---

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 March 31, 2004

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
|----- | ----

The Company had 27,422,269 shares of $0.01 par value common stock outstanding at May 3, 2004.

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TABLE OF CONTENTS

|PART I.  FINANCIAL INFORMATION |                                                                                                  
|------------------------------ | -------------------------------------------------------------------------------------------------
|Item 1.                        | Consolidated Financial Statements (unaudited)                                                    
|                               | Consolidated Balance Sheets as of March 31, 2004 and   December 31, 2003                         
|                               | Consolidated Statements of Operations for the Three   Month Periods ended March 31, 2004 and 2003
|                               | Consolidated Statements of Cash Flows for the Three   Months ended March 31, 2004 and 2003       
|                               | Notes to Unaudited Consolidated Financial Statements                                             
|Item 2.                        | Managements Discussion and Analysis of Financial Condition   and Results of Operations          
|Item 3.                        | Quantitative and Qualitative Disclosures about   Market Risk                                     
|Item 4.                        | Controls and Procedures                                                                          
|PART II.  OTHER INFORMATION    |                                                                                                  
|Item 1.                        | Legal Proceedings                                                                                
|Item 2.                        | Changes in Securities, Use of Proceeds and Issuer   Purchases of Equity Securities               
|Item 3.                        | Defaults Upon Senior Securities                                                                  
|Item 4.                        | Submission of Matters to a Vote of Security Holders                                              
|Item 5.                        | Other Information                                                                                
|Item 6.                        | Exhibits and Reports on Form 8-K                                                                 
|SIGNATURES                     | 13                                                                                               



PART I.  FINANCIAL INFORMATION Item 1.  Consolidated Financial Statements

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

|                                                                                                                                                                        |  | March 31,    2004 |         | December   31,    2003 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ---------------------- | -
|                                                                                                                                                                        |  |                   |         |                        |  
|                                                                                                                                                                        |  | (unaudited)       |         |                        |  
|ASSETS                                                                                                                                                                  |  |                   |         |                        |  
|Current assets:                                                                                                                                                         |  |                   |         |                        |  
|Cash and cash equivalents                                                                                                                                               |  | $                 | 7,932   |                        | $
|Accounts receivable, net                                                                                                                                                |  |                   | 24,456  |                        |  
|Other receivables                                                                                                                                                       |  |                   | 1,142   |                        |  
|Prepaid expenses                                                                                                                                                        |  |                   | 1,793   |                        |  
|Other assets                                                                                                                                                            |  |                   | 2,904   |                        |  
|                                                                                                                                                                        |  |                   |         |                        |  
|Total current assets                                                                                                                                                    |  |                   | 38,227  |                        |  
|Furniture,   fixtures, equipment and software development, net                                                                                                          |  |                   | 11,933  |                        |  
|Franchise   costs, net                                                                                                                                                  |  |                   | 98      |                        |  
|Publishing   rights, net                                                                                                                                                |  |                   | 1,132   |                        |  
|Deferred   income taxes                                                                                                                                                 |  |                   | 16,311  |                        |  
|Investment   in affiliates                                                                                                                                              |  |                   | 424     |                        |  
|Territorial   marketing rights                                                                                                                                          |  |                   | 1,481   |                        |  
|Goodwill                                                                                                                                                                |  |                   | 39,580  |                        |  
|Other   assets                                                                                                                                                          |  |                   | 11,529  |                        |  
|                                                                                                                                                                        |  |                   |         |                        |  
|Total assets                                                                                                                                                            |  | $                 | 120,715 |                        | $
|                                                                                                                                                                        |  |                   |         |                        |  
|LIABILITIES AND STOCKHOLDERS   EQUITY                                                                                                                                  |  |                   |         |                        |  
|Current liabilities:                                                                                                                                                    |  |                   |         |                        |  
|Accounts payable                                                                                                                                                        |  | $                 | 5,736   |                        | $
|Accrued expenses                                                                                                                                                        |  |                   | 7,397   |                        |  
|Current maturities of long-term debt                                                                                                                                    |  |                   | 1,304   |                        |  
|Deferred income                                                                                                                                                         |  |                   | 15,209  |                        |  
|Book advances                                                                                                                                                           |  |                   | 56      |                        |  
|                                                                                                                                                                        |  |                   |         |                        |  
|Total current liabilities                                                                                                                                               |  |                   | 29,702  |                        |  
|Deferred   rent                                                                                                                                                         |  |                   | 1,096   |                        |  
|Long-term debt                                                                                                                                                          |  |                   | 6,149   |                        |  
|Stockholders equity:                                                                                                                                                   |  |                   |         |                        |  
|Preferred stock, $.01 par value; 5,000,000 shares   authorized; none issued and outstanding at March 31, 2004 and December 31,   2003                                   |  |                   |        |                        |  
|Common stock, $.01 par value; 100,000,000 shares   authorized; 27,391,453 and 27,385,273 issued and outstanding at March 31,   2004 and December 31, 2003, respectively |  |                   | 274     |                        |  
|Additional paid-in capital                                                                                                                                              |  |                   | 114,932 |                        |  
|Accumulated deficit                                                                                                                                                     |  |                   | (30,966 | )                      |  
|Accumulated other comprehensive loss                                                                                                                                    |  |                   | (472    | )                      |  
|                                                                                                                                                                        |  |                   |         |                        |  
|Total stockholders equity                                                                                                                                              |  |                   | 83,768  |                        |  
|                                                                                                                                                                        |  |                   |         |                        |  
|Total liabilities and stockholders equity                                                                                                                              |  | $                 | 120,715 |                        | $
|                                                                                                                                                                        |  |                   |         |                        |  

See accompanying notes.

2



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

|                                                               |  | Three   Months Ended March 31, |       
|-------------------------------------------------------------- |  | ------------------------------ | ------
|                                                               |  |                                |       
|                                                               |  | 2004                           |       
|                                                               |  |                                |       
|                                                               |  | (unaudited)                    |       
|Revenue                                                        |  |                                |       
|Test Preparation Services                                      |  | $                              | 18,830
|K-12 Services                                                  |  |                                | 6,283 
|Admissions Services                                            |  |                                | 2,834 
|                                                               |  |                                |       
|Total revenue                                                  |  |                                | 27,947
|                                                               |  |                                |       
|Cost of revenue                                                |  |                                |       
|Test Preparation Services                                      |  |                                | 5,839 
|K-12 Services                                                  |  |                                | 3,664 
|Admissions Services                                            |  |                                | 596   
|                                                               |  |                                |       
|Total cost of revenue                                          |  |                                | 10,099
|                                                               |  |                                |       
|Gross profit                                                   |  |                                | 17,848
|                                                               |  |                                |       
|Operating expenses                                             |  |                                | 18,984
|                                                               |  |                                |       
|Loss   from operations                                         |  |                                | (1,136
|                                                               |  |                                |       
|Interest   expense                                             |  |                                | (115  
|Other   income                                                 |  |                                | 34    
|                                                               |  |                                |       
|Loss   before benefit for income taxes                         |  |                                | (1,217
|Benefit   for income taxes                                     |  |                                | 511   
|                                                               |  |                                |       
|Net   loss                                                     |  | $                              | (706  
|                                                               |  |                                |       
|Net   loss per share - basic and diluted                       |  | $                              | (0.03 
|                                                               |  |                                |       
|Weighted   average shares used in computing net loss per share |  |                                | 27,391
|                                                               |  |                                |       

See accompanying notes.

3



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

|                                                                              |  | Three   Months Ended March 31, |       
|----------------------------------------------------------------------------- |  | ------------------------------ | ------
|                                                                              |  |                                |       
|                                                                              |  | 2004                           |       
|                                                                              |  |                                |       
|Cash flows from operating activities:                                         |  |                                |       
|Net   loss                                                                    |  | $                              | (706  
|Adjustments   to reconcile net loss to net cash used in operating activities: |  |                                |       
|Depreciation                                                                  |  |                                | 355   
|Amortization                                                                  |  |                                | 1,222 
|Bad debt expense                                                              |  |                                | 11    
|Gain on disposal of fixed assets                                              |  |                                | 13    
|Deferred income taxes                                                         |  |                                | (511  
|Deferred rent                                                                 |  |                                | (81   
|Stock based compensation                                                      |  |                                | 34    
|Net change in operating assets and liabilities:                               |  |                                |       
|Accounts receivable                                                           |  |                                | (4,251
|Other receivables                                                             |  |                                | (96   
|Prepaid expenses                                                              |  |                                | 234   
|Other assets                                                                  |  |                                | 367   
|Accounts payable                                                              |  |                                | (4,839
|Accrued expenses                                                              |  |                                | 1,761 
|Deferred income                                                               |  |                                | 2,330 
|Book advances                                                                 |  |                                | 8     
|                                                                              |  |                                |       
|Net   cash used in operating activities                                       |  |                                | (4,149
|                                                                              |  |                                |       
|Cash flows from investing activities:                                         |  |                                |       
|Purchase   of furniture, fixtures, equipment and software development         |  |                                | (724  
|Purchase   of franchises and other businesses, net of cash acquired           |  |                                |      
|Notes   receivable                                                            |  |                                |      
|Additions   to capitalized development costs and other assets                 |  |                                | (952  
|                                                                              |  |                                |       
|Net   cash used in investing activities                                       |  |                                | (1,676
|                                                                              |  |                                |       
|Cash flows from financing activities:                                         |  |                                |       
|Capital   lease payments                                                      |  |                                | (102  
|Notes   payable related to acquisitions                                       |  |                                | (147  
|Proceeds   from exercise of options                                           |  |                                | 69    
|                                                                              |  |                                |       
|Net   cash used in financing activities                                       |  |                                | (180  
|                                                                              |  |                                |       
|Net   decrease in cash and cash equivalents                                   |  |                                | (6,005
|Cash   and cash equivalents, beginning of period                              |  |                                | 13,937
|                                                                              |  |                                |       
|Cash   and cash equivalents, end of period                                    |  | $                              | 7,932 
|                                                                              |  |                                |       
|Supplemental   disclosure of non-cash investing activities:                   |  |                                |       
|Equipment acquired through capital leases                                     |  | $                              | 566   
|                                                                              |  |                                |       

See accompanying notes.

4



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) March 31, 2004

1. Basis of Presentation

The accompanying unaudited interim consolidated financial statements of The Princeton Review, Inc. (the Company) include the accounts of the Company and its wholly-owned subsidiaries, Princeton Review Products, LLC, Princeton Review Management, LLC, Princeton Review Publishing, LLC, Princeton Review Operations, LLC, Princeton Review Carolinas, LLC and The Princeton Review of Canada Inc., as well as the Companys national advertising fund. This financial information has been prepared in accordance with generally accepted accounting principles for interim financial information and reflects 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, 2003 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 period ended March 31, 2004 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Products and Services

The following table summarizes the Companys revenue and cost of revenue by product type for the three months ended March 31, 2004 and 2003:

|                      |  | Three   Months Ended March 31, |       
|--------------------- |  | ------------------------------ | ------
|                      |  |                                |       
|                      |  | 2004                           |       
|                      |  |                                |       
|                      |  | (in   thousands)               |       
|Revenue               |  |                                |       
|Services              |  | $                              | 24,786
|Products              |  |                                | 1,720 
|Other                 |  |                                | 1,441 
|                      |  |                                |       
|Total revenue         |  | $                              | 27,947
|                      |  |                                |       
|Cost of   Revenue     |  |                                |       
|Services              |  | $                              | 8,244 
|Products              |  |                                | 1,693 
|Other                 |  |                                | 162   
|                      |  |                                |       
|Total cost of revenue |  | $                              | 10,099
|                      |  |                                |       

Services revenue includes course fees, professional development, subscription fees and marketing services fees. Products revenue includes sales of workbooks, test booklets and printed tests as well as sales of course materials to franchisees.  Other revenue includes royalties, and marketing fees received from publishers.

5



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 stock on the date of grant.

Had the Company accounted for its employee stock options under the fair-value method of that statement, the Companys net loss and net loss per share would have been as follows:

|                                                                                                                                        |  | Three   Months Ended March 31,        |      
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | -----
|                                                                                                                                        |  |                                       |      
|                                                                                                                                        |  | 2004                                  |      
|                                                                                                                                        |  |                                       |      
|                                                                                                                                        |  | (in thousands, except per share data) |      
|Net loss, as reported                                                                                                                   |  | $                                     | (706 
|Total stock-based   employee compensation expense determined under fair-value based method for   all awards, net of related tax effects |  | $                                     | (228 
|Pro forma net loss                                                                                                                      |  | $                                     | (934 
|Basic and diluted net loss per share, as reported                                                                                       |  | $                                     | (0.03
|Basic and diluted net loss per share, pro forma                                                                                         |  | $                                     | (0.03

2. 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, office facilities expenses, human resources expenses and other shared services which are allocated based on consumption. Corporate consists of unallocated administrative support functions. The Company operates its business through three divisions. 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.

6



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 of 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 as an indicator of the Companys operating
performance, nor as an alternative to any other measure of performance calculated in conformity with GAAP.

|                                                               |  | Three   Months Ended March 31, 2004 |       
|-------------------------------------------------------------- |  | ----------------------------------- | ------
|                                                               |  |                                     |       
|                                                               |  | (in   thousands)                    |       
|                                                               |  | Test   Preparation   Services       |       
|                                                               |  |                                     |       
|Revenue                                                        |  | $                                   | 18,830
|Operating   Expenses (including depreciation and amortization) |  |                                     | 11,338
|Segment   Assets                                               |  |                                     | 29,527
|Segment   operating income (loss)                              |  |                                     | 1,653 
|Depreciation   & Amortization                                  |  |                                     | 378   
|                                                               |  |                                     |       
|Segment   EBITDA                                               |  | $                                   | 2,031 
|                                                               |  |                                     |       

|                                                               |  | Three   Months Ended March 31, 2003 |       
|-------------------------------------------------------------- |  | ----------------------------------- | ------
|                                                               |  |                                     |       
|                                                               |  | (in   thousands)                    |       
|                                                               |  | Test   Preparation   Services       |       
|                                                               |  |                                     |       
|Revenue                                                        |  | $                                   | 16,030
|Operating   Expenses (including depreciation and amortization) |  |                                     | 9,975 
|Segment   Assets                                               |  |                                     | 32,191
|Segment   operating income (loss)                              |  |                                     | 1,554 
|Depreciation   & Amortization                                  |  |                                     | 384   
|Other                                                          |  |                                     |      
|                                                               |  |                                     |       
|Segment   EBITDA                                               |  | $                                   | 1,938 
|                                                               |  |                                     |       

|                                             |  | Three Months Ended March 31, |        |      |   |        |   |  |  |  |  | 
|-------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------ | - |  |  |  |  | 
|                                             |  |                              |        |      |   |        |   |  |  |  |  | 
|                                             |  | 2004                         |        | 2003 |   |        |   |  |  |  |  | 
|                                             |  |                              |        |      |   |        |   |  |  |  |  | 
|                                             |  | (in thousands)               |        |      |   |        |   |  |  |  |  | 
|Reconciliation of operating loss to net loss |  |                              |        |      |   |        |   |  |  |  |  | 
|Total   loss for reportable segments         |  | $                            | (1,136 | )    | $ | (1,977 | ) |  |  |  |  | 
|Unallocated   amounts:                       |  |                              |        |      |   |        |   |  |  |  |  | 
|Interest expense                             |  |                              | (115   | )    |   | (144   | ) |  |  |  |  | 
|Other income                                 |  |                              | 34     |      |   | 47     |   |  |  |  |  | 
|Benefit for income taxes                     |  |                              | 511    |      |   | 871    |   |  |  |  |  | 
|                                             |  |                              |        |      |   |        |   |  |  |  |  | 
|Net   loss                                   |  | $                            | (706   | )    | $ | (1,203 | ) |  |  |  |  | 
|                                             |  |                              |        |      |   |        |   |  |  |  |  | 

7



3. Loss Per Share

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

4. Comprehensive Loss

The components of comprehensive loss for the three-month periods ended March 31, 2004 and 2003 are as follows:

|                                                                                                            |  | 2004           |      | 2003 |  
|----------------------------------------------------------------------------------------------------------- |  | -------------- | ---- | ---- | -
|                                                                                                            |  |                |      |      |  
|                                                                                                            |  | (in thousands) |     
|Net loss                                                                                                    |  | $              | (706 | )    | $
|Foreign currency translation adjustment                                                                     |  |                | (113 | )    |  
|Unrealized gain (loss) on available-for-sale   securities, net of tax benefits of $12 and $11, respectively |  |                | 17   |      |  
|                                                                                                            |  |                |      |      |  
|Total comprehensive loss                                                                                    |  | $              | (802 | )    | $
|                                                                                                            |  |                |      |      |  

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, our ability to increase revenue from our newer products and services and the other factors described under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.  We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

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, 2003,

8



as well as in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Form 10-Q.

Results of Operations

Three Months Ended March 31, 2004 Compared With Three Months Ended March 31, 2003

Revenue

Our total revenue increased from $21.7 million in 2003 to $27.9 million in 2004, representing a 29% increase.

Test Preparation Services revenue increased from $16.0 million in 2003 to $18.8 million in 2004, representing an 18% increase, comprised primarily of an increase of approximately $2.9 million in revenue from our company-owned operations, which was partially offset by a decrease in royalties and other fees received from our independent franchises of approximately $111,000 and a decrease in the sales of course materials to our franchisees of approximately $142,000.  The increased revenue from company-owned operations resulted from an increase of approximately $2.1 million attributable to enrollment increases, approximately $202,000 attributable to the operations acquired from our former franchisee, Princeton Review of North Carolina, Inc., and approximately $817,000 in supplemental education services (SES) sales to schools.

K-12 Services revenue increased from $3.0 million in 2003 to $6.3 million in 2004 representing a 110% increase. This increase resulted primarily from an increase of approximately $3.5 million in revenue from schools for printed test materials, professional development and training and Homeroom subscriptions, which was partially offset by a decrease in revenue from McGraw-Hill.

Admissions Services revenue increased from $2.7 million in 2003 to $2.8 million in 2004, representing a 6% increase. This increase resulted primarily from increased web-based subscription fees from post secondary institutions.

Cost of Revenue

Our total cost of revenue increased from $6.6 million in 2003 to $10.1 million in 2004, representing a 53% increase.

Test Preparation Services cost of revenue increased from $4.5 million in 2003 to $5.8 million in 2004, representing a 30% increase largely due to higher teacher pay expenses of approximately $893,000, higher cost of course materials of approximately $252,000, increased classroom rental expense of approximately $184,000 and costs of approximately $80,000 associated with the operations acquired from Princeton Review of North Carolina, Inc.

K-12 Services cost of revenue increased from $1.2 million in 2003 to $3.7 million in 2004, representing a 202% increase. This increase is primarily attributable to an increase in costs incurred to service contracts with school-based customers. The increase in cost of revenue was significantly higher than the increase in revenue in this division due primarily to the product mix during the quarter, which was more heavily weighted towards lower margin professional development services.

9



Admissions Services cost of revenue decreased from $908,000 in 2003 to $596,000 in 2004, representing a 34% decrease, primarily due to lower sales commissions and customer support costs.

Operating Expenses

Selling, general and administrative expenses increased from $17.1 million in 2003 to $19.0 million in 2004, representing an 11% increase.  This increase resulted from the following:

| |  | an increase of approximately $974,000 attributable   primarily to personnel related costs, including office rent and expenses,   travel and entertainment, employee benefits and recruiting fees;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                  
| |  | an increase of approximately $480,000 in web site   technology and development expenses; and                                                                                                     
| |   |                                                                                                                                                                                                  
| |  | an increase of approximately $459,000 in advertising   and marketing expenses.                                                                                                                   

Liquidity and Capital Resources

Net cash used in operating activities during the three months ended March 31, 2004 was $4.1 million resulting primarily from the increase in accounts receivable attributable to the timing of payments on several large K-12 contracts with school districts. Net cash used in investing activities during the three months ended March 31, 2004 was $1.7 million, resulting primarily from the purchase of fixed assets and investment in software development projects.  Net cash used in financing activities during the three months ended March 31, 2004 was $180,000, resulting primarily from payments made with respect to outstanding loans and equipment leases.

At March 31, 2004, we had approximately $7.9 million of cash and cash equivalents.  We anticipate that our cash balances, together with cash generated from operations, will be sufficient to meet our normal operating requirements for at least the next 12 months.  We are also seeking to obtain a new credit facility as a source of additional liquidity.

Impact of Inflation

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

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.  The electronic application revenue recorded in our Admissions Services division is highest in the first and fourth quarters, corresponding with the busiest times of year for submission of applications to academic institutions. Our K-12 Services division may also experience seasonal fluctuations in revenue, but we are not yet able to predict the impact of seasonal factors on this business with any degree of accuracy.

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Our portfolio of marketable securities includes primarily short-term money market funds.  The fair value of our portfolio of marketable securities 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 outstanding long-term debt bears interest at fixed rates.  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

As of the end of the period covered by this report on form 10-Q, we performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of such period.  There has not been any significant change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the first fiscal quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, we are involved in legal proceedings incidental to the conduct of our business.  We are not currently a party to any legal proceeding which, in the opinion of our management, 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.

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

| | Exhibit Number |  | Description                                                                                                              
| | -------------- |  | -------------------------------------------------------------------------------------------------------------------------
| |                |  |                                                                                                                          
| | 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.

| | (b) Reports on Form 8-K                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                  
| | A current report on Form 8-K was furnished to the   SEC on March 3, 2004 in connection with The Princeton Reviews public   announcement of financial results for the quarter and year ended December 31,   2003.

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SIGNATURES

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

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

May 7, 2004

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