credit Agreement) with Wells Fargo Foothill, LLC as Arranger and Administrative Agent (the Agent) providing for a $20 million term loan and a $5 million revolving credit facility. The Credit Agreement
contains a number of restrictions on the Companys business that are customary for transactions of this type including, but not limited to, restrictions on the Companys ability to incur indebtedness, grant liens on assets, make certain
payments, merge, consolidate or dispose of assets. The Credit Agreement also contains affirmative covenants and events of default that are customary for transactions of this type. Failure to comply with these covenants, or the occurrence of an event
of default, could result in acceleration of the maturity of the Companys debt and other financial obligations under the Credit Agreement.



17



---

##### Table of Contents

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

All statements in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by words such as believe, intend, expect, may,
could, would, will, should, plan, project, contemplate, anticipate or similar statements. Because these statements reflect our current views concerning
future events, these forward-looking statements are subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to
demand for our products and services; our ability to compete effectively and adjust to rapidly changing market dynamics; the timing of revenue recognition from significant contracts with schools and school districts; market acceptance of our newer
products and services; continued federal and state focus on assessment and remediation in K-12 education; and the other factors described under the caption Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2007 filed with the Securities and Exchange Commission. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

The Princeton Review
provides integrated classroom-based, print and online products and services that address the needs of students, parents, educators and educational institutions. We believe that we offer the leading SAT preparation course and are among the leading
providers of test preparation courses for most major post-secondary and graduate admissions tests. The Company and its franchisees provided test preparation courses and tutoring services for the SAT, GMAT, MCAT, LSAT, GRE and other standardized
admissions tests to students in over 1,500 locations throughout the United States and abroad. In 2008, the Company operated through the following divisions:

Test Preparation Services Division

The Test Preparation Services division derives the majority of its revenue from
classroom-based and Princeton Review online test preparation courses and tutoring services. This division also receives royalties from its independent franchisees, which provide classroom-based courses under the Princeton Review brand. Additionally,
this division receives royalties and advances from Random House for books authored by The Princeton Review. The Test Preparation Services division has historically accounted for the majority of our overall revenue and accounted for approximately 72%
and 64% of our overall revenue in the first three and six months of 2008, respectively. As a result of the acquisition of TSI and the Princeton Review of Orange County (and despite the elimination of the related franchise fees), we expect revenues
in the Test Preparation Services Division and income from operations to continue to increase in 2008.

Supplemental Educational Services Division

The Supplemental Educational Services (SES) Division provides state-aligned research-based academic tutoring instruction to
students in schools in need of improvement in school districts throughout the country. We expect revenues in the SES Division to continue to increase in 2008 as a result of increased demand in existing markets and expansion into new markets.

K-12 Services Division

The K-12
Services division provides a number of services to K-12 schools and school districts, including assessment, professional development and intervention materials (workbooks and related products). Additionally, this division receives college counseling
fees paid by high schools.

Former Admission Services Division

Until February 2007, the Companys former Admissions Services division derived most of its revenue from the sale of web-based admissions and related application management products to educational institutions
(Higher Education Technology Services). In February 2007, we sold our web-based admissions and application management business for $7.0 million in cash and a potential earn-out of up to $1.25 million. In connection with the sale of the
Higher Education Technology Services business, financial results associated with this business have been reclassified as discontinued operations. In connection with this transaction, two other businesses operated by this division (college counseling
and admissions publications) were transferred to the K-12 Services and Test Preparation Services divisions, respectively. The only remaining business operated by the former Admissions Services division was providing higher education marketing
services to post secondary schools. In April 2007, we outsourced the business of selling these marketing services to post secondary schools to Higher Edge Marketing, Inc. Under this new arrangement, the sales and customer support functions related
to this business are to be performed by Higher Edge Marketing, Inc. and we are responsible solely for the fulfillment function. Accordingly, all of the remaining employees in this division were transferred to other divisions, or terminated and
re-hired by Higher Edge Marketing, Inc. Higher Edge Marketing, Inc. contracts with post secondary schools directly and is required to



18



---

##### Table of Contents

pay us a royalty on the fees it receives from post secondary schools for marketing services. Financial results associated with admissions publications and
marketing services, including any royalties from Higher Edge Marketing Services, Inc., previously reported in the Admissions Services division have been reclassified for all periods presented into Test Preparation Services. College counseling
services previously reported in the Admissions Services division have been reclassified for all periods and are presented within K-12 Services.

Corporate

The Companys Corporate segment is responsible for all company-wide related fees and activities, along with
a large portion of employee compensation and related expenses for the Companys general and administrative functions. In 2007, the Company undertook a restructuring effort which has resulted in a $3.1 million expense for the six month period
ending June 30, 2008. Approximately $1.0 million of that expense is expected to be paid out in the third quarter of 2008. The costs incurred related to the loss of a significant customer, the relocation of the Companys finance and some
legal operations from New York, New York to offices located near Boston, Massachusetts, and the consolidation of the remaining New York offices. The relocation was undertaken in order to improve the financial reporting process and to continue
remediation efforts related to material weaknesses previously reported by the Company in its Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission. This effort is expected
to save the Company $3.8 million annually, of which $3.6 million is related to compensation and related expenses and $182,000 of annual depreciation expense related to leasehold improvements on the abandoned portion of the property.

Results of Operations

Comparison of Three
Months Ended June 30, 2008 and 2007

Revenue

For the three months ended June 30, 2008, total revenue increased by $3.1 million, or 8.6%, to $39.5 million from $36.4 million in the three
months ended June 30, 2007. This was a result of strong growth at our Test Preparation Services and SES segments, but partially offset by the decrease sustained at our K-12 segment as a result of the loss of a significant customer.

Test Preparation Services revenue increased by $3.2 million, or 12.8%, to $28.3 million from $25.1 million in the three months ended June 30,
2007. This increase is primarily due to $3.5 million generated by Test Services, Inc. (TSI), which was acquired on March 7, 2008 and $1.5 million from small group tutoring revenue, partially offset by $1.9 million of lower franchise
and other related fees from TSI, and the Companys Providence, RI and Amherst, MA franchises acquired in October 2007.

SES Services
revenues increased by $3.3 million, or 135.2%, to $5.8 million from $2.5 million in the three months ended June 30, 2007. This increase is primarily due to $2.2 million of increased market share in existing markets and $1.3 million from
expansion into two new markets in 2008.

K-12 Services revenue decreased by $3.4 million, or 38.2%, to $5.5 million from $8.9 million in
the three months ended June 30, 2007. This decrease is primarily related to the loss of a significant customer in July 2007 which had been responsible for approximately $3.2 million of revenue in the three months ended June 30, 2007.

Cost of Revenue

For
the three months ended June 30, 2008, total cost of revenue decreased by $1.0 million, or 7.5%, to $13.4 million from $14.4 million in the three months ended June 30, 2007. This was a result of growth in our Test Preparation Services and
SES segments, partially offset by the loss of a significant customer in K-12.

Test Preparation Services cost of revenue increased by
$837,000, or 10.3%, to $9.0 million from $8.1 million in the three months ended June 30, 2007 due primarily to increased costs generated by TSI of approximately $1.2 million, offset by lower site rental costs of $320,000, excluding TSI. Gross
margin during the period for the Test Preparation Services division increased from 68.3% to 68.0%, primarily due to improved site utilization due to increased class sizes.

SES Services cost of revenue increased by $1.6 million, or 204.0%, to $2.4 million from $787,000 in the three months ended June 30, 2007. This
increase is due to the greater site rent expense of $513,000 and compensation of $1.1 million. Gross margin during the period for the SES Services division decreased from 68.0% to 58.6%. This was primarily due to increased site rent from 2007 to
2008.

K-12 Services cost of revenue decreased by $3.5 million, or 63.8%, to $2.0 million from $5.5 million in the three months ended
June 30, 2007, primarily due to the loss of a significant customer. Gross margin during the period for the K-12 Services division increased from 37.7% to 63.6%, primarily due to product and service mix. The revenue in the second quarter of 2008
was more heavily weighted with the higher margin assessment services as compared to the second quarter of 2007, which had a greater portion of lower margin professional development revenues.



19



---

##### Table of Contents

Operating Expenses

For the three months ended June 30, 2008, operating expenses increased by $3.6 million, or 16.6%, to $25.3 million from $21.7 million in the three months ended June 30, 2007.



| |  |  | Test Preparation Services operating expenses increased by $731,000, or 6.0%, to $12.8 million from $12.1 million in the three months ended June 30, 2008. This
increase is primarily related to the acquisition of TSI, which incurred operating expenses of $1.7 million for the quarter and increased advertising costs, excluding TSI, of $468,000 offset in part by lower professional fees and internally developed
software expense of $1.2 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SES Services operating expenses increased by $1.2 million, or 104.3%, to $2.3 million from $1.1 million in the three months ended June 30, 2008. The increase
is primarily due to higher compensation costs to support the increased revenues.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | K-12 Services operating expenses decreased by $834,000, or 21.8%, to $3.0 million from $3.8 million in the three months ended June 30, 2008. This decrease is
primarily related to reduced compensation, research and development and other costs offset by increased professional fees.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corporate operating expense, excluding restructuring costs, decreased by $30,000, or 0.1%, to $4.6 million from $4.7 million in the three months ended June 30,
2008, due to a reduction in salaries and wages and other professional fees, offset in part by increased stock based compensation costs and accounting and related fees.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Restructuring costs increased by $2.6 million, to $2.6 million from $0 in the three months ended June 30, 2008, due to exit costs associated with a leased
property of $1.1 million and compensation and related expenses of $1.5 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Income/Expense

For the three months ended June 30, 2008, net other income increased by $3.7 million to ($2,000) from ($3.7) million in the three months ended
June 30, 2007 due primarily to the fair value adjustment of the derivatives which were retired as a result of the Series C Preferred Stock financing.

Interest Income/Expense

For the three months ended June 30, 2008, net interest income increased
by $526,000 to $29,000 from ($497,000) in the three months ended June 30, 2007, due primarily to the termination of the credit facility in 2007, coupled with interest earned on balances invested in money market accounts.

Comparison of Six Months Ended June 30, 2008 and 2007

Revenue

For the six months ended June 30, 2008, total revenue increased by $4.3 million,
or 5.7%, to $80.9 million from $76.6 million in the six months ended June 30, 2007. This was a result in strong growth at our Test Preparation Services and SES segments, but partially offset by the decrease sustained at our K-12 segment as a
result of the loss of a significant customer.

Test Preparation Services revenue increased by $5.5 million, or 11.9%, to $51.4 million from
$45.9 million in the six months ended June 30, 2007. This increase is primarily due to $4.5 million generated by Test Services, Inc. (TSI), which was acquired on March 7, 2008 and $2.9 million from small group tutoring revenue,
offset in part by $2.3 million of lower franchise and other related fees from TSI, and the Companys Providence, RI and Amherst, MA franchises acquired in October 2007.

SES Services revenues increased $9.7 million, or 111.6%, to $18.4 million from $8.7 million in the six months ended June 30, 2007. This increase is
primarily due to $6.1 million of increased market share in existing markets and $3.6 million from expansion into two new markets in 2008.

K-12 Services revenue decreased by $10.8 million, or 49.4%, to $11.1 million from $21.9 million in the six months ended June 30, 2007. This decrease is primarily related to the loss of a significant customer in July 2007 which had been
responsible for approximately $10.8 million of revenue in the six months ended June 30, 2007.

Cost of Revenue

For the six months ended June 30, 2008, total cost of revenue decreased by $2.0 million, or 6.1%, to $30.6 million from $32.6 million in the six
months ended June 30, 2007. This was due to our acquisition of TSI and SES revenue expansion, partially offset by K-12s loss of a significant customer and increased productivity gains.

Test Preparation Services cost of revenue increased by $1.4 million, or 8.2%, to $17.9 million from $16.5 million in the six months ended June 30,
2007 due primarily to increased costs generated by TSI of approximately $1.5 million. Gross margin during the period for the Test Preparation Services division increased from 64.1% to 65.3%, primarily due to improved site utilization due to
increased class sizes.



20



---

##### Table of Contents

SES Services cost of revenue increased by $4.5 million, or 121.8%, to $8.1 million from $3.6 million in
the six months ended June 30, 2007. This increase is due to the greater site rent expense of $880,000, salaries and related expense of $2.6 million, and course materials expense of $764,000 to support the increase revenues. Gross margin during
the period for the SES Services division decreased from 58.2% to 56.2% due to an increase in site rental costs.

K-12 Services cost of
revenue decreased by $7.7 million, or 62.4%, to $4.7 million from $12.4 million in the six months ended June 30, 2007, primarily due to the loss of a significant customer. Gross margin during the period for the K-12 Services division increased
from 43.3% to 57.9%, primarily due to product and service mix. The revenue in the first two quarters of 2008 was more heavily weighted with the higher margin assessment services as compared to the first two quarters of 2007, which had a greater
portion of lower margin professional development revenues.

Operating Expenses

For the six months ended June 30, 2008, operating expenses increased by $5.7 million, or 12.9%, to $50.1 million from $44.4 million in the six months
ended June 30, 2007.



| |  |  | Test Preparation Services operating expenses increased by $1.2 million, or 4.9%, to $24.2 million from $23.0 million in the six months ended June 30, 2007.
This increase is primarily related to the acquisition of TSI, which incurred operating expenses of $1.9 million for the quarter and increased advertising costs, excluding TSI, of $713,000 offset by lower professional fees and internally developed
software expense of $1.6 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SES Services operating expenses increased by $3.2 million, or 126.5%, to $5.8 million from $2.6 million in the six months ended June 30, 2007. The increase is
primarily due to higher compensation costs to support the increased revenues.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | K-12 Services operating expenses decreased by $1.6 million, or 19.0%, to $6.6 million from $8.2 million in the six months ended June 30, 2007. This decrease is
primarily related to reduced compensation, marketing, and other costs offset by increased research and development and professional fees.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corporate operating expense, excluding restructuring costs, decreased by $178,000, or 1.7%, to $10.4 million from $10.6 million in the six months ended
June 30, 2007, due to a reduction in salaries and wages of $1.0 million and $1.0 million of taxes, miscellaneous and professional fees, offset by increased stock based compensation costs of $1.2 million, accounting and related fees of $565,000.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Restructuring expense increased by $3.1 million, or 100.0%, to $3.1 million from $0 in the six months ended June 30, 2007, due to exit costs associated with a
leased property of $1.1 million and compensation and related expenses of $2.0 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Income/Expense

For the six months ended June 30, 2008, net other income increased by $3.7 million to ($40,000) from ($3.8) million in the six months ended
June 30, 2007, due primarily to the fair value adjustment of the derivatives which were retired as a result of the Series C Preferred Stock financing.

Interest Income/Expense

For the six months ended June 30, 2008, net interest income increased by $968,000 to $127,000
from ($841,000) in the six months ended June 30, 2007, as a result of the termination of the credit facility in 2007 and additional interest earned from higher balances invested in money market accounts.

Liquidity and Capital Resources

Our primary sources
of liquidity are cash and cash equivalents on hand and collections from customers. At June 30, 2008, we had $28.7 million of cash and cash equivalents compared to $25.3 million at December 31, 2007. The $3.4 million increase in cash from
the December 31, 2007 balance is attributable to the $13.8 million collected on receivable balances and improved cash flows from operations, offset by $4.6 million paid for the acquisition of TSI, $6.4 million for restructuring costs primarily
related to termination benefits and $2.6 million for the settlement of a lawsuit with CollegeNet, Inc. For the same period in 2007, the decrease in cash of $1.5 million was due to a decrease of $6.1 million for continuing operations and $2.4 million
for discontinued operating activities, offset by the $7.0 million of proceeds from the sale of the former Admission Services division.

Our
Test Preparation Services division has historically generated, and continues to generate, the largest portion of our cash flow from its retail classroom and tutoring courses. These customers usually pay us in advance or contemporaneously with the
services we provide, thereby supporting our short-term liquidity needs. Increasingly, however, across all of our divisions, we are generating a



21



---

##### Table of Contents

greater percentage of our cash from contracts with institutions such as schools and school districts and post-secondary institutions, all of which pay us in
arrears. Typical payment performance for these institutional customers, once invoiced, ranges from 60 to 90 days. Additionally, long contract approval cycles and/or delays in purchase order generation with some of our contracts with large
institutions or school districts can contribute to the level of variability in the timing of our cash receipts.

Cash used for operating
activities from continuing operations is our net loss adjusted for certain non-cash items and changes in operating assets and liabilities. During the first six months of 2008, cash provided by operating activities was $7.1 million compared to $1.3
million during the first six months of 2007. The provision of cash was from the collection of customer receivable balances, offset by uses of cash in the first six months of 2008 related primarily to the payment of restructuring costs and a legal
settlement with CollegeNet, Inc.

During the first six months of 2008, investing activities from continuing operations used $5.4 million of
cash as compared to $6.8 million used during the comparable period in 2007. In the first quarter of 2008, we paid $4.6 million in cash to acquire TSI, offset by liabilities assumed as part of the transaction. Additionally, cash used in each of the
periods relates primarily to additions to internally developed software and purchases of fixed assets.

Financing cash flows from
continuing operations consist primarily of transactions related to our debt and equity structure. In the first six months of 2008 there was financing cash provided of approximately $1.6 million, compared to cash used of approximately $633,000, for
the first six months of 2007. The cash provided in 2008 was primarily due to the exercise of employee stock options partially offset by outstanding note and capital lease payments. The cash used in 2007 was primarily due to capital lease payments
and cash dividend payments related to the Series B-1 Preferred Stock.

Our future liquidity needs will depend on, among other factors, the
timing and extent of technology development expenditures, new business bookings, the timing and collection of receivables and continuing initiatives designed to improve operating cash flow. We believe that our current cash balances and anticipated
operating cash flow, after budgeted cost reductions, will be sufficient to fund our normal operating requirements for at least the next 12 months. However, in the event of unanticipated cash needs, we may need to secure additional capital within
this timeframe.

Seasonality in Results of Operations

We experience, and we expect to continue to experience, seasonal fluctuations in our revenue because the markets in which we operate are subject to seasonal fluctuations based on the scheduled dates for standardized
admissions tests and the typical school year. These fluctuations could result in volatility or adversely affect our stock price. We typically generate the largest portion of our test preparation revenue in the third quarter. However, as SES revenue
grows, we expect this revenue will be concentrated in the fourth and first quarters to more closely reflect the after school programs greatest activity during the school year. Our K-12 Services division may also experience seasonal
fluctuations in revenue, which is dependent on the school year, and it is expected that the revenue from new school sales during the year will be recognized primarily in the third and fourth quarters of the calendar year.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

We do not hold any derivative financial instruments. Revenue from our international operations and royalty payments from our international franchisees constitute an insignificant percentage of our revenue.
Accordingly, our exposure to exchange rate fluctuations is minimal. Our exposure to market risk is principally confined to cash and cash equivalents. We place our cash equivalents with high-quality financial institutions, limit the amount of credit
exposure to any one institution and have established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. Our exposure for cash and cash equivalents is limited to amounts held above the FDIC
limitations.

Based on a hypothetical ten percent adverse movement in interest rates, the potential losses in future earnings, fair value
of risk-sensitive financial instruments, and cash flows are immaterial, although the actual effects may differ materially from the hypothetical analysis.



|Item 4. | Controls and Procedures
|------- | -----------------------

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

Scope of the Controls Evaluation

The
evaluation of our Disclosure Controls included a review of the controls objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report. In the course of
the controls evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions,



22



---

##### Table of Contents

including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management,
including the CEO and CFO, concerning the effectiveness of the controls can be reported in our Quarterly Reports on Form 10-Q and in our Annual Reports on Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing
basis by other personnel in our accounting, finance and legal functions. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and to modify them on an ongoing basis as necessary. A control system can
provide only reasonable, not absolute, assurance that the control systems objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, have been detected. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of inherent limitations in a cost effective
control system, misstatements due to error or fraud may occur and not be detected.

Conclusions

As described in detail in Item 9A of our Annual Report on Form 10-K, for the fiscal year ended December 31, 2007, our management assessed the
effectiveness of our internal control over financial reporting as of December 31, 2007. Managements assessment identified three material weaknesses in internal control over financial reporting as of that date. These material weaknesses
were identified in the areas of financial statement close process, revenue recognition and accounting for income taxes. In light of these material weaknesses identified by management, which have not been remediated as of the end of the period
covered by this Quarterly Report, our CEO and CFO concluded, after the evaluation described above, that our Disclosure Controls were not effective, as of the end of the period covered by this Quarterly Report, in ensuring that information required
to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.

Changes in Internal Control over Financial Reporting

There have been changes in our internal control over financial reporting during the period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting. We have implemented certain remediation measures and are in the process of designing and implementing additional remediation measures for the material weaknesses described in the Form 10-K. Such remediation activities include the
following:



| |  |  | We have hired and continue to hire more qualified and experienced accounting personnel to perform the month end review and closing processes as well as provide
additional oversight and supervision within the accounting department.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have established, and intend to continue to establish more rigorous review procedures to ensure that account reconciliations and amounts recorded are
substantiated by detailed and contemporaneous documentary support and that reconciling items are investigated, resolved and recorded in a timely manner.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have implemented a formal contract review process to establish and document the revenue recognition events and methodology at the time a revenue generating
contract is signed. Appropriate contracts are reviewed and signed off by both the finance personnel and the project managers so that there is a clear understanding of what events will trigger revenue recognition and to establish the amounts to be
recognized for each event. Since the first quarter we have implemented a process for acknowledgement of delivered services from customers with multiple element delivery contracts.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are initiating programs providing ongoing training and professional education and development plans for the accounting department and improving internal
communications procedures throughout the Company.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to the foregoing remediation efforts, we intend to retain
a consulting firm to assist with the documentation of our internal control processes, including formal risk assessment of our financial reporting processes.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

From time
to time and in the ordinary course of business, we are subject to various claims, charges and litigation. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably
to us, we do not believe that we are currently a party to any material legal proceedings.



|Item 1A. | Risk Factors
|-------- | ------------

We operate in a
rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly
Report on Form 10-Q, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
There have been no material



23



---

##### Table of Contents

changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007. Additional risks and uncertainties not
presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the foregoing risks or uncertainties actually
occurs, our business, financial condition and operating results would likely suffer.



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

At the annual meeting of our stockholders held June 25, 2008, our stockholders elected John S. Katzman, Robert E. Evanson and Michael J. Perik as Class I directors of the Company, each to serve on our Board of
Directors until the 2011 Annual Meeting of Stockholders and until their successors are duly elected and qualified. The directors were elected by a plurality of the votes cast at the 2008 annual meeting, as follows:



|                  |  |            |  |               
|----------------- |  | ---------- |  | --------------
|Nominee           |  | VotesFor   |  | SharesWithheld
|John S. Katzman   |  | 19,811,399 |  | 5,318,840     
|Robert E. Evanson |  | 22,662,112 |  | 2,468,067     
|Michael J. Perik  |  | 24,040,123 |  | 1,090,056     

No other persons were nominated, nor received votes, for election as a director at the 2008 annual meeting.



|Item 6. | Exhibits
|------- | --------

Exhibit Index



|              |  |                                                                                                                                                                                                                                                                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                             
|10.1          |  | Agreement and Plan of Reorganization, dated as of June 11, 2008, by and among The Princeton Review, Inc., TPR SoCal I, Inc., TPR SoCal, LLC, The Princeton Review of Orange County, Inc. and Paul
Kanarek (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 16, 2008).
|              | 
|10.2          |  | Franchise and Asset Sale Agreement, dated as of June 11, 2008, by and between The Princeton Review, Inc., TPR SoCal, LLC, LeComp Co., Inc. and Lloyd Eric Cotsen (incorporated herein by reference
to Exhibit 10.2 to our Current Report on Form 8-K (File No. 000-32469), filed with the Securities and Exchange Commission on June 16, 2008).                                         
|              | 
|10.3          |  | Franchise and Asset Sale Agreement, dated as of June 11, 2008, by and between The Princeton Review, Inc., TPR SoCal, LLC and Paul Kanarek (incorporated herein by reference to Exhibit 10.3 to our
Current Report on Form 8-K (File No. 000-32469), filed with the Securities and Exchange Commission on June 16, 2008).                                                                
|              | 
|10.4          |  | Credit Agreement, dated as of July 2, 2008, by and among The Princeton Review, Inc. and Wells Fargo Foothill, LLC (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form
8-K (File No. 000-32469), filed with the Securities and Exchange Commission on July 7, 2008).                                                                                         
|              | 
|10.5          |  | The Princeton Review, Inc. Summary of Cash and Equity Compensation Practices for Non-Employee Directors (filed herewith).                                                                                                                                                                                                                                                               
|              | 
|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.                                                                                                                                                                                                                                                                 



24



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



THE PRINCETON REVIEW, INC.By:

/s/ STEPHEN RICHARDSStephen RichardsChief Operating Officer and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)


August 11, 2008



25



---

##### Table of Contents

Exhibit Index



|              |  |                                                                                                                                                                                                                                                                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                             
|10.1          |  | Agreement and Plan of Reorganization, dated as of June 11, 2008, by and among The Princeton Review, Inc., TPR SoCal I, Inc., TPR SoCal, LLC, The Princeton Review of Orange County, Inc. and Paul
Kanarek (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 16, 2008).
|              | 
|10.2          |  | Franchise and Asset Sale Agreement, dated as of June 11, 2008, by and between The Princeton Review, Inc., TPR SoCal, LLC, LeComp Co., Inc. and Lloyd Eric Cotsen (incorporated herein by reference
to Exhibit 10.2 to our Current Report on Form 8-K (File No. 000-32469), filed with the Securities and Exchange Commission on June 16, 2008).                                         
|              | 
|10.3          |  | Franchise and Asset Sale Agreement, dated as of June 11, 2008, by and between The Princeton Review, Inc., TPR SoCal, LLC and Paul Kanarek (incorporated herein by reference to Exhibit 10.3 to our
Current Report on Form 8-K (File No. 000-32469), filed with the Securities and Exchange Commission on June 16, 2008).                                                                
|              | 
|10.4          |  | Credit Agreement, dated as of July 2, 2008, by and among The Princeton Review, Inc. and Wells Fargo Foothill, LLC (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form
8-K (File No. 000-32469), filed with the Securities and Exchange Commission on July 7, 2008).                                                                                         
|              | 
|10.5          |  | The Princeton Review, Inc. Summary of Cash and Equity Compensation Practices for Non-Employee Directors (filed herewith).                                                                                                                                                                                                                                                               
|              | 
|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.                                                                                                                                                                                                                                                                 



26