---

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 September 30, 2005

OR

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

For the transition period from          to

Commission File Number 000-32469

|THE   PRINCETON REVIEW, INC.                            
|--------------------------------------------------------
|(Exact   name of registrant as specified in its charter)

|Delaware                                                         |  | 22-3727603                            
|---------------------------------------------------------------- |  | --------------------------------------
|(State   or other jurisdiction of 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
o
|----- | ----

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

|Yes
x | No
o
|----- | ----

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

|Yes
o | No
x
|----- | ----

The Company had 27,571,266 shares of $0.01 par value common stock outstanding at November 7, 2005.

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TABLE OF CONTENTS

|PART I.  FINANCIAL INFORMATION |        
|------------------------------ | -------
|                               |        
|                               | Item 1.
|                               |        
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|                               |        
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|                               | Item 2.
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|                               | Item 3.
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|                               | Item 4.
|                               |        
|PART II.  OTHER INFORMATION    |        
|                               |        
|                               | Item 1.
|                               |        
|                               | Item 2.
|                               |        
|                               | Item 3.
|                               |        
|                               | Item 4.
|                               |        
|                               | Item 5.
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|                               | Item 6.
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|SIGNATURE                      | 23     

2



PART I.  FINANCIAL INFORMATIONItem 1.  Consolidated Financial Statements

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

|                                                                                                                                                                              |  | September 30,   2005 |         | December 31,   2004 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | ------------------- | -
|                                                                                                                                                                              |  |                      |         |                     |  
|                                                                                                                                                                              |  | (unaudited)          |         |                     |  
|ASSETS                                                                                                                                                                        |  |                      |         |                     |  
|Current   assets:                                                                                                                                                             |  |                      |         |                     |  
|Cash   and cash equivalents                                                                                                                                                   |  | $                    | 7,489   |                     | $
|Accounts   receivable, net                                                                                                                                                    |  |                      | 22,023  |                     |  
|Prepaid   expenses                                                                                                                                                            |  |                      | 1,868   |                     |  
|Inventory                                                                                                                                                                     |  |                      | 2,831   |                     |  
|Other   assets                                                                                                                                                                |  |                      | 1,998   |                     |  
|                                                                                                                                                                              |  |                      |         |                     |  
|Total   current assets                                                                                                                                                        |  |                      | 36,209  |                     |  
|Furniture, fixtures,   equipment and software development, net                                                                                                                |  |                      | 15,089  |                     |  
|Investment in affiliates                                                                                                                                                      |  |                      | 1,582   |                     |  
|Goodwill                                                                                                                                                                      |  |                      | 31,511  |                     |  
|Other intangibles, net                                                                                                                                                        |  |                      | 11,692  |                     |  
|Notes receivable                                                                                                                                                              |  |                      | 1,574   |                     |  
|Other assets                                                                                                                                                                  |  |                      | 2,901   |                     |  
|                                                                                                                                                                              |  |                      |         |                     |  
|Total   assets                                                                                                                                                                |  | $                    | 100,558 |                     | $
|                                                                                                                                                                              |  |                      |         |                     |  
|LIABILITIES   AND STOCKHOLDERS EQUITY                                                                                                                                        |  |                      |         |                     |  
|Current   liabilities:                                                                                                                                                        |  |                      |         |                     |  
|Accounts   payable                                                                                                                                                            |  | $                    | 5,290   |                     | $
|Accrued   expenses                                                                                                                                                            |  |                      | 7,164   |                     |  
|Current   maturities of long-term debt                                                                                                                                        |  |                      | 1,375   |                     |  
|Deferred   income                                                                                                                                                             |  |                      | 15,983  |                     |  
|                                                                                                                                                                              |  |                      |         |                     |  
|Total   current liabilities                                                                                                                                                   |  |                      | 29,812  |                     |  
|Deferred   rent                                                                                                                                                               |  |                      | 2,095   |                     |  
|Long-term   debt                                                                                                                                                              |  |                      | 3,320   |                     |  
|Series B-1 Preferred Stock,   $.01 par value; 10,000 shares authorized issued and outstanding at September   30, 2005 and December 31, 2004 (liquidation value of  $10,000)   |  |                      | 9,901   |                     |  
|Stockholders   equity                                                                                                                                                        |  |                      |         |                     |  
|Preferred   stock, $.01 par value; 4,990,000 shares authorized; none issued and   outstanding                                                                                 |  |                      |        |                     |  
|Common   stock, $.01 par value; 100,000,000 shares authorized; 27,571,266 and   27,569,764 issued and outstanding at September 30, 2005 and December 31,   2004, respectively |  |                      | 276     |                     |  
|Additional   paid-in capital                                                                                                                                                  |  |                      | 116,275 |                     |  
|Accumulated   deficit                                                                                                                                                         |  |                      | (60,845 | )                   |  
|Accumulated   other comprehensive loss                                                                                                                                        |  |                      | (276    | )                   |  
|                                                                                                                                                                              |  |                      |         |                     |  
|Total   stockholders equity                                                                                                                                                  |  |                      | 55,430  |                     |  
|                                                                                                                                                                              |  |                      |         |                     |  
|Total   liabilities and stockholders equity                                                                                                                                  |  | $                    | 100,558 |                     | $
|                                                                                                                                                                              |  |                      |         |                     |  

See accompanying notes to the condensed consolidated financial statements.

3



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

|                                                                            |  | Three Months Ended   September 30, |        | Nine Months Ended   September 30, |  
|--------------------------------------------------------------------------- |  | ---------------------------------- | ------ | --------------------------------- | -
|                                                                            |  |                                    |        |                                   |  
|                                                                            |  | 2005                               |        | 2004                              |  
|                                                                            |  |                                    |        |                                   |  
|Revenue                                                                     |  |                                    |        |                                   |  
|Test   Preparation Services                                                 |  | $                                  | 26,748 |                                   | $
|K-12   Services                                                             |  |                                    | 5,281  |                                   |  
|Admissions   Services                                                       |  |                                    | 2,767  |                                   |  
|                                                                            |  |                                    |        |                                   |  
|Total   revenue                                                             |  |                                    | 34,796 |                                   |  
|                                                                            |  |                                    |        |                                   |  
|Cost of   revenue                                                           |  |                                    |        |                                   |  
|Test   Preparation Services                                                 |  |                                    | 8,007  |                                   |  
|K-12   Services                                                             |  |                                    | 2,934  |                                   |  
|Admissions   Services                                                       |  |                                    | 1,283  |                                   |  
|                                                                            |  |                                    |        |                                   |  
|Total   cost of revenue                                                     |  |                                    | 12,224 |                                   |  
|Gross profit                                                                |  |                                    | 22,572 |                                   |  
|                                                                            |  |                                    |        |                                   |  
|Selling,   general and administrative expenses                              |  |                                    | 21,910 |                                   |  
|                                                                            |  |                                    |        |                                   |  
|Income (loss) from   operations                                             |  |                                    | 662    |                                   |  
|                                                                            |  |                                    |        |                                   |  
|Interest expense                                                            |  |                                    | (110   | )                                 |  
|Sale of  rights to franchisees                                              |  |                                    | 990    |                                   |  
|Other income, net                                                           |  |                                    |       |                                   |  
|Equity in the loss of   affiliates                                          |  |                                    | (71    | )                                 |  
|                                                                            |  |                                    |        |                                   |  
|Income (loss) before   benefit from  income taxes                           |  |                                    | 1,471  |                                   |  
|Benefit from income taxes                                                   |  |                                    |       |                                   |  
|                                                                            |  |                                    |        |                                   |  
|Net income (loss)                                                           |  |                                    | 1,471  |                                   |  
|Dividends and accretion on   Series B-1 Preferred Stock                     |  |                                    | (206   | )                                 |  
|                                                                            |  |                                    |        |                                   |  
|Net income (loss) attributed   to common stockholders                       |  | $                                  | 1,265  |                                   | $
|                                                                            |  |                                    |        |                                   |  
|Basic  income (loss) per share                                              |  | $                                  | 0.05   |                                   | $
|                                                                            |  |                                    |        |                                   |  
|Diluted income (loss) per   share                                           |  | $                                  | 0.04   |                                   | $
|                                                                            |  |                                    |        |                                   |  
|Weighted average shares   used in computing basic income (loss) per share   |  |                                    | 27,571 |                                   |  
|                                                                            |  |                                    |        |                                   |  
|Weighted average shares   used in computing diluted income (loss) per share |  |                                    | 28,733 |                                   |  
|                                                                            |  |                                    |        |                                   |  

See accompanying notes to the condensed consolidated financial statements.

4



THE PRINCETON REVIEW, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows (unaudited) (in thousands)

|                                                                                           |  | Nine Months Ended September 30, |        
|------------------------------------------------------------------------------------------ |  | ------------------------------- | -------
|                                                                                           |  |                                 |        
|                                                                                           |  | 2005                            |        
|                                                                                           |  |                                 |        
|Cash flows   from operating activities:                                                    |  |                                 |        
|Net income (loss)                                                                          |  | $                               | 856    
|Adjustments to reconcile   net income (loss) to net cash provided by operating activities: |  |                                 |        
|Depreciation                                                                               |  |                                 | 1,304  
|Amortization                                                                               |  |                                 | 4,237  
|Notes   issued in connection with sale of rights to franchisees                            |  |                                 | (703   
|Write-off   of deferred financing costs                                                    |  |                                 | 117    
|Bad   debt expense                                                                         |  |                                 | 326    
|Other,   net                                                                               |  |                                 | 114    
|Net   change in operating assets and liabilities:                                          |  |                                 |        
|Accounts   receivable                                                                      |  |                                 | 989    
|Prepaid   expenses                                                                         |  |                                 | 151    
|Other   assets                                                                             |  |                                 | (2,012 
|Accounts   payable and accrued expenses                                                    |  |                                 | (3,247 
|Deferred   income                                                                          |  |                                 | (1,654 
|                                                                                           |  |                                 |        
|Net cash provided by   operating activities                                                |  |                                 | 478    
|                                                                                           |  |                                 |        
|Cash flows   from investing activities:                                                    |  |                                 |        
|Purchases of furniture,   fixtures, equipment and software development                     |  |                                 | (5,407 
|Additions to capitalized   development costs and other assets                              |  |                                 | (3,945 
|Investment in affiliate                                                                    |  |                                 |       
|Payment of notes receivable                                                                |  |                                 | 250    
|Landlord construction   contribution                                                       |  |                                 | 892    
|                                                                                           |  |                                 |        
|Net cash used in investing   activities                                                    |  |                                 | (8,210 
|                                                                                           |  |                                 |        
|Cash flows   from financing activities:                                                    |  |                                 |        
|Proceeds from the sale of   Series B-1 Preferred Stock, net of issuance costs              |  |                                 |       
|Repayment of revolving   credit facility                                                   |  |                                 | (2,000 
|Proceeds from revolving   credit facility                                                  |  |                                 |       
|Payment of deferred   financing costs                                                      |  |                                 |       
|Capital lease payments                                                                     |  |                                 | (527   
|Dividends on Series B-1   Preferred Stock                                                  |  |                                 | (386   
|Notes payable related to   acquisitions                                                    |  |                                 | (1,078 
|Proceeds from exercise of   options                                                        |  |                                 | 15     
|                                                                                           |  |                                 |        
|Net cash (used in) provided   by financing activities                                      |  |                                 | (3,976 
|                                                                                           |  |                                 |        
|Net (decrease) increase in   cash and cash equivalents                                     |  |                                 | (11,708
|Cash and cash equivalents,   beginning of period                                           |  |                                 | 19,197 
|                                                                                           |  |                                 |        
|Cash and cash equivalents,   end of period                                                 |  | $                               | 7,489  
|                                                                                           |  |                                 |        

See accompanying notes to the condensed consolidated financial statements.

5



THE PRINCETON REVIEW, INC. AND SUBSIDIARIESNotes to Condensed Consolidated Financial Statements (Unaudited)

1.  Basis of Presentation

The
accompanying unaudited interim consolidated financial statements include the
accounts of The Princeton Review, Inc. and its wholly-owned subsidiaries, The
Princeton Review Canada Inc. and Princeton Review Operations L.L.C., as well as
the Companys national advertising fund (together, the
Company).  On January 1, 2005, the Company completed a
corporate reorganization whereby the Company merged its former wholly owned
subsidiaries, Princeton Review Products, L.L.C., Princeton Review Management,
L.L.C., Princeton Review Publishing, L.L.C. and Princeton Review Carolinas,
L.L.C. into the parent company, The Princeton Review, Inc.

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and reflect all adjustments, consisting only of normal recurring accruals, that are, in the opinion of management, necessary for a fair presentation of the interim financial statements. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2004 included in the Companys Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. The results of operations for the three-month and nine-month periods ended September 30, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Actual results could differ from those estimated.

Products and Services

The following table summarizes the Companys revenue and cost of revenue for the three-month and nine-month periods ended September 30, 2005 and 2004:

|                        |  | Three Months Ended September 30, |        | Nine Months Ended September 30, |  
|----------------------- |  | -------------------------------- | ------ | ------------------------------- | -
|                        |  |                                  |        |                                 |  
|                        |  | 2005                             |        | 2004                            |  
|                        |  |                                  |        |                                 |  
|                        |  | (in   thousands)                 |       
|Revenue                 |  |                                  |        |                                 |  
|Services                |  | $                                | 30,649 |                                 | $
|Products                |  |                                  | 1,784  |                                 |  
|Other                   |  |                                  | 2,363  |                                 |  
|                        |  |                                  |        |                                 |  
|Total   revenue         |  | $                                | 34,796 |                                 | $
|                        |  |                                  |        |                                 |  
|Cost of   Revenue       |  |                                  |        |                                 |  
|Services                |  | $                                | 11,169 |                                 | $
|Products                |  |                                  | 911    |                                 |  
|Other                   |  |                                  | 144    |                                 |  
|                        |  |                                  |        |                                 |  
|Total   cost of revenue |  | $                                | 12,224 |                                 | $
|                        |  |                                  |        |                                 |  

6



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

Stock-Based Compensation

The Company accounts for the issuance of stock options using the intrinsic value method in accordance with Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees,and related interpretations. Generally for the Companys stock option plans, no compensation cost is recognized in the Consolidated Statements of Operations because the exercise price of the Companys stock options equals the market price of the underlying common stock on the date of grant.

Had the Company accounted for its employee stock options under the fair-value method of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, the Companys net income (loss) per share would have been as follows:

|                                                                                                                                        |  | Three Months Ended September 30,        |       | Nine Months Ended September 30, |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ----- | ------------------------------- | -
|                                                                                                                                        |  |                                         |       |                                 |  
|                                                                                                                                        |  | 2005                                    |       | 2004                            |  
|                                                                                                                                        |  |                                         |       |                                 |  
|                                                                                                                                        |  | (in   thousands, except per share data) |      
|Net income (loss)   attributed to common stockholders, as reported                                                                      |  | $                                       | 1,265 |                                 | $
|Total stock-based employee   compensation expense determined under fair-value based method for all awards,   net of related tax effects |  |                                         | (468  | )                               |  
|                                                                                                                                        |  |                                         |       |                                 |  
|Pro forma net income (loss)   attributed to common stockholders                                                                         |  | $                                       | 797   |                                 | $
|                                                                                                                                        |  |                                         |       |                                 |  
|Basic net income (loss) per   share, as reported                                                                                        |  | $                                       | 0.05  |                                 | $
|                                                                                                                                        |  |                                         |       |                                 |  
|Diluted net income (loss)   per share, as reported                                                                                      |  | $                                       | 0.04  |                                 | $
|                                                                                                                                        |  |                                         |       |                                 |  
|Basic net income (loss) per   share, pro forma                                                                                          |  | $                                       | 0.03  |                                 | $
|                                                                                                                                        |  |                                         |       |                                 |  
|Diluted net income (loss)   per share, pro forma                                                                                        |  | $                                       | 0.03  |                                 | $
|                                                                                                                                        |  |                                         |       |                                 |  

During the nine months ended September 30, 2005, an employee exercised 1,500 stock options.

Adoption of New Accounting Pronouncements

In December 2004, the Financial Accounting
Standards Board (FASB) replaced SFAS No. 123 with SFAS No. 123(R),
Share-Based Payments, which requires all share-based payments to
employees, including employee stock options, to be recognized in the income
statement based on their fair values.  In April of 2005, the SEC extended
the effective date of the adoption until January 1, 2006, for calendar year
companies.  Based on the options outstanding as of September 30, 2005 and
the SFAS No. 123 pro forma information presented above, the Company expects SFAS
No. 123(R) to have a material impact on its Consolidated Statement of
Operations. However, the Company has not yet completed its evaluation as to the
full impact.

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (GAAP) in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant accounting estimates used include estimates for uncollectible accounts receivable, deferred tax valuation allowances, impairment write-downs, amortization lives assigned to intangible assets and money back guarantees.

7



The Company began offering a money back guarantee to students who enrolled in classes for certain graduate test prep courses on or after February 22, 2005. In order to qualify to receive a full refund, students who do not achieve score improvements must have attended all class sessions, taken all practice tests and turned in all homework assignments.  This guarantee expires 90 days after completion of the course.  The Company reserves for expected refunds as revenue is recognized.

Reclassifications

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

2.  Accounts Receivable, Net

Accounts receivable, net consists of the following components:

|                                        |  | September 30,   2005 |        | December 31,   2004 |  
|--------------------------------------- |  | -------------------- | ------ | ------------------- | -
|                                        |  |                      |        |                     |  
|                                        |  | (in thousands)       |       
|Accounts   receivable - customers       |  | $                    | 21,473 |                     | $
|Accounts   receivable - related parties |  |                      | 1,535  |                     |  
|Allowance   for doubtful accounts       |  |                      | (985   | )                   |  
|                                        |  |                      |        |                     |  
|Accounts receivable, net                |  | $                    | 22,023 |                     | $
|                                        |  |                      |        |                     |  

3. Franchise Renewal and Sale of SES Rights

During the
third quarter of 2005, the Company completed the franchise renewal process with
five of the seven domestic franchisees that were in the Companys franchise
system as of December 31, 2004.  The renewal agreements took effect
immediately and superseded the remaining term of the franchisees prior
contracts. Of the two remaining franchises, the Company terminated one
franchisee for default under the then existing franchise agreement in July
2005, initiated an arbitration proceeding to confirm the validity of the
termination, and opened an office to service that franchisees former
territory. The remaining franchisee (which holds ten separate franchises, six of
which expire at the end of 2005) and the Company are currently in
litigation regarding renewal terms.  Pending the outcome of the litigation,
the franchisee has signed renewals for the six expiring agreements.

As part of the franchise renewal process described above, four of the franchisees also licensed the right to sell, under The Princeton Review brand, Supplementary Educational Services, or after school academic instruction, under the No Child Left Behind Act of 2001 (SES) in their franchised territories.  Up-front fees totaling approximately $1.0 million associated with these new rights were included in the Companys financial statements for the three and nine months ended September 30, 2005. Of this amount, approximately $0.3 million was paid in cash, and the remainder was paid through the issuance to the Company of notes with a discounted present value of approximately $0.7 million.

4. Line of Credit

In February 2005, the Company repaid the entire outstanding balance and terminated the three-year revolving credit facility the Company had entered into in May of 2004 with Commerce Bank, N.A.  The outstanding balance at the time of payment was $2.0 million.  Additionally, the Company wrote off  unamortized deferred financing costs of approximately $0.1 million.

5.  Series B-1 Preferred Stock

On June 4, 2004, the Company sold 10,000 shares of its Series B-1 Preferred Stock to Fletcher International, Ltd. (Fletcher) for proceeds of $10,000,000. These shares are convertible into common stock at any time. Prior to conversion, each share accrues dividends at an annual rate of the greater of 5% and the 90-day London Interbank Offered Rate (LIBOR) plus 1.5%, subject to adjustment. Dividends are payable, at the Companys option, in cash or registered shares of common stock. At the time of issuance of the Series B-1 Preferred Stock to Fletcher, each share of Series B-1 Preferred Stock was convertible into a number of shares of common stock equal to: (1) the stated value of one share of Series B-1 Preferred Stock plus accrued and unpaid dividends, divided by (2) the conversion price of $11.00, subject to adjustment. In accordance with the terms of the agreement with Fletcher, the
conversion price was decreased to $9.9275 per share because effectiveness of the registration statement relating to the Fletcher shares was delayed until December 28, 2004.

8



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

In addition, the Company granted Fletcher
certain rights entitling Fletcher to purchase up to 20,000 shares of additional
preferred stock, at a price of $1,000 per share, for an aggregate additional
consideration of $20,000,000. The agreement with Fletcher provides that any
shares of additional preferred stock will have the same conversion ratio as the
Series B-1 Preferred Stock, except that the conversion price will be the greater
of (1) $11.00, or (2) 120% of the prevailing price of common stock at the time
of exercise of the rights (based on an average daily trading price formula),
subject to adjustment upon the occurrence of certain events. Due to the delay in
the effectiveness of the registration statement relating to the Series B-1
Preferred Stock, the conversion price for any such additional series of
preferred stock was reduced to the greater of (1) $9.9275, or (2) 108.3% of the
prevailing price of common stock at the time of exercise of the rights. These
rights may be exercised by Fletcher on one or more occasions commencing July 1,
2005, and for the 24-month period thereafter, which period may be extended under
certain circumstances. The agreement with Fletcher also provides that shares of
additional preferred stock will also be redeemable upon terms substantially
similar to those of the Series B-1 Preferred Stock. The voting rights of the
Series B-1 Preferred stockholders are limited to voting with regard to: (1) any
changes to the rights, preferences or privileges of the Series B-1 Preferred
stockholders, (2) authorizing, creating or issuing any senior securities or
securities that rank pari passu with the Series B-1 Preferred Stock, or any
securities issued by a subsidiary of the Company, (3) changing the number of
authorized shares of preferred stock, and (4) amending any provision of any
security of the Company so as to make such security redeemable by the
Company.

For the nine months ended September 30, 2005, dividends of approximately $0.4 million were paid to the Series B-1 Preferred stockholders.  For the nine months ended September 30, 2004, dividends of approximately $0.2 million were paid to the Series B-1 Preferred Stockholders.

6.  Segment Information

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

The following segment results include the allocation of certain information technology costs, accounting services, executive management costs, legal department costs, office facilities expenses, human resources expenses and other shared services, which are allocated based on consumption. Corporate consists of unallocated administrative support functions. The majority of the Companys revenue is earned by the Test Preparation Services division, which sells a range of services including test preparation, tutoring and academic counseling.  Test Preparation Services derives its revenue from Company operated locations and from royalties from and product sales to independently owned franchises. The K-12 Services division earns fees from assessment, remediation and professional development services it renders to K-12 schools and from its content development work.  The Admissions Services division
earns revenue from subscription, transaction and marketing fees from higher education institutions and from selling advertising and sponsorships. Additionally, each division earns royalties and other fees from sales of its books published by Random House.

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

9



|                                                                                         |  | Three   Months Ended September 30, 2005 |       
|---------------------------------------------------------------------------------------- |  | --------------------------------------- | ------
|                                                                                         |  |                                         |       
|                                                                                         |  | (In   thousands)                        |       
|                                                                                         |  | Test   Preparation   Services           |       
|                                                                                         |  |                                         |       
|Revenue                                                                                  |  | $                                       | 26,748
|                                                                                         |  |                                         |       
|Cost of revenue (including   amortization)                                               |  |                                         | 8,007 
|Selling, general and administrative   expenses (including depreciation and amortization) |  |                                         | 12,778
|                                                                                         |  |                                         |       
|Operating income (loss)                                                                  |  |                                         | 5,963 
|                                                                                         |  |                                         |       
|Depreciation and amortization                                                            |  |                                         | 440   
|Sale of rights to   franchisees                                                          |  |                                         |      
|Equity in the loss of   affiliates                                                       |  |                                         |      
|Other expense                                                                            |  |                                         |      
|                                                                                         |  |                                         |       
|EBITDA                                                                                   |  | $                                       | 6,403 
|                                                                                         |  |                                         |       

|                                                                                         |  | Three   Months Ended September 30, 2004 |       
|---------------------------------------------------------------------------------------- |  | --------------------------------------- | ------
|                                                                                         |  |                                         |       
|                                                                                         |  | (In   thousands)                        |       
|                                                                                         |  | Test   Preparation   Services           |       
|                                                                                         |  |                                         |       
|Revenue                                                                                  |  | $                                       | 24,185
|                                                                                         |  |                                         |       
|Cost of revenue (including   amortization)                                               |  |                                         | 7,316 
|Selling, general and   administrative expenses (including depreciation and amortization) |  |                                         | 10,804
|                                                                                         |  |                                         |       
|Operating income (loss)                                                                  |  |                                         | 6,065 
|                                                                                         |  |                                         |       
|Depreciation and   amortization                                                          |  |                                         | 501   
|Equity in the loss of   affiliates                                                       |  |                                         |      
|                                                                                         |  |                                         |       
|EBITDA                                                                                   |  | $                                       | 6,566 
|                                                                                         |  |                                         |       

10



|                                                                                         |  | Nine   Months Ended September 30, 2005 |       
|---------------------------------------------------------------------------------------- |  | -------------------------------------- | ------
|                                                                                         |  |                                        |       
|                                                                                         |  | (In thousands)                         |       
|                                                                                         |  | Test   Preparation   Services          |       
|                                                                                         |  |                                        |       
|Revenue                                                                                  |  | $                                      | 70,263
|                                                                                         |  |                                        |       
|Cost of revenue (including   amortization)                                               |  |                                        | 21,496
|Selling, general and   administrative expenses (including depreciation and amortization) |  |                                        | 35,695
|                                                                                         |  |                                        |       
|Operating income (loss)                                                                  |  |                                        | 13,072
|                                                                                         |  |                                        |       
|Depreciation and   amortization                                                          |  |                                        | 1,351 
|Sale of rights to   franchisees                                                          |  |                                        |      
|Equity in the loss of   affiliates                                                       |  |                                        |      
|Other expense                                                                            |  |                                        |      
|                                                                                         |  |                                        |       
|EBITDA                                                                                   |  | $                                      | 14,423
|                                                                                         |  |                                        |       

|                                                                                         |  | Nine   Months Ended September 30, 2004 |       
|---------------------------------------------------------------------------------------- |  | -------------------------------------- | ------
|                                                                                         |  |                                        |       
|                                                                                         |  | (In   thousands)                       |       
|                                                                                         |  | Test   Preparation   Services          |       
|                                                                                         |  |                                        |       
|Revenue                                                                                  |  | $                                      | 61,178
|                                                                                         |  |                                        |       
|Cost of revenue (including   amortization)                                               |  |                                        | 18,449
|Selling, general and   administrative expenses (including depreciation and amortization) |  |                                        | 32,736
|                                                                                         |  |                                        |       
|Operating income (loss)                                                                  |  |                                        | 9,993 
|                                                                                         |  |                                        |       
|Depreciation and   amortization                                                          |  |                                        | 1,270 
|Equity in the loss of   affiliates                                                       |  |                                        |      
|                                                                                         |  |                                        |       
|EBITDA                                                                                   |  | $                                      | 11,263
|                                                                                         |  |                                        |       

11



|       |  | As of   September 30, 2005    |       
|------ |  | ----------------------------- | ------
|       |  |                               |       
|       |  | (In   thousands)              |       
|       |  | Test   Preparation   Services |       
|       |  |                               |       
|Assets |  | $                             | 40,860
|       |  |                               |       

|       |  | As of   December 31, 2004     |       
|------ |  | ----------------------------- | ------
|       |  |                               |       
|       |  | (In   thousands)              |       
|       |  | Test   Preparation   Services |       
|       |  |                               |       
|Assets |  | $                             | 36,424
|       |  |                               |       

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

|                                               |  | Three   Months Ended September 30, |       | Nine   Months Ended September 30, |  
|---------------------------------------------- |  | ---------------------------------- | ----- | --------------------------------- | -
|                                               |  |                                    |       |                                   |  
|                                               |  | 2005                               |       | 2004                              |  
|                                               |  |                                    |       |                                   |  
|Total income (loss) from   reportable segments |  | $                                  | 662   |                                   | $
|Interest   expense                             |  |                                    | (110  | )                                 |  
|Sale   of rights to franchisees                |  |                                    | 990   |                                   |  
|Other   income, net                            |  |                                    |      |                                   |  
|Equity   in loss of affiliate                  |  |                                    | (71   | )                                 |  
|Benefit   from income taxes                    |  |                                    |      |                                   |  
|                                               |  |                                    |       |                                   |  
|Net   income (loss)                            |  | $                                  | 1,471 |                                   | $
|                                               |  |                                    |       |                                   |  

7. Income (Loss) Per Share

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

12



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

|                                                                             |  | Three   Months Ended September 30, |        | Nine   Months Ended September 30, | 
|---------------------------------------------------------------------------- |  | ---------------------------------- | ------ | --------------------------------- | 
|                                                                             |  |                                    |        |                                   | 
|                                                                             |  | 2005                               |        | 2004                              | 
|                                                                             |  |                                    |        |                                   | 
|Weighted average common   shares outstanding                                 |  |                                    |        |                                   | 
|Basic                                                                        |  |                                    | 27,571 |                                   | 
|Net   effect of convertible preferred stock-based on the if converted method |  |                                    | 1,007  |                                   | 
|Net   effect of diluted stock options - based on the treasury stock method   |  |                                    | 146    |                                   | 
|Other                                                                        |  |                                    | 9      |                                   | 
|                                                                             |  |                                    |        |                                   | 
|Diluted                                                                      |  |                                    | 28,733 |                                   | 
|                                                                             |  |                                    |        |                                   | 

Excluded from the computation of diluted earnings per common share because of their antidilutive effect were 909,091 of Series B-1 Preferred stock, 188,989 stock options and 9,128 of other for the three months ended September 30, 2004 and 392,940 of Series B-1 Preferred stock, 317,899 stock options and 9,128 of other for the nine months ended September 30, 2004.

8. Comprehensive Income (Loss)

The components of comprehensive income (loss) for the three and nine-months ended September 30, 2005 and 2004 are as follows:

|                                                                                                               |  | Three   Months Ended September 30, |       | Nine   Months Ended September 30, |  
|-------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ----- | --------------------------------- | -
|                                                                                                               |  |                                    |       |                                   |  
|                                                                                                               |  | 2005                               |       | 2004                              |  
|                                                                                                               |  |                                    |       |                                   |  
|                                                                                                               |  | (in   thousands)                   |      
|Net income (loss)   attributable to common stockholders                                                        |  | $                                  | 1,265 |                                   | $
|Foreign currency   translation adjustment                                                                      |  |                                    | (16   | )                                 |  
|Unrealized gain on   available-for-sale securities, net of tax provision of $0, $0, $0 and $12,   respectively |  |                                    |      |                                   |  
|                                                                                                               |  |                                    |       |                                   |  
|Total comprehensive income   (loss)                                                                            |  | $                                  | 1,249 |                                   | $
|                                                                                                               |  |                                    |       |                                   |  

9. Legal Proceedings

On September
10, 2003, CollegeNet, Inc. filed suit in Federal District Court in Oregon,
alleging that the Company infringed a patent owned by CollegeNet
related to the processing of on-line applications.  CollegeNet never served
 the Company  and no discovery was ever conducted.  However, based
on adverse rulings in other lawsuits concerning the same patent, CollegeNet
dismissed the 2003 case without prejudice on January 9, 2004 against  the Company.  Thereafter, on August 2, 2005, the Federal Circuit Court
of Appeals issued an opinion favorable to CollegeNet from its appeal from the
adverse rulings.  Then on August 3, 2005, CollegeNet filed suit again
against  the Company alleging an infringement of the same CollegeNet
patent related to processing on-line applications.  At this time  the Company
has not been served and accordingly it has no answer date and
no discovery has been conducted. CollegeNet seeks injunctive relief and
unspecified monetary damages. Because this potential proceeding is at a very
preliminary stage,  the Company is unable to predict its outcome with any degree of
certainty. However,  the Company believes that it has meritorious
defenses to CollegeNets claims of infringement and intends to vigorously
defend. In a related matter, on September 1, 2005,  the Company filed a
request with the United Stated Patent and Trademark Office (PTO) for
ex parte reexamination of the CollegeNet patent.  On October 31, 2005, the
PTO granted  the Companys request and ordered reexamination of all
claims of the CollegeNet patent.

On August 29,
2005, Test Services, Inc. (TSI), a franchisee of  the Company
under ten separate franchise agreements, six of which expire on December
31, 2005, filed suit against  the Company in the United States District Court for the
District of Colorado. In this proceeding, TSI alleges that the terms  the
Company has offered for renewal of the franchise do not comply with TSIs contractual
renewal rights, seeks declaratory relief and specific performance and
unspecified damages as to alleged breaches of the renewal provisions, and also
alleges a violation of the Michigan franchise law. Notwithstanding its pursuit
of this action, TSIs entered into the tendered

13



renewal agreements under a reservation of
rights. TSIs complaint also includes claims that the Company breached its existing
franchise agreements with TSI that are unrelated to the core renewal dispute.
TSI seeks damages for these alleged breaches in unspecified amounts, except that
damages in excess of $500,000 are alleged in connection with one of the claims.
A trial on the merits of the franchise renewal issues is scheduled to begin on
November 14, 2005.  With respect to the remaining claims, the Court has set
a trial date in January 2007.

The Company  does not
believe that the resolution of the dispute regarding the terms upon which TSI
may renew its franchise agreements will materially affect  the Companys financial
condition or results of operations.  With respect to TSIs claims for
damages for breach of the existing franchise agreements that are unrelated to
this issue, the proceeding is at a preliminary stage and  the Company  is unable to
predict its outcome with any degree of certainty.  However,  the Company  believes that it has meritorious defenses to these claims and intends to
vigorously defend.

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

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

All statements in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements may be identified by words such as believe, intend, expect, may, could, would, will, should, plan, project, contemplate, anticipate or similar statements.  Because these statements reflect our current views concerning future events, these forward-looking statements are subject to risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to demand for our products and services; our
ability to compete effectively and adjust to rapidly changing market dynamics; the timing of revenue recognition from significant contracts with schools and school districts; market acceptance of our newer products and services; continued federal and state focus on assessment and remediation in K-12 education; and the other factors described under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC.  We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The following information should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2004, as well as in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Form 10-Q.

Overview

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

Our Test Preparation Services division derives the majority of its revenue from classroom-based and Princeton Review Online test preparation courses and tutoring services.  Since 2004, this division has also been providing Supplementary Educational Services (SES), or after school academic instruction under the No Child Left Behind Act of 2001, to students in public school districts.

Our K-12
Services division provides assessment, professional development and intervention
materials (workbooks and related products) to K-12 schools and school districts. 
As a result of the increased emphasis on measurable results, this division continues to see
growing demand by the public school market for its products.

14



Our
Admissions Services division derives most of its revenue from the sale of
web-based admissions and application management products and marketing services
to higher education institutions.  In addition, we have recently signed
several counseling contracts that will generate significant revenues during the
2005/2006 school year.  We are continuing with the process of
refocusing this divisions marketing services business model.  We are
moving from a model of pricing for various bundles of marketing services, to a
model where payment is based upon actual leads we generate.  We believe
this model will allow us to better capitalize on the popularity of our web site
with college and graduate school-bound students.  To support this change in
our marketing services model, we have re-launched our web site with a view to
optimizing our ability to match the right prospects with the post-secondary
institutions looking to attract them.

The third
quarter of 2005 reflects revenue growth in all three of our divisions as
compared to the third quarter of 2004. The increased emphasis on preparing for
the new SAT test and the increased enrollments in our new LSAT course were
contributing factors behind revenue growth in the Test Prep division. 
While there was no significant SES revenue in the third quarter, we expect that
this service will deliver substantial revenue during the fourth quarter and into
2006. K-12 Services revenue growth was driven by the introduction of our new
SideStreets workbooks which are a new product offering related to our
intervention services.  While we continue to see significant opportunities
in the market place for our K-12 division, we have experienced problems with
fully staffing the sales organization, higher product support costs and extended
timeframes around closing new contracts. Subsequently, we have hired a new
Executive Vice President of K-12, who will be reviewing the current sales
structure and product pricing and fulfillment.
 In the Admissions Services division,
revenue increased over the prior year primarily due to new counseling services
contracts. We continue to believe that revenue from sales of lead generation and
high school counseling services will drive modest revenue growth in this
division for full year 2005.

Selling,
general and administrative expenses (SG&A) for the three months
ended September 30, 2005 increased by 14% over the same period in 2004,
resulting primarily from increases in professional fees related to
Sarbanes-Oxley compliance costs, legal fees associated with the franchise
renewal process and advertising expense related to our SES marketing initiative. During the
third quarter, we invested in promoting our SES services that are expected to
generate revenue primarily during the fourth quarter and into 2006.  We
expect to launch SES programs in several new cities around the
country throughout the 2005/2006 school year.  We are committed to reviewing all components of
SG&A and implementing new strategies for driving  productivity.

Results of Operations

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004

Revenue

Total revenue increased 18%, or $5.2 million, from $29.6 million in 2004 to $34.8 million in 2005.

Test
Preparation Services revenue increased 11%, or $2.5 million, from $24.2 million
in 2004 to $26.7 million in 2005, and was primarily comprised of an approximately
$2.0 million increase in revenue from our company-owned operations, and an
increase of approximately $0.6 million in fees from franchises.  The
increased revenue from company-owned operations was primarily a result of an
increase of approximately $1.8 million in course and tutoring revenue reflecting
higher enrollment in SAT, LSAT and MCAT courses.

K-12 Services
revenue increased 92%, or $2.6 million, from $2.7 million in 2004 to $5.3
million in 2005.  This increase of 92% is affected by the timing of revenue
recognition for certain prior year contracts related to professional development and assessment
services. Excluding these timing differences driven by third quarter contracts not signed until the fourth quarter of 2004, revenue for the third
quarter of 2005 is 8% higher when compared to the third quarter of 2004.
This 8% increase is a result of the introduction and sale of our new SideStreets
workbooks.

Admissions Services revenue increased 4%, or $0.1 million, from $2.7 million in 2004 to $2.8 million in 2005. This increase resulted primarily from greater fees for secondary school counseling services derived from two new contracts in Texas.

15



Cost of Revenue

Our total cost of revenue increased 9%, or $1.0 million, from $11.2 million in 2004 to $12.2 million in 2005.

Test Preparation Services cost of revenue increased 9%, or $0.7 million, from $7.3 million in 2004 to $8.0 million in 2005. This is in line with our expectation around enrollment increases, which caused variable costs such as teacher pay, site rent and course materials to increase.  Gross margins were approximately 70% in both quarters.

K-12 Services
cost of revenue increased 8%, or $0.2 million, from $2.7 million in 2004 to $2.9
million in 2005 and is primarily attributable to an increase in costs
related to the servicing of customer contracts.  The increase in gross
margin from approximately 2% in 2004 to 44% in 2005 is affected by the timing of both revenue
and cost recognition related to professional development and assessment services
contracts. Excluding the impact of the timing of the above revenue and cost
recognition, gross margin declined from 44.6%, for the three months ended
September 30, 2004 to 39.5% for the three months ended September 30, 2005.

Admissions
Services cost of revenue increased 10%, or $0.1 million, from $1.2 million in
2004 to $1.3 million in 2005, primarily due to higher costs to service our
post-secondary-counseling customers.  Gross margin in this division
decreased from 56% to 54% primarily as a result of start-up costs and ongoing
expense in support of the new counseling services contracts.

Selling, General & Administrative Expenses

SG&A
expenses increased 14%, or $2.7 million, from $19.2 million in 2004 to $21.9
million in 2005.  Approximately $1.1 million of this increase pertains to
professional fees that were primarily related to Sarbanes-Oxley compliance
requirements and franchise renewal legal fees.  Advertising and
marketing expense for the third quarter increased by approximately $0.7 million
over the same period in 2004, primarily related to SES marketing efforts and the
2005 Admission Services User Conference. In addition, corporate salaries and
related expenses increased by approximately $0.8 million primarily in the
Information Technology and Accounting departments, and we experienced an
increase of $0.3 million in office rent and related expenses primarily within
our Test Preparation Services division as a result of new administrative offices related to expansion.

Sale of Rights to Franchises

During the
third quarter of 2005, we sold the right to sell SES services to four of our
independent franchisees for approximately $1.0 million.

Income Taxes

The estimated effective tax rate used in 2005 was approximately 40%, as compared to 42% during 2004.  However, during 2005 we continued to record a valuation allowance against the increase in our deferred tax asset.  If we achieve profitability for the 2005 fiscal year, any tax provision recorded as a result of these pre-tax profits will be offset by a reversal of the tax valuation allowances previously recorded, which reversal would be for the same amount as the provision.  This will result in zero net tax expense for all periods until the valuation allowance is fully reversed.

Nine Months Ended September 30, 2005 Compared With Nine Months Ended September 30, 2004

Overview

The trends
experienced year-to-date are similar to those noted above for the third
quarter.  Year-to-date results reflect revenue growth in two of our
three divisions. In the Test Preparation Services division, we experienced a
significant increase in SAT enrollment which resulted in growth in its retail,
tutoring and institutional revenue. K-12 Services division revenue increased
primarily as a result of new contracts, the introduction of SideStreets and
price increases on renewals. In the Admissions Services division, revenue
decreased. While revenue from our marketing services products and counseling products
increased, we experienced a larger decline in revenue from technology
subscription services on a year-to-date basis.  We are continuing our
efforts to transform this division from a technology subscription business to a
marketing services business that monetizes our reach into the high school and
college populations.

16



Revenue

Our total revenue increased 14%, or $12.2 million, from $86.0 million in 2004 to $98.2 million in 2005.

Test Preparation Services revenue increased 15%, or $9.1 million, from $61.2 million in 2004 to $70.3 million in 2005, and was primarily comprised of an increase of approximately $8.4 million in revenue from our company-owned operations. The increased revenue from company-owned operations was primarily a result of an increase of approximately $7.3 million in course and tutoring revenue that reflected higher SAT, LSAT and MCAT enrollments, and an increase of approximately $1.1 million in SES sales to schools.

K-12 Services
revenue increased 21%, or $3.6 million, from $16.7 million in 2004 to $20.3
million in 2005.  As with the quarter, this increase is affected by timing
of revenue recognition for certain prior year contracts related to professional
development and assessment services. Excluding these timing differences, revenue
for the nine-month period is 8% higher, when compared to the same period in
2004, primarily as a result of new contracts, the introduction of SideStreets
and price increases on renewals.

Admissions
Services revenue decreased 6%, or $0.5 million, from $8.1 million in 2004 to
$7.6 million in 2005. This decrease resulted primarily from lower application
and technology subscription fees that decreased by approximately $1.6 million,
primarily as a result of customer non-renewals and customer credits.  This decrease was
partially offset by increases in marketing services revenue of approximately
$1.0 million resulting primarily from our lead generation contracts.

Cost of Revenue

Our total cost of revenue increased 16%, or $5.0 million, from $30.1 million in 2004 to $35.1 million in 2005.

Test
Preparation Services cost of revenue increased 17%, or $3.1 million, from $18.4
million in 2004 to $21.5 million in 2005,  primarily due to enrollment increases, which caused variable costs such as
teacher pay, site rent and course materials to increase proportionately.  Gross margins
were approximately the same in both periods.

K-12 Services
cost of revenue increased 10%, or  $1.0 million, from $9.4 million in 2004
to $10.4 million in 2005.  This increase is primarily attributable
to an increase in costs related to the servicing of customer
contracts.  The increase in gross margin from 44% in 2004 to
49% in 2005 is affected by the timing impact of both revenue and cost
recognition related to professional development and assessment contracts.
Excluding this timing impact, gross margin declined from 50.4% for the nine months ended September 30, 2004
to 47.9% for the nine months ended September 30, 2005.

Admissions
Services cost of revenue increased 39%, or $0.9 million, from $2.3 million in
2004 to $3.2 million in 2005, primarily due to higher customer support costs and
costs associated with our counseling contracts in Texas.  Higher
customer support costs along with several customer credits decreased gross margins
from 71% in the nine-month period ending September 30, 2004 to 58% in the
current nine-month period.

Selling, General and Administrative Expenses

SG&A
expenses increased 10%, or $5.8 million year-to-date from $56.8 million
in 2004 to $62.6 million in 2005.  Approximately $3.5 million of this
increase relates to professional fees primarily associated with Sarbanes-Oxley
compliance requirements and legal fees related to the franchise renewal
process.  In addition, corporate salaries and related expenses increased by
approximately $2.6 million, primarily in the Information Technology, Accounting
and Legal departments.

17



Income Taxes

The estimated effective tax rate used in 2005 was approximately 40%, as compared to 42% during the first nine months of 2004.  However, during the first nine months of 2005 we continued to record a valuation allowance against the increase in our deferred tax asset.  If we achieve profitability for the 2005 fiscal year, any tax provision recorded as a result of these pre-tax profits will be offset by a reversal of the tax valuation allowances previously recorded, which reversal would be for the same amount as the provision.  This will result in zero net tax expense for all periods until the valuation allowance is fully reversed.

Liquidity and Capital Resources

Our current
primary sources of liquidity are cash and cash equivalents on hand and
collections from customers.  At September 30, 2005, we had approximately
$7.5 million of cash and cash equivalents.  The $11.7 million decrease in
cash from the December 31, 2004 balance is primarily attributed to capital
expenditures and payments against our debt obligations that more than offset the
$0.5 million cash increase provided by operating activities. Our Test
Preparation Services division has historically generated, and continues to
generate, the largest portion of our cash flow from its retail classroom and
tutoring courses.  These customers usually pay us in advance or
contemporaneously with the services we provide, thereby supporting our
short-term liquidity needs.  Increasingly, however, across all of our
divisions, we are generating a greater percentage of our cash from contracts
with institutions such as the schools and school districts serviced by our K-12
Services division and the post-secondary institutions serviced by our Admissions Services
division, all of which pay us in arrears.  Typical payment performance for
these institutional customers, once invoiced, ranges from 60 to 90 days. 
Additionally, the long contract approval cycles and/or delays in purchase order
generation with some of our contracts with large institutions or school
districts can contribute to the level of variability in the timing of our cash
receipts.

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in operating assets and liabilities.  During the first nine months of 2005, cash provided by operating activities was $0.5 million, compared to $6.0 million for the first nine months of 2004, a decrease of $5.5 million. The decrease is attributed to an increase in net income adjusted for non cash items of $1.5 million and the year-over-year reduction in accounts payable and accrued expenses of $2.9 million which was more than offset by the collection of $2.4 million less in receivables in 2005 as compared to 2004, an increase in other assets of $1.9 million, primarily related to our SideStreets inventory, and a decrease in deferred income of approximately $5.4 million.

During the first nine months of 2005, we used $8.2 million in cash for investing activities as compared to $6.0 million used during the first nine months of 2004.  The increase of $3.7 million in capital expenditures is due primarily to software purchased and increased development projects including our investments in SideStreets content.  In connection with the renovation of one of our New York City locations, our landlord contributed approximately $0.9 million to help defray our construction cost outlays during 2005. In addition, during the nine months ended September 30, 2004, we invested approximately $0.6 million and incurred approximately $0.2 million of acquisition costs for an approximate 25% equity interest in Oasis Childrens Services LLC, a privately held company.

Financing cash flows consist primarily of transactions related to our debt and equity structure. During the first nine months of 2005, we repaid approximately $2.0 million of the debt we had borrowed under a bank credit facility during the first nine months of 2004, and we repaid approximately $0.3 million less in other debt in 2005 than in 2004 which was almost offset by an increase in dividend payments on our Series B-1 Preferred Stock of $0.2 million. In 2004 we received approximately $9.9 million, net of issuance costs, from the sale of Series B-1 Preferred Stock and received approximately $0.4 million from the exercise of stock options.

We believe
that our cash balances, together with cash generated from operations, should be
sufficient to meet our normal operating requirements for at least the next 12
months. Additionally, we are evaluating several options to augment our cash flow
in the short term, including obtaining a new credit facility.  Our future
capital requirements will depend on a number of factors, including market
acceptance of our products and services and the resources we devote to
developing, marketing, selling and supporting these products and services.

Impact of Inflation

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

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Seasonality in Results of Operations

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

Recent Developments

During the
third quarter of 2005, we completed the franchise renewal process with five of
the seven domestic franchisees that were in our franchise system as of December
31, 2004.  The renewal agreements took effect immediately and
superseded the remaining term of the franchisees prior contracts.  Of
the two remaining franchisees, we terminated one franchisee for default in July
2005.  We initiated an arbitration proceeding to confirm the
validity of the termination and to recover amounts owed and seek damages from
the former franchisee.  We opened a company-owned office to service that
franchisees former territory.  We are currently in litigation with
the remaining franchisee (which holds ten separate franchises, six of which
expire at the end of 2005) regarding the contract terms to which the franchisee
is entitled upon renewal.  However, the franchisee has signed renewals
for the six expiring agreements under a reservation of rights pending the
outcome of the litigation, and has informed the Court of its intention to renew
regardless of the outcome of the litigation.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Included in
our cash and cash equivalents are short-term money market funds.  The fair
value of these money market funds would not be significantly impacted by either
a 100 basis point increase or decrease in interest rates due primarily to the
short-term nature of the portfolio.  Our Series B-1 Preferred Stock
requires the payment of quarterly dividends at the greater of 5% or 1.5% above
90-day LIBOR.  During the three months ended September 30, 2005, we paid
dividends on the Series B-1 Preferred Stock in an aggregate amount of $134,335
at the rate of 5.3%.  A 100 basis point increase in the dividend rate would
have resulted in a $25,000 increase in dividends paid during this period. 
We do not currently hold or issue 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.

Item 4.  Controls and Procedures

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

Scope of the Controls Evaluation

The evaluation of our Disclosure Controls included a review of the controls objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the controls evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the controls can be reported in our Quarterly Reports on Form 10-Q and in our Annual Reports on Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by other personnel in our accounting, finance and legal functions. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls and to modify them on an ongoing basis as necessary.

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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 the Companys Form 10-K/A, dated May 2, 2005 (Form 10-K/A), the Companys management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2004.  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 capitalized software development costs, the financial statement close process and revenue recognition.  During the period covered by this Quarterly Report, we continued to implement the extensive remediation described in more detail below. While our management believes that these material weaknesses are in the process of being remediated, we have not conducted enough testing to be certain of the results of these remediation efforts.  Accordingly,
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.  Notwithstanding this conclusion, the Companys preparation of its financial statements for the period covered by this report, and its evaluation of Disclosure Controls as of the end of such period, were conducted with particular attention to the material weaknesses identified by management in the Form 10-K/A and the remediation activities discussed below, and management continued to retain third party consultants and hire additional accounting personnel during the period to provide certain compensating controls and other assistance in areas where material weaknesses were identified. 
Accordingly, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects our financial condition, results of operations and cash flows as of and for the periods presented.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the period covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for the following remediation:

| | 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 are in the process of   implementing a tier one accounting and financial reporting software system to   further automate and integrate and thereby improve the Companys financial   reporting processes and systems by removing unnecessary manual interfaces and   to facilitate the revenue recognition of multiple element contracts.    This system is expected to be fully implemented in 2006.
|  |                                                                                                                                                                                                                                                                                                                                                                                                         
| | We are in the process of   establishing written policies and procedures along with control matrices to   ensure that account reconciliation and amounts recorded, as well as the   review of these areas, are substantiated by detailed and contemporaneous   documentary support and that reconciling items are investigated, resolved and   recorded in a timely manner.                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                         
| | We have initiated 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 continue to work with a consulting firm to assist us with the continuing improvement of our internal control processes.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

On September 10, 2003, CollegeNet, Inc. filed suit in Federal District Court in Oregon, alleging that The Princeton Review infringed a patent owned by CollegeNet related to the processing of on-line applications.  CollegeNet never served The Princeton Review and no discovery was ever conducted.  However, based on adverse rulings in other lawsuits concerning the same patent, CollegeNet dismissed the 2003 case without prejudice on January 9, 2004 against The Princeton Review.  Thereafter, on August 2, 2005, the Federal Circuit Court of Appeals issued an opinion favorable to CollegeNet from its appeal from the adverse rulings.  Then on August 3, 2005, CollegeNet filed suit again against The Princeton Review alleging an infringement of the same CollegeNet patent related to processing on-line applications.  At this time The Princeton Review has not been served and accordingly it has no
answer date and no discovery has been conducted. CollegeNet seeks injunctive relief and unspecified monetary damages. Because this potential proceeding is at a very preliminary stage, we are unable to predict its outcome with any degree of certainty. However, The Princeton Review believes that it has meritorious defenses to CollegeNets claims of infringement and intends to vigorously defend. In a related matter, on September 1, 2005, The Princeton Review filed a request with the United Stated Patent and Trademark Office (PTO) for ex parte reexamination of the CollegeNet patent.  On October 31, 2005, the PTO granted The Princeton Reviews request and ordered reexamination of all claims of the CollegeNet patent.

On August 29, 2005, Test Services, Inc. (TSI), a franchisee of The Princeton Review under ten separate franchise agreements, six of which expire on December 31, 2005, filed suit against us in the United States District Court for the District of Colorado. In this proceeding, TSI alleges that the terms we have offered for renewal of the franchise do not comply with TSIs contractual renewal rights, seeks declaratory relief and specific performance and unspecified damages as to alleged breaches of the renewal provisions, and also alleges a violation of the Michigan franchise law. Notwithstanding its pursuit of this action, TSIs entered into the tendered renewal agreements under a reservation of rights. TSIs complaint also includes claims that we breached our existing franchise agreements with TSI that are unrelated to the core renewal dispute. TSI seeks damages for these
alleged breaches in unspecified amounts, except that damages in excess of $500,000 are alleged in connection with one of the claims. A trial on the merits of the franchise renewal issues is scheduled to begin on November 14, 2005.  With respect to the remaining claims, the Court has set a trial date in January 2007.

We do not believe that the resolution of the dispute regarding the terms upon which TSI may renew its franchise agreements with us will materially affect our financial condition or results of operations.  With respect to TSIs claims for damages for breach of the existing franchise agreements that are unrelated to this issue, the proceeding is at a preliminary stage and we are unable to predict its outcome with any degree of certainty.  However, The Princeton Review believes that it has meritorious defenses to these claims and intends to vigorously defend.

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

Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Not applicable.

Item 3.  Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5.  Other Information

Not applicable

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Item 6.  Exhibits

| | Exhibit Number |  | Description                                                                                                                
| | -------------- |  | ---------------------------------------------------------------------------------------------------------------------------
| |                |  |                                                                                                                            
| | 10.1           |  | Amendment to Employment   Agreement, dated September 12, 2005, between The Princeton Review, Inc. and   Stephen Melvin     
| |                |  |                                                                                                                            
| | 10.2           |  | Employment Agreement,   dated September 9, 2005, between The Princeton Review, Inc. and Andrew   Bonanni                   
| |                |  |                                                                                                                            
| | 31.1           |  | Certification Pursuant to   Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act   of 2002.        
| |                |  |                                                                                                                            
| | 31.2           |  | Certification Pursuant to   Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act   of 2002.        
| |                |  |                                                                                                                            
| | 32.1           |  | Certification Pursuant to   18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the   Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

| | THE PRINCETON REVIEW, INC.
| | --------------------------
| |                           
| |                           
| | By:                       
| |                           
| |                           
| |                           
| |                           
| |                           
| |                           

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