##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

For the quarterly period ended September 30, 2009

OR



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

For the transition period from              to

Commission file number 000-32469





THE PRINCETON REVIEW, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-3727603                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                           |  |           
|------------------------------------------ |  | ----------
|111 Speen Street Framingham, Massachusetts |  | 01701     
|(Address of principal executive offices)   |  | (Zip Code)

Registrants telephone number, including area code (508) 663-5050





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



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

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

The registrant had 33,727,272 shares of $0.01 par value common stock outstanding at November 3, 2009









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##### Table of Contents

TABLE OF CONTENTS



|           |  |                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                       |  | Page
|PART I.    |  | FINANCIAL INFORMATION (UNAUDITED):                                                    |  | 3   
|           |  |                                                                                      
|Item 1.    |  | Consolidated Financial Statements                                                     |  | 3   
|           |  |                                                                                      
|           |  | Consolidated Balance Sheets                                                           |  | 3   
|           |  |                                                                                      
|           |  | Consolidated Statements of Operations                                                 |  | 4   
|           |  |                                                                                      
|           |  | Consolidated Statement of Stockholders Equity                                        |  | 5   
|           |  |                                                                                      
|           |  | Consolidated Statements of Cash Flows                                                 |  | 6   
|           |  |                                                                                      
|           |  | Notes to Consolidated Financial Statements                                            |  | 7   
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 22  
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 22  
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  | 24  
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 24  
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 24  
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 24  
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 25  
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 25  
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 25  
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 25  
|           | 
|SIGNATURES |  | 26                                                                                   



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION (UNAUDITED)



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

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share data)



|                                                                                                                                    |  |                   |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                    |  | September 30,2009 |          |   | December 31,2008 |  
|ASSETS                                                                                                                              |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                     |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                           |  | $                 | 10,237   |   |                  | $ | 8,853    |  
|Restricted cash and cash equivalents                                                                                                |  |                   | 616      |   |                  |   | 615      |  
|Accounts receivable, net of allowance of $830 and $1,105, respectively                                                              |  |                   | 10,934   |   |                  |   | 17,367   |  
|Other receivables, including $574 in 2009 and $2,363 in 2008 from related parties                                                   |  |                   | 867      |   |                  |   | 2,689    |  
|Inventory                                                                                                                           |  |                   | 2,096    |   |                  |   | 1,946    |  
|Prepaid expenses                                                                                                                    |  |                   | 1,197    |   |                  |   | 1,287    |  
|Other current assets                                                                                                                |  |                   | 2,518    |   |                  |   | 2,616    |  
|Assets held for sale                                                                                                                |  |                   |         |   |                  |   | 4,019    |  
|                                                                                                                                    |  |                   |          |   |                  |   |          |  
|                                                                                                                                    |  |                  
|Total current assets                                                                                                                |  |                   | 28,465   |   |                  |   | 39,392   |  
|Furniture, fixtures, equipment and software development, net                                                                        |  |                   | 18,147   |   |                  |   | 14,646   |  
|Goodwill                                                                                                                            |  |                   | 84,584   |   |                  |   | 84,584   |  
|Other intangibles, net                                                                                                              |  |                   | 27,536   |   |                  |   | 28,703   |  
|Other assets                                                                                                                        |  |                   | 1,287    |   |                  |   | 1,466    |  
|Assets held for sale                                                                                                                |  |                   |         |   |                  |   | 5,705    |  
|                                                                                                                                    |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                        |  | $                 | 160,019  |   |                  | $ | 174,496  |  
|                                                                                                                                    |  |                   |          |   |                  |   |          |  
|                                                                                                                                    |  |                  
|LIABILITIES & STOCKHOLDERS EQUITY                                                                                                  |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                                    |  | $                 | 3,297    |   |                  | $ | 1,496    |  
|Accrued expenses                                                                                                                    |  |                   | 8,962    |   |                  |   | 10,971   |  
|Current maturities of long-term debt                                                                                                |  |                   | 3,735    |   |                  |   | 3,283    |  
|Deferred revenue                                                                                                                    |  |                   | 17,541   |   |                  |   | 19,198   |  
|Liabilities held for sale                                                                                                           |  |                   |         |   |                  |   | 4,650    |  
|                                                                                                                                    |  |                   |          |   |                  |   |          |  
|                                                                                                                                    |  |                  
|Total current liabilities                                                                                                           |  |                   | 33,535   |   |                  |   | 39,598   |  
|Deferred rent                                                                                                                       |  |                   | 1,620    |   |                  |   | 1,712    |  
|Long-term debt                                                                                                                      |  |                   | 5,420    |   |                  |   | 17,488   |  
|Other liabilities                                                                                                                   |  |                   | 650      |   |                  |   | 710      |  
|Deferred tax liability                                                                                                              |  |                   | 6,733    |   |                  |   | 5,912    |  
|Series C Preferred Stock, $0.01 par value; 60,000 shares authorized; 60,000 shares issued and outstanding                           |  |                   | 66,313   |   |                  |   | 62,646   |  
|Commitments and contingencies                                                                                                       |  |                   |          |   |                  |   |          |  
|Stockholders equity                                                                                                                |  |                   |          |   |                  |   |          |  
|Common stock, $0.01 par value; 100,000,000 shares authorized; 33,727,272 and 33,729,462 shares issued and outstanding,
respectively |  |                   | 337      |   |                  |   | 337      |  
|Additional paid-in capital                                                                                                          |  |                   | 162,495  |   |                  |   | 164,153  |  
|Accumulated deficit                                                                                                                 |  |                   | (116,539 | ) |                  |   | (117,239 | )
|Accumulated other comprehensive loss                                                                                                |  |                   | (545     | ) |                  |   | (821     | )
|                                                                                                                                    |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                          |  |                   | 45,748   |   |                  |   | 46,430   |  
|                                                                                                                                    |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                          |  | $                 | 160,019  |   |                  | $ | 174,496  |  
|                                                                                                                                    |  |                   |          |   |                  |   |          |  

See accompanying notes to the consolidated financial statements.



3



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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

(In thousands, except per share data)



|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                  |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                  |  | 2009                            |        |   | 2008                           |   |        | 2009 |  |   | 2008    |  
|Revenue                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Test Preparation Services                                         |  | $                               | 34,090 |   |                                | $ | 34,050 |      |  | $ | 86,673  |   |  | $ | 85,472  |  
|SES Services                                                      |  |                                 | 235    |   |                                |   | 699    |      |  |   | 23,947  |   |  |   | 19,071  |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total revenue                                                     |  |                                 | 34,325 |   |                                |   | 34,749 |      |  |   | 110,620 |   |  |   | 104,543 |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                                  |  |                                 |        |  
|Cost of revenue                                                   |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Test Preparation Services                                         |  |                                 | 11,237 |   |                                |   | 10,634 |      |  |   | 30,719  |   |  |   | 28,492  |  
|SES Services                                                      |  |                                 | 486    |   |                                |   | 544    |      |  |   | 12,048  |   |  |   | 8,599   |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total cost of revenue                                             |  |                                 | 11,723 |   |                                |   | 11,178 |      |  |   | 42,767  |   |  |   | 37,091  |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                                      |  |                                 | 22,602 |   |                                |   | 23,571 |      |  |   | 67,853  |   |  |   | 67,452  |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                                  |  |                                 |        |  
|Operating expenses                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Selling, general and administrative                               |  |                                 | 20,518 |   |                                |   | 21,741 |      |  |   | 61,065  |   |  |   | 62,082  |  
|Restructuring                                                     |  |                                 | 1,131  |   |                                |   | 482    |      |  |   | 5,179   |   |  |   | 2,233   |  
|Acquisition expenses                                              |  |                                 | 285    |   |                                |   |       |      |  |   | 285     |   |  |   |        |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                          |  |                                 | 21,934 |   |                                |   | 22,223 |      |  |   | 66,529  |   |  |   | 64,315  |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating income from continuing operations                       |  |                                 | 668    |   |                                |   | 1,348  |      |  |   | 1,324   |   |  |   | 3,137   |  
|Interest expense                                                  |  |                                 | (136   | ) |                                |   | (510   | )    |  |   | (681    | ) |  |   | (583    | )
|Interest income                                                   |  |                                 | 2      |   |                                |   | 110    |      |  |   | 34      |   |  |   | 311     |  
|Other income (expense), net                                       |  |                                 | 1      |   |                                |   |       |      |  |   | 255     |   |  |   | (2      | )
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations before income taxes             |  |                                 | 535    |   |                                |   | 948    |      |  |   | 932     |   |  |   | 2,863   |  
|Provision for income taxes                                        |  |                                 | (391   | ) |                                |   | (499   | )    |  |   | (512    | ) |  |   | (1,162  | )
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations                                 |  |                                 | 144    |   |                                |   | 449    |      |  |   | 420     |   |  |   | 1,701   |  
|Discontinued operations                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss from discontinued operations                                 |  |                                 | (405   | ) |                                |   | (7,764 | )    |  |   | (711    | ) |  |   | (9,357  | )
|Gain (loss) from disposal of discontinued operations              |  |                                 |       |   |                                |   | (240   | )    |  |   | 913     |   |  |   | (240    | )
|Benefit for income taxes                                          |  |                                 | 29     |   |                                |   | 11     |      |  |   | 78      |   |  |   | 40      |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) from discontinued operations                        |  |                                 | (376   | ) |                                |   | (7,993 | )    |  |   | 280     |   |  |   | (9,557  | )
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss)                                                 |  |                                 | (232   | ) |                                |   | (7,544 | )    |  |   | 700     |   |  |   | (7,856  | )
|Dividends and accretion on Preferred Stock                        |  |                                 | (1,252 | ) |                                |   | (1,191 | )    |  |   | (3,667  | ) |  |   | (3,489  | )
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss attributed to common stockholders                            |  | $                               | (1,484 | ) |                                | $ | (8,735 | )    |  | $ | (2,967  | ) |  | $ | (11,345 | )
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Earnings (loss) per share                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted:                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                                   |  | $                               | (0.03  | ) |                                | $ | (0.02  | )    |  | $ | (0.10   | ) |  | $ | (0.06   | )
|Income (loss) from discontinued operations                        |  |                                 | (0.01  | ) |                                |   | (0.24  | )    |  |   | 0.01    |   |  |   | (0.30   | )
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss attributed to common stockholders                            |  | $                               | (0.04  | ) |                                | $ | (0.26  | )    |  | $ | (0.09   | ) |  | $ | (0.35   | )
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares used in computing income (loss) per share |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted                                                 |  |                                 | 33,725 |   |                                |   | 33,498 |      |  |   | 33,728  |   |  |   | 31,973  |  

See accompanying notes to the consolidated financial statements.



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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders Equity

(unaudited)

(in thousands)

For the nine months ended September 30, 2009



|                                                                      |  |                      |   |                          |        |     |                    |   |         |                                   |  |   |                          |   |  |   |      |   |  |   |        |  
|--------------------------------------------------------------------- |  | -------------------- | - | ------------------------ | ------ | --- | ------------------ | - | ------- | --------------------------------- |  | - | ------------------------ | - |  | - | ---- | - |  | - | ------ | -
|                                                                      |  | Stockholders Equity |  
|                                                                      |  | Common Stock         |   | AdditionalPaid-inCapital |        |     | AccumulatedDeficit |   |         | AccumulatedOtherComprehensiveLoss |  |   | TotalStockholdersEquity |  
|                                                                      |  | Shares               |   |                          | Amount |     |                    |   |        
|Balance at December 31, 2008                                          |  | 33,729               |   |                          | $      | 337 |                    | $ | 164,153 |                                   |  | $ | (117,239                 | ) |  | $ | (821 | ) |  | $ | 46,430 |  
|Vesting of restricted stock                                           |  | 25                   |   |                          |        |    |                    |   |        |                                   |  |   |                         |   |  |   |     |   |  |   |       |  
|Stock option exercises                                                |  | 8                    |   |                          |        |     |                    |   | 18      |                                   |  |   |                          |   |  |   |      |   |  |   | 18     |  
|Stock-based compensation                                              |  |                     |   |                          |        |    |                    |   | 2,153   |                                   |  |   |                         |   |  |   |     |   |  |   | 2,153  |  
|Dividends and accretion of issuance costs on Series C Preferred Stock |  |                     |   |                          |        |    |                    |   | (3,667  | )                                 |  |   |                         |   |  |   |     |   |  |   | (3,667 | )
|Shares received in settlement of note receivable                      |  | (35                  | ) |                          |        |    |                    |   | (162    | )                                 |  |   |                         |   |  |   |     |   |  |   | (162   | )
|Comprehensive income                                                  |  |                      |   |                          |        |     |                    |   |         |                                   |  |   |                          |   |  |   |      |   |  |   |        |  
|Net income                                                            |  |                     |   |                          |        |    |                    |   |        |                                   |  |   | 700                      |   |  |   |     |   |  |   | 700    |  
|Foreign currency gain                                                 |  |                     |   |                          |        |    |                    |   |        |                                   |  |   |                         |   |  |   | 276  |   |  |   | 276    |  
|                                                                      |  |                      |   |                          |        |     |                    |   |         |                                   |  |   |                          |   |  |   |      |   |  |   |        |  
|Comprehensive income                                                  |  |                      |   |                          |        |     |                    |   |         |                                   |  |   |                          |   |  |   |      |   |  |   | 976    |  
|                                                                      |  |                      |   |                          |        |     |                    |   |         |                                   |  |   |                          |   |  |   |      |   |  |   |        |  
|                                                                      |  |                      |   |                          |        |    
|Balance at September 30, 2009                                         |  | 33,727               |   |                          | $      | 337 |                    | $ | 162,495 |                                   |  | $ | (116,539                 | ) |  | $ | (545 | ) |  | $ | 45,748 |  
|                                                                      |  |                      |   |                          |        |     |                    |   |         |                                   |  |   |                          |   |  |   |      |   |  |   |        |  

See accompanying notes to the consolidated financial statements.



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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

(In thousands)



|                                                                                                      |  |                                        |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                      |  | For the Nine MonthsEnded September 30, |        
|                                                                                                      |  | 2009                                   |         |   | 2008 |  
|Cash flows provided by continuing operating activities:                                               |  |                                        |         |   |      |   |         |  
|Net income (loss)                                                                                     |  | $                                      | 700     |   |      | $ | (7,856  | )
|Less: Income (loss) from discontinued operations                                                      |  |                                        | 280     |   |      |   | (9,557  | )
|                                                                                                      |  |                                        |         |   |      |   |         |  
|Income from continuing operations                                                                     |  |                                        | 420     |   |      |   | 1,701   |  
|Adjustments to reconcile income from continuing operations to net cash used for operating activities: |  |                                        |         |   |      |   |         |  
|Depreciation                                                                                          |  |                                        | 1,618   |   |      |   | 1,859   |  
|Amortization                                                                                          |  |                                        | 3,195   |   |      |   | 1,507   |  
|Deferred income taxes                                                                                 |  |                                        | 834     |   |      |   | 604     |  
|Stock based compensation                                                                              |  |                                        | 2,153   |   |      |   | 2,452   |  
|Disposal of software development                                                                      |  |                                        |        |   |      |   | 462     |  
|Other                                                                                                 |  |                                        | (51     | ) |      |   | 40      |  
|Accounts receivable                                                                                   |  |                                        | 8,087   |   |      |   | 13,186  |  
|Inventory                                                                                             |  |                                        | (150    | ) |      |   | (620    | )
|Prepaid expenses and other assets                                                                     |  |                                        | (5      | ) |      |   | 783     |  
|Accounts payable and accrued expenses                                                                 |  |                                        | (1,055  | ) |      |   | (8,178  | )
|Deferred revenue                                                                                      |  |                                        | (1,657  | ) |      |   | (3,567  | )
|                                                                                                      |  |                                        |         |   |      |   |         |  
|Net cash provided by operating activities                                                             |  |                                        | 13,389  |   |      |   | 10,229  |  
|                                                                                                      |  |                                        |         |   |      |   |         |  
|                                                                                                      |  |                                       
|Cash used for investing activities                                                                    |  |                                        |         |   |      |   |         |  
|Purchases of furniture, fixtures, and equipment                                                       |  |                                        | (849    | ) |      |   | (887    | )
|Expenditures for software development                                                                 |  |                                        | (5,953  | ) |      |   | (3,524  | )
|Restricted cash and cash equivalents                                                                  |  |                                        | (1      | ) |      |   | (31     | )
|Purchases of franchises, net of cash acquired                                                         |  |                                        | (60     | ) |      |   | (27,451 | )
|Proceeds from investment sale note receivable                                                         |  |                                        | 169     |   |      |   |        |  
|                                                                                                      |  |                                        |         |   |      |   |         |  
|Net cash used for investing activities                                                                |  |                                        | (6,694  | ) |      |   | (31,893 | )
|                                                                                                      |  |                                        |         |   |      |   |         |  
|                                                                                                      |  |                                       
|Cash flows (used for) provided by financing activities                                                |  |                                        |         |   |      |   |         |  
|Proceeds from borrowings under credit facility revolver and term loan                                 |  |                                        | 4,500   |   |      |   | 20,000  |  
|Capital lease payments                                                                                |  |                                        | (144    | ) |      |   | (220    | )
|Payments of credit facility revolver and term loan                                                    |  |                                        | (15,669 | ) |      |   | (204    | )
|Deferred financing costs                                                                              |  |                                        |        |   |      |   | (957    | )
|Proceeds from exercise of options                                                                     |  |                                        | 18      |   |      |   | 2,529   |  
|Payment of notes payable related to acquisitions                                                      |  |                                        | (416    | ) |      |   | (599    | )
|                                                                                                      |  |                                        |         |   |      |   |         |  
|Net cash (used for) provided by financing activities                                                  |  |                                        | (11,711 | ) |      |   | 20,549  |  
|                                                                                                      |  |                                        |         |   |      |   |         |  
|Effect of exchange rate changes on cash                                                               |  |                                        | 344     |   |      |   | (203    | )
|                                                                                                      |  |                                        |         |   |      |   |         |  
|Net cash flows used for continuing operations                                                         |  |                                        | (4,672  | ) |      |   | (1,318  | )
|                                                                                                      |  |                                        |         |   |      |   |         |  
|                                                                                                      |  |                                       
|Cash Flows from Discontinued Operations                                                               |  |                                        |         |   |      |   |         |  
|Net cash used for operating activities                                                                |  |                                        | (1,377  | ) |      |   | (823    | )
|Net cash provided by investing activities                                                             |  |                                        | 7,433   |   |      |   | 231     |  
|                                                                                                      |  |                                        |         |   |      |   |         |  
|Net cash provided by (used for) discontinued operations                                               |  |                                        | 6,056   |   |      |   | (592    | )
|                                                                                                      |  |                                        |         |   |      |   |         |  
|Increase (decrease) in cash and cash equivalents                                                      |  |                                        | 1,384   |   |      |   | (1,910  | )
|Cash and cash equivalents, beginning of period                                                        |  |                                        | 8,853   |   |      |   | 25,281  |  
|                                                                                                      |  |                                        |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                              |  | $                                      | 10,237  |   |      | $ | 23,371  |  
|                                                                                                      |  |                                        |         |   |      |   |         |  
|                                                                                                      |  |                                       
|Supplemental cash flow disclosure:                                                                    |  |                                        |         |   |      |   |         |  
|Net cash proceeds from sale of discontinued operation (note 2)                                        |  | $                                      | 7,796   |   |      | $ |        |  

See accompanying notes to the consolidated financial statements.



6



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##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

(In thousands, except per share data)

1. Basis of Presentation

The unaudited consolidated financial statements of The Princeton Review, Inc., and its wholly-owned subsidiaries, The Princeton Review Canada Inc. and Princeton Review Operations, L.L.C., and effective March 7, 2008, Test Services,
Inc., and effective July 24, 2008, The Princeton Review of Orange County, LLC, (together, the Company or Princeton Review) included herein have been prepared in accordance with generally accepted accounting principles
(GAAP). In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected.

Certain information and footnote disclosures normally included in the Companys annual consolidated financial statements have been
condensed or omitted and, accordingly, the accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in the Companys Annual Report on Form 10-K, filed with the
United States Securities and Exchange Commission for the year ended December 31, 2008.

On March 12, 2009, the
Company sold substantially all of the assets and liabilities of its K-12 Services division. The unaudited consolidated financial statements reflect the K-12 Services division as a discontinued operation. Refer to Note (2) to these Notes to
Consolidated Financial Statements.

Certain reclassifications have been made in the prior period consolidated financial
statements to conform to the current presentation.

Seasonality in Results of Operations

The Company experiences, and is expected to continue to experience, seasonal fluctuations in its revenue, results of operations and cash
flows because the markets in which the Company operates are subject to seasonal fluctuations based on the scheduled dates for standardized admissions tests and the typical school year. These fluctuations could result in volatility or adversely
affect the Companys stock price. The Company typically generates the largest portion of its test preparation revenue in the third quarter. As Supplemental Educational Services (SES) revenue grows, the Company expects this revenue
to be concentrated in the fourth and first quarters to more closely correspond to the after school programs greatest activity during the school year.

New Accounting Pronouncements

In September 2009, the Emerging
Issues Task Force (the EITF) reached final consensus on the issue related to revenue arrangements with multiple deliverables. This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than
one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. This issue is effective for the Companys revenue arrangements entered into or materially modified on or after
January 1, 2010. The Company will evaluate the impact of this issue on the Companys financial statements when reviewing its new or materially modified revenue arrangements with multiple deliverables once this issue becomes effective.

In June 2009, the Financial Accounting Standards Board (the FASB) issued the FASB Accounting Standards
Codification (the Codification). The Codification became the single source for all authoritative GAAP recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification
does not change GAAP and will not have an effect on our financial position, results of operations or liquidity.

In December
2007, the FASB issued accounting standards that require the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction, the fair value of certain contingent assets and
liabilities acquired on the acquisition date and the fair value of contingent consideration on the acquisition date, with any changes in that fair value to be recognized in earnings until settled. The standard also requires the expensing of
most transaction and restructuring costs and generally requires the reversal of valuation allowances related to acquired deferred tax assets and the recognition of changes to acquired income tax uncertainties in earnings. The standard became
effective as of January 1, 2009 and the Company plans to apply the provisions in connection with the anticipated acquisition of Penn Foster Education Group, Inc. described below under Subsequent Events. In connection with the
acquisition, the Company expects to incur significant transaction costs which will be included in acquisition expenses in the consolidated statement of operations.

In September 2006, an accounting standard was established for fair value measurements. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, expands disclosures about fair value measurements and does not require any new fair value measurements. The standard requires quantitative disclosures about fair value measurements for each major category of assets and liabilities
measured at fair value on a recurring and non-recurring basis during a period. In February 2008, the FASB issued authoritative guidance that deferred the effective date of this standard to January 1, 2009



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##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)

(unaudited)

(In thousands, except per share data)



for all non-financial assets and liabilities except those that are recognized or disclosed in the financial statements on a recurring basis (that is, at least annually). The standard remained
effective on January 1, 2008 for financial assets and liabilities. The adoption of this standard did not impact the Companys financial disclosures as the Company did not carry any financial assets or liabilities subject to fair value
accounting during 2008. The Company adopted the deferred portions of this standard on January 1, 2009, which had no impact on the Companys results of operations or financial statement disclosures for the nine months ended
September 30, 2009 as no fair value assessments requiring disclosure were made.

Use of Estimates

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

Subsequent Events

The Company adopted the accounting disclosures for subsequent events effective beginning the quarter ended June 30, 2009 and evaluated
for disclosure subsequent events that have occurred up to November 6, 2009, the date of issuance of our financial statements.

On October 16, 2009, the Company entered into a Stock Purchase Agreement (the Purchase Agreement) with Penn Foster Holdings, LLC (Seller), certain members of Seller and Penn Foster Education Group, Inc.
(Penn Foster), a provider of online career education programs, to purchase all of the issued and outstanding shares of Penn Fosters capital stock (the Acquisition). Under the terms of the Purchase Agreement, the Company
will pay $170.0 million in cash for the stock of Penn Foster, subject to post-closing adjustments. The purchase price is subject to adjustment at and after the closing in the event the working capital associated with Penn Foster deviates from a
threshold amount. Upon completion of the Acquisition, Penn Foster will become a wholly-owned subsidiary of the Company.

The
Acquisition is expected to close after all of the closing conditions to the Purchase Agreement obligations have been satisfied or waived. The closing of the Acquisition is subject to customary regulatory approvals, including the expiration or
termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Companys obligation to close the Acquisition is not conditioned upon its ability to secure financing for the transaction. The
Company currently expects to complete the Acquisition and financings in the fourth quarter of 2009, however there can be no assurance as to whether or when all of the conditions to closing will be satisfied or, where permissible, waived.

Concurrently, and in connection with entering into the Purchase Agreement, the Company entered into commitment letters to raise
approximately $155.0 million in debt financing and between $30.0 and $40.0 million in equity financing to fund the cash consideration for the Acquisition, pay certain fees and expenses in connection with the Acquisition, repay the outstanding term
loan under our existing credit facility and for general working capital purposes. The debt financing commitments include a $40.0 million senior secured credit facility term loan, a $40.0 million bridge loan, $50.0 million in senior subordinated
notes and $25.0 million in junior subordinated notes. The equity financing commitments consist of a new Series E Non-Convertible Preferred Stock of the Company which, subject to and upon shareholder approval, will automatically convert into a new
Series D Convertible Preferred Stock of the Company which will be convertible into shares of Company common stock. These commitment letters are subject to various conditions precedent, and there can be no assurance as to whether or when all of those
conditions will be satisfied or, where permissible, waived.

Acquisition Expenses

Acquisition expenses consist of legal, accounting and other advisory fees and transaction costs related to business acquisitions as well as
the costs to integrate acquired businesses. Such costs are expensed as incurred.

2. Sale of Assets and Discontinued Operations

On March 12, 2009, the Company completed its sale of substantially all of the assets and liabilities of the K-12
Services division to CORE Education and Consulting Solutions, Inc. (CORE), a subsidiary of CORE Projects and Technologies Limited, an education technology company. The aggregate consideration received consisted of (i) $9.5 million
in cash paid on the closing date and (ii) a purchase price adjustment based on net working capital of the K-12 Services division as of the closing date, to be calculated 180 days after the closing date, and to be paid within a reasonable amount
of time thereafter. During the nine months ended September 30, 2009, the Company recorded a gain on the sale of these assets of $913,000 within discontinued operations in the consolidated statement of operations. The gain excludes the net
working capital purchase price adjustment as collection of these proceeds in 180 days could not be assured. On October 7, 2009 the Company received the proceeds from the net working capital purchase price adjustment of $2.3 million and will
record an adjustment to the gain on the sale of discontinued operations in the fourth quarter of 2009.



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##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)

(unaudited)

(In thousands, except per share data)



The following table includes summary income statement information related primarily to
the K-12 Services division, reflected as discontinued operations for the periods presented:



|                                                     |  |                                 |      |   |                                |   |        |      |  |   |       |   |  |   |        |  
|---------------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                                     |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                                     |  | (In thousands)                  |     
|                                                     |  | 2009                            |      |   | 2008                           |   |        | 2009 |  |   | 2008  |  
|Revenues                                             |  | $                               |     |   |                                | $ | 3,928  |      |  | $ | 2,720 |   |  | $ | 15,033 |  
|Cost of revenues                                     |  |                                 |     |   |                                |   | 2,231  |      |  |   | 808   |   |  |   | 6,910  |  
|                                                     |  |                                 |      |   |                                |   |        |      |  |   |       |   |  |   |        |  
|Gross margin                                         |  |                                 |     |   |                                |   | 1,697  |      |  |   | 1,912 |   |  |   | 8,123  |  
|Operating expenses                                   |  |                                 | 405  |   |                                |   | 9,461  |      |  |   | 2,623 |   |  |   | 17,480 |  
|                                                     |  |                                 |      |   |                                |   |        |      |  |   |       |   |  |   |        |  
|Loss before income taxes                             |  |                                 | (405 | ) |                                |   | (7,764 | )    |  |   | (711  | ) |  |   | (9,357 | )
|Gain (loss) from disposal of discontinued operations |  |                                 |     |   |                                |   | (240   | )    |  |   | 913   |   |  |   | (240   | )
|Benefit for income taxes                             |  |                                 | 29   |   |                                |   | 11     |      |  |   | 78    |   |  |   | 40     |  
|                                                     |  |                                 |      |   |                                |   |        |      |  |   |       |   |  |   |        |  
|Income (loss) from discontinued operations           |  | $                               | (376 | ) |                                | $ | (7,993 | )    |  | $ | 280   |   |  | $ | (9,557 | )
|                                                     |  |                                 |      |   |                                |   |        |      |  |   |       |   |  |   |        |  

There were no assets or liabilities related to discontinued operations as of
September 30, 2009.

3. Acquisition of TSI

On March 7, 2008, the Company acquired Test Services, Inc. (TSI), the operator of eight of the Companys franchises, from Alta Colleges, Inc. (Alta), the parent company
of TSI, through a merger in which TSI became a wholly owned subsidiary of the Company (the TSI Merger) pursuant to a Merger Agreement among the parties (the TSI Merger Agreement). The consideration paid at the effective time
of the TSI Merger to Alta consisted of 4,225,000 shares of the Companys common stock (the Alta Shares), and $4.6 million in cash. In the event that the aggregate value of the Alta Shares, plus $4.6 million, is less than $36.0
million, the Company may become obligated to pay additional consideration to Alta (the Additional Consideration). The final transaction value determination is to be made upon the earliest of (1) the date on which Alta sells the last
of the Alta Shares, (2) the date on which the Company, by merger or otherwise, is sold in a transaction that results in a change in control of the Company as defined in the TSI Merger Agreement, or a sale of all or substantially all of the
Companys assets, or (3) March 31, 2010. At such time, a final evaluation of the value of the Alta Shares will be made, and if the final value of such shares, plus $4.6 million in cash, is less than $36.0 million, a number of
additional shares of Company common stock equal to the shortfall of such value below $36.0 million, calculated in accordance with the TSI Merger Agreement, shall be issued to Alta, subject to certain exceptions set forth in the TSI Merger Agreement.
The Company may also elect to pay any of the Additional Consideration in cash instead of issuing shares of Company common stock, subject to certain exceptions set forth in the TSI Merger Agreement. The maximum amount of Additional Consideration as
determined in accordance with the TSI Merger Agreement is approximately $9.9 million. If an event triggering the final transaction value determination had occurred as of September 30, 2009, the Company would have been required to pay the
maximum amount of Additional Consideration. Any Additional Consideration paid to Alta, whether in cash or shares of common stock, will be recorded as an adjustment to stockholders equity within the Companys consolidated balance sheet.

4. Stock-Based Compensation

Stock-based compensation expense primarily relates to stock options and restricted stock under the Companys 2000 Stock Incentive Plan. Compensation expense for awards with only a service condition
is recognized on a straight-line method over the requisite service period. Performance based stock compensation expense is recognized over the service period, if the achievement of performance criteria is considered probable by the Company. The fair
value of stock options is estimated using the Black-Scholes option pricing formula for which we estimated the following assumptions in its fair value calculation at the date of grant for the nine months ended September 30, 2009 and the three
and nine months ended September 30, 2008. There were no options granted during the three months ended September 30, 2009:



|                        |  |                                 |  |      |                                |  |      |   |  |      |  
|----------------------- |  | ------------------------------- |  | ---- | ------------------------------ |  | ---- | - |  | ---- | -
|                        |  | Three Months EndedSeptember 30, |  |      | Nine Months EndedSeptember 30, | 
|                        |  | 2009                            |  | 2008 |                                |  | 2009 |   |  | 2008 |  
|Expected life (years)   |  | N/A                             |  | 5.0  |                                |  | 5.0  |   |  | 5.0  |  
|Risk-free interest rate |  | N/A                             |  | 3.4  | %                              |  | 1.9  | % |  | 2.8  | %
|Volatility              |  | N/A                             |  | 37.9 | %                              |  | 46.0 | % |  | 36.9 | %



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##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)

(unaudited)

(In thousands, except per share data)



Information concerning all stock option activity for the nine months ended
September 30, 2009 is summarized as follows:



|                                                 |  |                                             |   |  |                                          |      |                                                     |      |                                        |   |   
|------------------------------------------------ |  | ------------------------------------------- | - |  | ---------------------------------------- | ---- | --------------------------------------------------- | ---- | -------------------------------------- | - | --
|                                                 |  | Shares ofCommon StockAttributable toOptions |   |  | Weighted-AverageExercise PriceOf Options |      | Weighted-AverageRemainingContractual Term(in years) |      | AggregateIntrinsic Value(in thousands)
|Outstanding at December 31, 2008                 |  | 6,511,521                                   |   |  | $                                        | 6.43 |                                                     |      |                                        |   |   
|Granted at market price                          |  | 230,000                                     |   |  |                                          | 4.61 |                                                     |      |                                        |   |   
|Forfeited                                        |  | (1,071,257                                  | ) |  |                                          | 7.79 |                                                     |      |                                        |   |   
|Exercised                                        |  | (8,472                                      | ) |  |                                          | 2.13 |                                                     |      |                                        |   |   
|                                                 |  |                                             |   |  |                                          |      |                                                     |      |                                        |   |   
|Outstanding at September 30, 2009                |  | 5,661,792                                   |   |  | $                                        | 6.11 |                                                     | 6.16 |                                        | $ | 92
|Vested or expected to vest at September 30, 2009 |  | 5,581,411                                   |   |  | $                                        | 6.11 |                                                     | 6.12 |                                        | $ | 92
|Exercisable at September 30, 2009                |  | 3,478,742                                   |   |  | $                                        | 6.22 |                                                     | 4.89 |                                        | $ | 92

As of September 30, 2009, the total unrecognized compensation cost related to
non-vested stock option awards amounted to approximately $6.2 million, net of estimated forfeitures that will be recognized over the weighted-average remaining requisite service period of approximately 2.2 years.

A summary of the status of non-vested shares of restricted stock as of September 30, 2009, and changes during the period then ended, is
presented below:



|                                                    |  |         |   |  |                                      |     
|--------------------------------------------------- |  | ------- | - |  | ------------------------------------ | ----
|                                                    |  | Shares  |   |  | Weighted-AverageGrant DateFair Value
|Non-vested awards outstanding at December 31, 2008  |  | 25,000  |   |  | $                                    | 6.76
|Awards granted                                      |  | 20,000  |   |  |                                      | 5.41
|Awards vested                                       |  | (25,000 | ) |  |                                      | 6.76
|                                                    |  |         |   |  |                                      |     
|                                                    |  |        
|Non-vested awards outstanding at September 30, 2009 |  | 20,000  |   |  | $                                    | 5.41
|                                                    |  |         |   |  |                                      |     

On June 30, 2009, the Company granted 20,000 restricted shares of stock to
certain of its non-employee directors having a grant fair value of $108,000. These restricted stock awards vest on January 30, 2010.

Total stock-based compensation expense recorded for the three months ended September 30, 2009 and 2008 was $752,000 and $875,000, respectively and for the nine months ended September 30, 2009
and 2008 was $2.2 million and $2.5 million, respectively. Stock-based compensation is recorded as operating expense within the accompanying consolidated statements of operations.

5. Long-term Debt and Line of Credit

Long-term debt consists of the
following:



|                          |  |                   |       |                  |   |       
|------------------------- |  | ----------------- | ----- | ---------------- | - | ------
|                          |  | September 30,2009 |       | December 31,2008
|                          |  | (in thousands)   
|Credit facility           |  | $                 | 7,831 |                  | $ | 18,958
|Notes payable             |  |                   | 833   |                  |   | 1,239 
|Capital lease obligations |  |                   | 491   |                  |   | 574   
|                          |  |                   |       |                  |   |       
|Total debt                |  |                   | 9,155 |                  |   | 20,771
|Less current portion      |  |                   | 3,735 |                  |   | 3,283 
|                          |  |                   |       |                  |   |       
|Long-term debt            |  | $                 | 5,420 |                  | $ | 17,488
|                          |  |                   |       |                  |   |       

The Credit facility portion of long-term debt in the table above refers
to the Companys outstanding borrowings under its credit agreement (July 2008 Credit Agreement) with Wells Fargo Foothill, LLC, as arranger and administrative agent (Wells Fargo) that is comprised of a $5.0 million
revolving line of credit (Revolving Credit Facility) and a $20.0 million term loan (Term Loan). There were no borrowings outstanding under the Revolving Credit Facility as of September 30, 2009 and December 31,
2008.

The Term Loan is due in 20 consecutive graduating quarterly installments ranging from $500,000 to $1.0 million, which
began on October 1, 2008. The Company is required to make additional installment payments for non-recurring cash receipts of greater than $100,000. On March 13, 2009, the Company made one such installment payment of $9.5 million from the
proceeds of the K-12 Services division sale described in Note 2.



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##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)

(unaudited)

(In thousands, except per share data)



6. Income Taxes

The Company has recorded an income tax provision related to continuing operations for the nine months ended September 30, 2009 in the amount of $512,000. Additionally, a benefit for income taxes for
the nine months ended September 30, 2009 of $78,000 has been recorded as part of the Companys income from discontinued operations.

Income tax expense for the period varies from the amount that would normally be derived based upon statutory rates in the respective jurisdictions in which we operate. The significant reasons for this
variation are our inability to record a tax benefit on our losses generated in the United States, differences in foreign tax rates, and the effect of tax-deductible goodwill, for which a deferred tax liability has been recorded.

Internal Revenue Code Section 382 (Section 382) imposes limitations on the amount of net operating loss carry-forwards an
entity may use based on certain ownership changes. During the three months ended June 30, 2009, the Company determined that due to common stock transactions by holders of 5% or more of the Companys capital stock in May 2009, its future
use of net operating loss carry-forwards will be limited under the provisions of Section 382. The limitation did not impact the income tax provision for the nine months ended September 30, 2009 as the limitation of net operating loss
carry-forward utilization for fiscal 2009 is greater than the Companys current and expected pre-tax income for 2009. The Company will continue to evaluate the effect of the Section 382 limitation on its income tax provision and cash tax
liabilities.

The Company complies with accounting standards that clarify the accounting for uncertainty in income taxes
recognized in an enterprises financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Based on the
Companys evaluation, it has concluded that there are not significant uncertain tax positions requiring recognition in the Companys financial statements. The tax years which remain subject to examination by major tax jurisdictions as of
September 30, 2009 are tax years ended December 31, 2006 and later.

7. Segment Information

The Company operates in two reportable segments: Test Preparation Services and Supplemental Educational Services (SES). These
operating segments are divisions of the Company for which separate financial information is available and evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.

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

The majority
of the Companys revenue is from the Test Preparation Services division, which sells a range of services including test preparation, tutoring and academic counseling. Test Preparation Services derives its revenue from Company operated locations
and from royalties from, and product sales to, independent international franchisees. The SES division delivers state-aligned research-based academic tutoring instruction to students in schools in need of improvement in school districts throughout
the country.

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



11



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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)

(unaudited)

(In thousands, except per share data)





|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|----------------------------------------------------------- |  | --------------------------------------------------- | ------- | ----------- | - | ------ | --------- |  | - | ------ | - |  | - | -------
|                                                            |  | Three Months Ended September 30, 2009(in thousands)
|                                                            |  | TestPreparationServices                             |         | SESServices |   |        | Corporate |  |   | Total 
|Revenue                                                     |  | $                                                   | 34,090  |             | $ | 235    |           |  | $ |       |   |  | $ | 34,325 
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            |  |                                                     |         |            
|Operating expense (including depreciation and amortization) |  | $                                                   | 13,603  |             |   | 3,110  |           |  | $ | 5,221  |   |  | $ | 21,934 
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            |  |                                                     |         |            
|Operating income (loss)                                     |  |                                                     | 9,250   |             |   | (3,361 | )         |  |   | (5,221 | ) |  |   | 668    
|Depreciation and amortization                               |  |                                                     | 887     |             |   | 37     |           |  |   | 710    |   |  |   | 1,634  
|Other income                                                |  |                                                     |        |             |   |       |           |  |   | 1      |   |  |   | 1      
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            |  |                                                     |         |            
|Segment EBITDA                                              |  | $                                                   | 10,137  |             | $ | (3,324 | )         |  | $ | (4,510 | ) |  | $ | 2,303  
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            |  |                                                     |         |            
|Total segment assets                                        |  | $                                                   | 138,907 |             | $ | 904    |           |  | $ | 20,208 |   |  | $ | 160,019
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            |  |                                                     |         |            
|Segment goodwill                                            |  | $                                                   | 84,584  |             | $ |       |           |  | $ |       |   |  | $ | 84,584 
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            | 
|                                                            |  | Three Months Ended September 30, 2008(in thousands)
|                                                            |  | TestPreparationServices                             |         | SESServices |   |        | Corporate |  |   | Total 
|Revenue                                                     |  | $                                                   | 34,050  |             | $ | 699    |           |  | $ |       |   |  | $ | 34,749 
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            |  |                                                     |         |            
|Operating expense (including depreciation and amortization) |  | $                                                   | 14,987  |             | $ | 2,580  |           |  | $ | 4,656  |   |  | $ | 22,223 
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            |  |                                                     |         |            
|Operating income (loss)                                     |  |                                                     | 8,429   |             |   | (2,425 | )         |  |   | (4,656 | ) |  |   | 1,348  
|Depreciation and amortization                               |  |                                                     | 649     |             |   | 5      |           |  |   | 577    |   |  |   | 1,231  
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            |  |                                                     |         |            
|Segment EBITDA                                              |  | $                                                   | 9,078   |             | $ | (2,420 | )         |  | $ | (4,079 | ) |  | $ | 2,579  
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            |  |                                                     |         |            
|Total segment assets (excluding assets held for sale)       |  | $                                                   | 126,651 |             | $ | 4,837  |           |  | $ | 31,384 |   |  | $ | 162,872
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        
|                                                            |  |                                                     |         |            
|Segment goodwill                                            |  | $                                                   | 82,615  |             | $ |       |           |  | $ |       |   |  | $ | 82,615 
|                                                            |  |                                                     |         |             |   |        |           |  |   |        |   |  |   |        



12



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##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)

(unaudited)

(In thousands, except per share data)





|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | -------------------------------------------------- | ------- | ----------- | - | --------- |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Nine Months Ended September 30, 2009(in thousands) |        
|                                                            |  | TestPreparationServices                            |         | SESServices |   | Corporate |  |   | Total   |  
|Revenue                                                     |  | $                                                  | 86,673  |             | $ | 23,947    |  | $ |        |   |  | $ | 110,620 |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            |  |                                                    |         |            
|Operating expense (including depreciation and amortization) |  | $                                                  | 40,995  |             | $ | 9,524     |  | $ | 16,010  |   |  | $ | 66,529  |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            |  |                                                    |         |            
|Operating income (loss)                                     |  |                                                    | 14,959  |             |   | 2,375     |  |   | (16,010 | ) |  |   | 1,324   |  
|Depreciation and amortization                               |  |                                                    | 2,961   |             |   | 137       |  |   | 1,715   |   |  |   | 4,813   |  
|Other income                                                |  |                                                    | 63      |             |   |          |  |   | 192     |   |  |   | 255     |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            |  |                                                    |         |            
|Segment EBITDA                                              |  | $                                                  | 17,983  |             | $ | 2,512     |  | $ | (14,103 | ) |  | $ | 6,392   |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            |  |                                                    |         |            
|Total segment assets                                        |  | $                                                  | 138,907 |             | $ | 904       |  | $ | 20,208  |   |  | $ | 160,019 |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            |  |                                                    |         |            
|Segment goodwill                                            |  | $                                                  | 84,584  |             | $ |          |  | $ |        |   |  | $ | 84,584  |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            | 
|                                                            |  | Nine Months Ended September 30, 2008(in thousands) |        
|                                                            |  | TestPreparationServices                            |         | SESServices |   | Corporate |  |   | Total   |  
|Revenue                                                     |  | $                                                  | 85,472  |             | $ | 19,071    |  | $ |        |   |  | $ | 104,543 |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            |  |                                                    |         |            
|Operating expense (including depreciation and amortization) |  | $                                                  | 39,151  |             |   | 8,399     |  | $ | 16,765  |   |  | $ | 64,315  |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            |  |                                                    |         |            
|Operating income (loss)                                     |  |                                                    | 17,829  |             |   | 2,073     |  |   | (16,765 | ) |  |   | 3,137   |  
|Depreciation and amortization                               |  |                                                    | 1,646   |             |   | 14        |  |   | 1,706   |   |  |   | 3,366   |  
|Other expense                                               |  |                                                    |        |             |   |          |  |   | (2      | ) |  |   | (2      | )
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            |  |                                                    |         |            
|Segment EBITDA                                              |  | $                                                  | 19,475  |             | $ | 2,087     |  | $ | (15,061 | ) |  | $ | 6,501   |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            |  |                                                    |         |            
|Total segment assets (excluding assets held for sale)       |  | $                                                  | 126,651 |             | $ | 4,837     |  | $ | 31,384  |   |  | $ | 162,872 |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  
|                                                            |  |                                                    |         |            
|Segment goodwill                                            |  | $                                                  | 82,615  |             | $ |          |  | $ |        |   |  | $ | 82,615  |  
|                                                            |  |                                                    |         |             |   |           |  |   |         |   |  |   |         |  

Reconciliation of Segment EBITDA to income from continuing operations before income taxes (in
thousands):



|                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                      |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                      |  | 2009                            |        |   | 2008                           |   |        | 2009 |  |   | 2008   |  
|Segment EBITDA                                        |  | $                               | 2,303  |   |                                | $ | 2,579  |      |  | $ | 6,392  |   |  | $ | 6,501  |  
|Depreciation and amortization                         |  |                                 | (1,634 | ) |                                |   | (1,231 | )    |  |   | (4,813 | ) |  |   | (3,366 | )
|Interest income (expense), net                        |  |                                 | (134   | ) |                                |   | (400   | )    |  |   | (647   | ) |  |   | (272   | )
|                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income from continuing operations before income taxes |  | $                               | 535    |   |                                | $ | 948    |      |  | $ | 932    |   |  | $ | 2,863  |  
|                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  

8. Earnings (loss) 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 anti-dilutive.



13



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##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)

(unaudited)

(In thousands, except per share data)



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



|                                                             |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------ |  | ------------------------------------- | ------ | - | ------------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                             |  | Three Months EndedSeptember 30,       |        |   | Nine Months EndedSeptember 30,        |  
|                                                             |  | 2009                                  |        |   | 2008                                  |   |        | 2009 |  |   | 2008   |  
|                                                             |  | (In thousands, except per share data) |        |   | (In thousands, except per share data) |  
|Income from continuing operations                            |  | $                                     | 144    |   |                                       | $ | 449    |      |  | $ | 420    |   |  | $ | 1,701   |  
|Income (loss) from discontinued operations                   |  |                                       | (376   | ) |                                       |   | (7,993 | )    |  |   | 280    |   |  |   | (9,557  | )
|Less preferred dividends                                     |  |                                       | (1,252 | ) |                                       |   | (1,191 | )    |  |   | (3,667 | ) |  |   | (3,489  | )
|                                                             |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  
|                                                             |  |                                       |        |  
|Loss attributed to common stockholders                       |  | $                                     | (1,484 | ) |                                       | $ | (8,735 | )    |  | $ | (2,967 | ) |  | $ | (11,345 | )
|                                                             |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  
|Weighted average common shares outstanding for the period:   |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  
|Basic and diluted weighted average common shares outstanding |  |                                       | 33,725 |   |                                       |   | 33,498 |      |  |   | 33,728 |   |  |   | 31,973  |  
|Basic and diluted earnings (loss) per share                  |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  
|Loss from continuing operations                              |  | $                                     | (0.03  | ) |                                       | $ | (0.02  | )    |  | $ | (0.10  | ) |  | $ | (0.06   | )
|Income (loss) from discontinued operations                   |  |                                       | (0.01  | ) |                                       |   | (0.24  | )    |  |   | 0.01   |   |  |   | (0.30   | )
|                                                             |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  
|                                                             |  |                                       |        |  
|Net loss attributed to common stockholders                   |  | $                                     | (0.04  | ) |                                       | $ | (0.26  | )    |  | $ | (0.09  | ) |  | $ | (0.35   | )
|                                                             |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  

The following were excluded from the computation of diluted earnings per common share
because of their anti-dilutive effect.



|                                                                               |  |                                 |  |                                |  |        |  |       
|------------------------------------------------------------------------------ |  | ------------------------------- |  | ------------------------------ |  | ------ |  | ------
|                                                                               |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                                                               |  | 2009                            |  | 2008                           |  | 2009   |  | 2008  
|                                                                               |  | (In thousands)                  |  | (In thousands)                
|Shares of common stock issuable upon exercise of stock options                 |  | 5,874                           |  | 6,573                          |  | 6,049  |  | 6,443 
|Shares of common stock issuable upon conversion of convertible preferred stock |  | 11,277                          |  | 10,640                         |  | 11,116 |  | 10,488
|                                                                               |  |                                 |  |                                |  |        |  |       
|                                                                               |  | 17,151                          |  | 17,213                         |  | 17,165 |  | 16,931
|                                                                               |  |                                 |  |                                |  |        |  |       

9. Restructuring

The Company announced and commenced a restructuring initiative in the first quarter of 2009 related to the decision to outsource the Companys information technology operations, transfer the majority
of remaining corporate functions located in New York City to the offices located near Boston, Massachusetts, and simplify managements structure following the sale of the K-12 Services division. For the three and nine months ended
September 30, 2009, the Company has recorded $1.1 million and $5.2 million, respectively, of expenses related to these actions consisting of severance benefits for terminated employees and consulting fees related to transition of information
technology operations to a third party. The Company expects to make all cash payments related to this restructuring initiative by the end of the fourth quarter of 2009. The following table sets forth an analysis of the components of the
restructuring charge and payments made against the reserve for the nine months ended September 30, 2009:





|                                                    |  |                                                 |        |  
|--------------------------------------------------- |  | ----------------------------------------------- | ------ | -
|                                                    |  | Severance,TerminationBenefits andConsultingFees |       
|                                                    |  | (In thousands)                                  |       
|Accrued restructuring balance at December 31, 2008  |  | $                                               | 23     |  
|Restructuring provision                             |  |                                                 | 5,179  |  
|Cash paid                                           |  |                                                 | (4,750 | )
|                                                    |  |                                                 |        |  
|Accrued restructuring balance at September 30, 2009 |  | $                                               | 452    |  
|                                                    |  |                                                 |        |  

10. Commitments and Contingencies

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



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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)

(unaudited)

(In thousands, except per share data)



In August 2008, the Company learned that certain of the Companys web pages that
appeared to contain confidential information were available to the public on the Internet for a short period of time (the Security Incident). The Company discovered that due to an operational error or errors that occurred in connection
with a change in information system architecture and concurrent change of hosting providers, an Internet web page that was intended to be, and historically has been, password protected, had inadvertently ceased to be password protected for a 7-8
week period. Although the web page was shut down the day the Company learned about the matter, prior to that time some files that contained personal information about students from schools that used the Companys assessment center product (or
its predecessor product) under license from the K-12 Services division were accessible. With the exception of one school district in Sarasota, Florida that included social security numbers for some students, the K-12 student data accessible during
the Security Incident did not include financially sensitive information such as social security numbers, credit card information or other financial information. The Company notified the Sarasota school district as well as Sarasota students who may
have had such sensitive data accessible during the incident and has procured credit monitoring for those students requesting it and for whom such monitoring is available because they are over 18. In some cases, the Company also notified other school
districts and students whose information was subject to compromise, even where the Company was not legally obligated to do so because the nature of the information did not trigger notification statutes. Other than the Security Incident, the Company
believes its systems remain secure.

On September 19, 2008, a putative class action captioned Virginia B. Townsend v.
The Princeton Review, Inc.(Case No. 8:08-CIV-1879-T-33TBM) was filed against the Company in the United States District Court for the Middle District of Florida, Tampa Division relating to the Security Incident alleging negligence, breach
of contract and unfair trade practices. The complaint seeks unspecified monetary damages and other relief including the provision of personal data monitoring and identity theft insurance and unspecified enhancement of the security of the
Companys computer data systems, together with attorneys fees and costs. In July 2009 the parties entered into a settlement agreement which was approved preliminarily by the Court on August 5, 2009. Under the settlement
agreement, subject to final approval by the Court, the Company will provide a specified identity protection service to the class members that elect to participate and pay the fees and expenses of plaintiffs counsel as approved by the Court.
The Company believes that the full cost of the settlement will be within the limits of its applicable insurance policies.



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

All statements in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by words such as believe, intend, expect,
may, could, would, will, should, plan, project, contemplate, anticipate or similar statements. Because these statements reflect our current
views concerning future events, these forward-looking statements are subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including,
but not limited to demand for our products and services; our ability to compete effectively and adjust to rapidly changing market dynamics; the timing of revenue recognition from significant contracts with schools and school districts; market
acceptance of our newer products and services; continued federal and state focus on assessment and remediation in K-12 education; and the other factors described under the caption Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2008 filed with the Securities and Exchange Commission (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.

Overview

The Princeton Review provides integrated classroom-based, print and online products and services that address the needs of students, parents,
educators and educational institutions. We offer one of the leading SAT preparation courses and are among the leading providers of test preparation courses for most major post-secondary and graduate admissions tests. The Company and its
international franchisees provide test preparation courses and tutoring services for the SAT, GMAT, MCAT, LSAT, GRE and other standardized admissions tests to students throughout the United States and abroad. The Company currently operates through
our Test Preparation Services and Supplemental Educational Services (SES) divisions.

Test Preparation
Services Division

The Test Preparation Services division derives the majority of its revenue from classroom-based and
Princeton Review online test preparation courses and tutoring services. This division also receives royalties from its independent international franchisees, which provide classroom-based courses under the Princeton Review brand. As a result of the
acquisitions of Test Services, Inc. (TSI) in March 2008, the Princeton Review franchises in several southern California locations, Utah and New Mexico (SoCal) in July 2008 and the Princeton Review Pittsburgh, Inc.
(Pittsburgh) in October 2008, we do not have any remaining domestic franchisees as of September 30, 2009. Additionally, this division receives royalties and advances from Random House for books authored by The Princeton Review.



15



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##### Table of Contents

The Test Preparation Services division accounted for 78% of our overall revenue for the nine
months ended September 30, 2009, and historically has accounted for the majority of our overall revenue.

Supplemental Educational Services Division

The Supplemental Educational Services (SES)
division provides state-aligned research-based academic tutoring instruction to students in schools in need of improvement in school districts throughout the country which receive funding under the No Child Left Behind Act of 2001
(NCLB). We expect SES revenue and income from operations to continue to increase in 2009 as a result of the full year benefit of new markets entered over the course of 2008, increased demand in existing markets and expansion into new
markets.

Former K-12 Services Division

The Companys former K-12 Services division provided a number of services to K-12 schools and districts, including assessment,
professional development and intervention materials (workbooks and related products). Additionally, this division received college counseling fees paid by high schools. In March 2009, we sold our K-12 Services division to CORE Education and
Consulting Solutions, Inc. (CORE). The Company received $9.5 million of cash from CORE at the close of the transaction and recognized a gain of $913,000. In connection with the sale of its K-12 Services division, financial results
associated with this business have been reclassified as discontinued operations.



16



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##### Table of Contents

Results of Operations

Comparison of Three Months Ended September 30, 2009 and 2008



|                                         |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|---------------------------------------- |  | ------------------------------- | ------ | - | --------------------------- | - | ------ | ------------------------- |  | - | ------ | - |  | --- | --
|                                         |  | Three Months EndedSeptember 30, |        |   | Amount ofIncrease(Decrease) |   |        | PercentIncrease(Decrease) | 
|                                         |  | 2009                            |        |   | 2008                        |   |        |                          
|Revenue:                                 |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|Test Preparation Services                |  | $                               | 34,090 |   |                             | $ | 34,050 |                           |  | $ | 40     |   |  | 0   | % 
|SES Services                             |  |                                 | 235    |   |                             |   | 699    |                           |  |   | (464   | ) |  | (66 | )%
|                                         |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|Total revenue                            |  |                                 | 34,325 |   |                             |   | 34,749 |                           |  |   | (424   | ) |  | (1  | )%
|                                         |  |                                 |        |  
|Cost of revenue:                         |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|Test Preparation Services                |  |                                 | 11,237 |   |                             |   | 10,634 |                           |  |   | 603    |   |  | 6   | % 
|SES Services                             |  |                                 | 486    |   |                             |   | 544    |                           |  |   | (58    | ) |  | (11 | )%
|                                         |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|Total cost of revenue                    |  |                                 | 11,723 |   |                             |   | 11,178 |                           |  |   | 545    |   |  | 5   | % 
|                                         |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|Gross profit                             |  |                                 | 22,602 |   |                             |   | 23,571 |                           |  |   | (969   | ) |  | (4  | )%
|                                         |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|                                         |  |                                 |        |  
|Operating expenses:                      |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|Selling, general and administrative      |  |                                 | 20,518 |   |                             |   | 21,741 |                           |  |   | (1,223 | ) |  | (6  | )%
|Restructuring                            |  |                                 | 1,131  |   |                             |   | 482    |                           |  |   | 649    |   |  | 135 | % 
|Acquisition expenses                     |  |                                 | 285    |   |                             |   |       |                           |  |   | 285    |   |  | N/A |   
|                                         |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|Total operating expenses                 |  |                                 | 21,934 |   |                             |   | 22,223 |                           |  |   | (289   | ) |  | (1  | )%
|                                         |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|                                         |  |                                 |        |  
|Other income (expense) and other items:  |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|Interest expense                         |  |                                 | (136   | ) |                             |   | (510   | )                         |  |   | 374    |   |  | (73 | )%
|Interest income                          |  |                                 | 2      |   |                             |   | 110    |                           |  |   | (108   | ) |  | (98 | )%
|Other income                             |  |                                 | 1      |   |                             |   |       |                           |  |   | 1      |   |  | N/A |   
|Provision for income taxes               |  |                                 | (391   | ) |                             |   | (499   | )                         |  |   | 108    |   |  | (22 | )%
|                                         |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   
|(Loss) income from continuing operations |  | $                               | 144    |   |                             | $ | 449    |                           |  | $ | (305   | ) |  | (68 | )%
|                                         |  |                                 |        |   |                             |   |        |                           |  |   |        |   |  |     |   

Revenue

For the three months ended September 30, 2009, total revenue decreased by $424,000, or 1%, to $34.3 million from $34.7 million in the
three months ended September 30, 2008.

Test Preparation Services revenue remained flat at $34.1 million for the three
months ended September 30, 2009 as compared to the same period of 2008. Increases in revenue of $1.4 million from domestic franchises acquired subsequent to June 30, 2008 and $812,000 from increased institutional contract revenue were
offset by a $2.2 million reduction attributed primarily to lower classroom-based and tutoring revenues. Increases in organic classroom-based enrollments were offset by lower prices charged for our classroom-based courses and a higher percentage of
enrollments from lower-priced services. Organic tutoring revenues declined due to lower enrollments and a shift towards lower priced tutoring packages. We expect these pricing and enrollment trends to continue through the remainder of 2009.

SES Services revenues decreased $464,000, or 66%, to $235,000 from $699,000 in the three months ended September 30,
2008. SES Services revenue for the three months ended September 30, 2009 was derived primarily from new summer programs being offered in certain of our operating regions. SES Services revenue for the three months ended September 30, 2008
primarily related to positive billing adjustments from the 2007-2008 academic year, which ended in June 2008. There were no significant billing adjustments from the 2008-2009 academic year, which ended in June 2009.

Cost of Revenue

For the three months ended September 30, 2009, total cost of revenue increased by $545,000, or 5%, to $11.7 million from $11.2 million in the three months ended September 30, 2008.

Test Preparation Services cost of revenue increased by $603,000 or 6%, to $11.2 million from $10.6 million in the three months ended
September 30, 2008 due primarily to incremental costs related to the 2008 acquisitions. Gross margin during the period for the Test Preparation Services division decreased from 69% to 67%, primarily as a result of the lower prices charged for
our classroom-based courses, as costs per an instruction session are relatively fixed. We expect the impact of lower prices to continue to negatively impact gross margin through the remainder of 2009.



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SES Services cost of revenue decreased by $58,000, or 11%, to $486,000 from $544,000 in the
three months ended September 30, 2008 and gross margin during the same period decreased from 22% to (107%). The decrease in gross margin is primarily due to the lower revenue described above without a proportionate decrease in costs, as the
majority of the costs per class are relatively fixed.

Selling, General and Administrative Expenses

For the three months ended September 30, 2009, selling, general and administrative expenses decreased by $1.2 million, or 6%, to $20.5
million from $21.7 million in the three months ended September 30, 2008.

Test Preparation Services selling, general and
administrative expenses decreased by $1.4 million, or 9%, to $13.6 million from $15.0 million in the three months ended September 30, 2008. This decrease is primarily due to increased efforts to reduce expenses, including advertising,
professional fees and facility expenses and lower compensation. This decrease is partially offset by incremental expenses related to the 2008 franchise acquisitions, including depreciation and amortization.

SES Services selling, general and administrative expenses increased by $530,000, or 20% to $3.1 million from $2.6 million in the three
months ended September 30, 2008. The increase is primarily attributable to additional personnel, facility and other costs necessary to support entry into nine new markets during the 2008-2009 school year.

Corporate selling, general and administrative expenses decreased by $369,000, or 9%, to $3.8 million from $4.2 million in the three months
ended September 30, 2008, due primarily to reductions in corporate headcount and reduced compensation expense. This decrease is partially offset by increased professional service fees attributed to our outsourced information technology
function.

Restructuring

The Companys restructuring charges increased by $649,000 or 135%, to $1.1 million from $482,000 in the three months ended September 30, 2008. The restructuring charges incurred during the three
months ended September 30, 2009 were attributed to the restructuring initiative announced and commenced in the first quarter of 2009 related to outsourcing the Companys information technology operations and simplifying managements
structure following the sale of the K-12 Services division. The restructuring charges incurred during the three months ended September 30, 2008 were severance expenses related to restructuring activities initiated during 2007 to relocate the
Companys finance and certain legal operations from New York City to offices located near Boston, Massachusetts.

Acquisition expenses

Acquisition expenses for the three months ended September 30, 2009 consist of legal
and accounting fees associated with due diligence and other preparations for our anticipated acquisition of Penn Foster Education Group, Inc.

Interest Expense

Interest expense decreased by $374,000 to $136,000, from
$510,000 in the three months ended September 30, 2008, primarily due to a decrease in our term loan outstanding under our credit facility. Since September 30, 2008, we have repaid approximately $12.0 million of principal under our credit
facility term loan.

Interest Income

Interest income decreased by $108,000, or 98% from the three months ended September 30, 2008 due primarily to higher average cash balances during the three months ended September 30, 2008.

Provision for Income Taxes

The provision for income taxes decreased by $108,000 to $391,000, from $499,000 in the three months ended September 30, 2008. The income tax provision was recorded during the three months ended
September 30, 2009 based on the estimated annual tax liability calculated using an annual effective tax rate for United States and foreign tax purposes. The effective rate differs from the federal statutory rate of 34% due to our inability to
record a tax benefit on our losses generated in the United States, differences in foreign tax rates, and the effect of tax-deductible goodwill, for which a deferred tax liability has been recorded.



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Comparison of Nine Months Ended September 30, 2009 and 2008



|                                        |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|--------------------------------------- |  | ------------------------------ | ------- | - | --------------------------- | - | ------- | ------------------------- |  | - | ------ | - |  | ------- | --
|                                        |  | Nine Months EndedSeptember 30, |         |   | Amount ofIncrease(Decrease) |   |         | PercentIncrease(Decrease) | 
|                                        |  | 2009                           |         |   | 2008                        |   |         |                          
|Revenue:                                |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|Test Preparation Services               |  | $                              | 86,673  |   |                             | $ | 85,472  |                           |  | $ | 1,201  |   |  | 1       | % 
|SES Services                            |  |                                | 23,947  |   |                             |   | 19,071  |                           |  |   | 4,876  |   |  | 26      | % 
|                                        |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|Total revenue                           |  |                                | 110,620 |   |                             |   | 104,543 |                           |  |   | 6,077  |   |  | 6       | % 
|Cost of revenue:                        |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|Test Preparation Services               |  |                                | 30,719  |   |                             |   | 28,492  |                           |  |   | 2,227  |   |  | 8       | % 
|SES Services                            |  |                                | 12,048  |   |                             |   | 8,599   |                           |  |   | 3,449  |   |  | 40      | % 
|                                        |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|Total cost of revenue                   |  |                                | 42,767  |   |                             |   | 37,091  |                           |  |   | 5,676  |   |  | 15      | % 
|                                        |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|Gross profit                            |  |                                | 67,853  |   |                             |   | 67,452  |                           |  |   | 401    |   |  | 1       | % 
|                                        |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|                                        |  |                                |         |  
|Operating expenses:                     |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|Selling, general and administrative     |  |                                | 61,065  |   |                             |   | 62,082  |                           |  |   | (1,017 | ) |  | (2      | )%
|Restructuring                           |  |                                | 5,179   |   |                             |   | 2,233   |                           |  |   | 2,946  |   |  | 132     | % 
|Acquisition expenses                    |  |                                | 285     |   |                             |   |        |                           |  |   | 285    |   |  | N/A     |   
|                                        |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|Total operating expenses                |  |                                | 66,529  |   |                             |   | 64,315  |                           |  |   | 2,214  |   |  | 3       | % 
|                                        |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|                                        |  |                                |         |  
|Other income (expense) and other items: |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|Interest expense                        |  |                                | (681    | ) |                             |   | (583    | )                         |  |   | (98    | ) |  | 17      | % 
|Interest income                         |  |                                | 34      |   |                             |   | 311     |                           |  |   | (277   | ) |  | (89     | )%
|Other income                            |  |                                | 255     |   |                             |   | (2      | )                         |  |   | 257    |   |  | (12,850 | )%
|Provision for income taxes              |  |                                | (512    | ) |                             |   | (1,162  | )                         |  |   | 650    |   |  | (56     | )%
|                                        |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   
|Income from continuing operations       |  | $                              | 420     |   |                             | $ | 1,701   |                           |  | $ | (1,281 | ) |  | (75     | )%
|                                        |  |                                |         |   |                             |   |         |                           |  |   |        |   |  |         |   

Revenue

For the nine months ended September 30, 2009, total revenue increased by $6.1 million, or 6%, to $110.6 million from $104.5 million
in the nine months ended September 30, 2008.

Test Preparation Services revenue increased by $1.2 million, or 1%, to
$86.7 million from $85.5 million in the nine months ended September 30, 2008. This increase is primarily due to incremental revenue of $9.1 million from domestic franchises acquired during 2008 as described above. This increase in revenue is
partially offset by a $1.7 million reduction in franchise fees as a direct result of the same franchise acquisitions and a $0.8 million reduction in non-franchise licensing revenue due to the termination of a contract with a marketing partner that
has filed for bankruptcy. The increase is further offset by a decrease of $5.4 million due primarily to lower classroom-based and tutoring revenues during the nine months ended September 30, 2009. Increases in classroom-based enrollments were
offset by lower prices charged for our classroom-based courses and a higher percentage of enrollments from lower-priced services. Organic tutoring revenues declined due to lower enrollments and a shift towards lower priced tutoring packages. We
expect these pricing and enrollment trends to continue through the remainder of 2009.

SES Services revenues increased $4.9
million, or 26%, to $24.0 million from $19.1 million in the nine months ended September 30, 2008. This increase is primarily due to expansion into nine new markets during the 2008-2009 school year.

Cost of Revenue

For the nine months ended September 30, 2009, total cost of revenue increased by $5.7 million, or 15%, to $42.8 million from $37.1 million in the nine months ended September 30, 2008.

Test Preparation Services cost of revenue increased by $2.2 million, or 8%, to $30.7 million from $28.5 million in the nine months ended
September 30, 2008. This increase is primarily due to incremental costs of $3.7 million related to the 2008 acquisitions. Excluding the impact of franchises acquired, cost of revenue decreased by $1.5 million due to improved classroom operating
efficiencies which lowered relative teacher, course material and facility costs required to deliver our services. Gross margin during the period for the Test Preparation Services division decreased from 67% to 65%, primarily as a result of lower
prices charged for our classroom-based courses, as costs per an instruction session are relatively fixed. We expect the impact of lower prices to continue to negatively impact gross margin through the remainder of 2009.



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SES Services cost of revenue increased by $3.4 million, or 40%, to $12.0 million from $8.6
million in the nine months ended September 30, 2008 as a direct result of the increase in revenue and the additional operating regions in the 2008-2009 school year that were not included in the results for the nine months ended
September 30, 2008. Gross margin during the period for the SES Services division decreased from 55% to 50% due primarily to lower gross margins in new operating regions as average students per class were lower than existing regions as of the
nine months ended September 30, 2008.

Selling, General and Administrative Expenses

For the nine months ended September 30, 2009, selling, general and administrative expenses decreased by $1.0 million, or 2%, to $61.1
million from $62.1 million in the nine months ended September 30, 2008.

Test Preparation Services selling, general and
administrative expenses increased by $1.8 million, or 5%, to $41.0 million from $39.2 million in the nine months ended September 30, 2008. This increase is primarily due to incremental expenses related to the 2008 franchise acquisitions,
partially offset by a reduction in expenses due to lower advertising and compensation expense.

SES Services selling, general
and administrative expenses increased by $1.1 million, or 13%, to $9.5 million from $8.4 million in the nine months ended September 30, 2008. The increase is primarily attributable to additional personnel, facility and other costs necessary to
support entry into nine new markets during the 2008-2009 school year.

Corporate selling, general and administrative expenses
decreased by $4.0 million, or 28%, to $10.5 million from $14.5 million in the nine months ended September 30, 2008, due primarily to reductions in corporate headcount and reduced incentive compensation expense. This decrease is partially offset
by increased professional service fees attributed to our outsourced information technology function.

Restructuring

The Companys restructuring charges increased by $3.0 million, or 132%, to $5.2 million from $2.2 million in the nine
months ended September 30, 2008. The increase is attributed to the restructuring initiative announced and commenced in the first quarter of 2009 related to outsourcing the Companys information technology operations, transferring the
majority of remaining corporate functions located in New York City to the offices located near Boston, Massachusetts, and simplifying managements structure following the sale of the K-12 Services division. The restructuring charges incurred
during the nine months ended September 30, 2008 were severance expense related to restructuring activities initiated during 2007 to relocate the Companys finance and certain legal operations from New York City to offices located near
Boston, Massachusetts.

Acquisition expenses

Acquisition expenses for the nine months ended September 30, 2009 consist of legal and accounting fees associated with due diligence and
other preparations for our anticipated acquisition of Penn Foster Education Group, Inc.

Interest Expense

Interest expense increased by $98,000 to $681,000, from $583,000 in the nine months ended September 30, 2008 as a result of
borrowings outstanding under the credit facility. The average outstanding balance under the credit facility during the nine months ended September 30, 2009 was lower than the prior period, but outstanding for the entire nine month period,
resulting in the increase in interest expense over the prior period. The average outstanding balance under the credit facility during the nine months ended September 30, 2008 was higher but outstanding for only three months during this period.

Interest Income

Interest income decreased by $277,000, or 89%, to $34,000 from $311,000 in the nine months ended September 30, 2008 due primarily to higher average cash balances during the nine months ended
September 30, 2008.

Other Income

Other income for the nine months ended September 30, 2009 primarily consists of additional proceeds received from the sale of stock in a private investment that occurred in September 2008 and a
settlement payment received in conjunction with the termination of one of our international franchises. There was essentially no other income or expense for the nine months ended September 30, 2008.

Provision for Income Taxes

The provision for income taxes decreased by $650,000 to $512,000, from $1.2 million in the nine months ended September 30, 2008. The decrease is due to the utilization of the annual effective tax
rate to calculate the current year provision and the amount of



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income earned year to date in proportion to the expected income to be earned for the year. The effective rate differs from the federal statutory rate of 34% due to our inability to record a tax
benefit on our losses generated in the United States, differences in foreign tax rates, and the effect of tax-deductible goodwill, for which a deferred tax liability has been recorded. For the nine months ended September 30, 2008, the discrete
method was used to calculate the provision as the annual effective tax rate was not considered a reliable estimate of year to date income tax expense.

Liquidity and Capital Resources

Our primary sources of liquidity
during the nine months ended September 30, 2009 were cash and cash equivalents on hand, cash flow generated from operations, cash proceeds from the sale of our K-12 Services division (a discontinued operation) and borrowings under our revolving
line of credit. Our primary uses of cash during the nine months ended September 30, 2009 were capital expenditures, repayments of borrowings under our revolving line of credit and the required installment payment of a portion of the term loan
under our credit facility in connection with the sale of our K-12 Services division. At September 30, 2009 we had $10.9 million of cash and cash equivalents (including $616,000 of restricted cash) and $5.0 million of unused borrowing capacity
available under the revolving line of credit of our Wells Fargo credit facility. In addition, in September 2009 we filed a registration statement on Form S-3 with the SEC utilizing a shelf registration process whereby we may from time to time offer
and sell common stock, preferred stock, warrants or units, or any combination of these securities, in one or more offerings up to a total amount of $75.0 million.

On October 16, 2009, we entered into the Purchase Agreement to purchase all of the issued and outstanding shares of Penn Fosters capital stock for $170.0 million in cash, subject to
post-closing adjustments. We concurrently entered into commitment letters to raise approximately $155.0 million in debt financing and between $30.0 million and $40.0 million in equity financing to fund the cash consideration for the acquisition, pay
certain fees and expenses in connection with the acquisition, repay the outstanding term loan under our existing credit facility and for general working capital purposes. The debt financing commitments include a $40.0 million senior secured credit
facility term loan, a $40.0 million bridge loan, $50.0 million in senior subordinated notes and $25.0 million in junior subordinated notes. The equity financing commitments consist of a new Series E Non-Convertible Preferred Stock of the Company
which, subject to and upon shareholder approval, will automatically convert into a new Series D Convertible Preferred Stock of the Company which will be convertible into shares of Company common stock. A substantial portion of the debt financing
will require periodic cash interest payments and, in the case of the new senior secured credit facility term loan, scheduled principal payments. The new senior secured credit facility will also include a $10.0 million revolving line of credit. We
expect the operating cash flows generated from our legacy business and Penn Foster, once acquired, and currently available cash on hand to be sufficient to fund our working capital needs, capital expenditures and the debt service obligations under
the new financing arrangements over the next twelve months and beyond. However, there can be no assurance that the acquisition or related financings will be completed, or if completed, will be completed on a timely basis. In
addition, our ability to generate positive cash flows from operations is dependent on our future financial performance, which is subject to many factors beyond our control as outlined in Part I, Item 1A of our Annual Report on Form 10-K for the
year ended December 31, 2008 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.

In addition to
generating positive income from operations, the timing of cash payments received under our customer arrangements is a primary factor impacting our sources of liquidity. Our Test Preparation Services division generates the largest portion of our cash
flow from operations 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 Test
Preparation Services and SES, we are generating a greater percentage of our cash from contracts with institutions such as schools and school districts and post secondary institutions all of which pay us in arrears. Typical payment performance for
these institutional customers, once invoiced, ranges from 60 to 90 days. Additionally, 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 flows provided by operating activities from continuing
operations for the nine months ended September 30, 2009 were $13.4 million as compared to $10.2 million for the nine months ended September 30, 2008. The increase is primarily due to a reduction in restructuring related payments of $1.8
million for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. In addition, for the nine months ended September 30, 2008, we used $2.6 million of cash from operations for payment of a
legal settlement.

Cash flows used for investing activities from continuing operations during the nine months ended
September 30, 2009 were $6.7 million as compared to $31.9 million used during the comparable period in 2008. An increase in cash expended for internally developed software of $2.4 million was offset by a decrease in cash expended for the
acquisition of domestic franchises of $27.4 million.

Cash flows used for financing activities from continuing operations for
the nine months ended September 30, 2009 were $11.7 million as compared to $20.5 million provided by financing activities for the nine months ended September 30, 2008. Cash used for financing activities in 2009 primarily consisted of $11.2
million in repayments of our Wells Fargo credit facility term loan, $9.7 million of which represented required non-recurring installment payments from the cash proceeds of asset sales, including the K-12



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Services division sale and the sale of stock in a private investment that occurred in September 2008. During the three months ended June 30, 2009, we borrowed $4.5 million under our Wells
Fargo revolving line of credit for short term working capital purposes which was repaid during the same period. Cash provided by financing activities in 2008 primarily consisted of proceeds from borrowings under the term loan of our credit facility
of $19.0 million, net of deferred financing costs, and proceeds from the exercise of stock options.

Cash flows provided by
discontinued operations for the nine months ended September 30, 2009 were $6.1 million as compared to $592,000 used for discontinued operations for the nine months ended September 30, 2008. The increase in cash provided by discontinued
operations is primarily due to $7.8 million of net cash proceeds from the sale of the K-12 Services division on March 12, 2009, offset by an increase in cash used for K-12 Services division operating activities.

Seasonality in Results of Operations

We experience, and we expect to continue to experience, seasonal fluctuations in our revenue, results of operations and cash flow because the markets in which we operate are subject to seasonal
fluctuations based on the scheduled dates for standardized admissions tests and the typical school year. These fluctuations could result in volatility or adversely affect our stock price. We typically generate the largest portion of our test
preparation revenue in the third quarter. However, as SES revenue grows, we expect this revenue will be concentrated in the fourth and first quarters to more closely reflect the after school programs greatest activity during the school year.



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

The term loan under our credit facility carries a variable interest rate that fluctuates based primarily on changes in LIBOR rates. We had $7.8 million of outstanding principal under the term loan as of
September 30, 2009. A 10% increase in the interest rate on the term loan would increase annual interest expense by approximately $59,000. We do not carry any other variable interest rate debt.

Revenue from our international operations and royalty payments from our international franchises 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. A control system can provide only reasonable, not absolute, assurance that the control systems objectives
will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusions

As described in detail in Item 9A of our Annual Report on Form 10-K, for the fiscal year ended December 31, 2008, our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. Managements assessment identified one material weakness in internal control over financial reporting as of that date. This material weakness was identified in the area of the financial statement close
process. In light of this material weakness identified by management, which has not been remediated as of the end of the period covered by this Quarterly Report, our CEO and CFO concluded, after the evaluation described above, that our Disclosure
Controls were not effective, as of the end of the period covered by this Quarterly Report, in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms.



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Changes in Internal Control over Financial Reporting

During the nine months ended September 30, 2009, we continued to undertake actions to remediate the material weakness described above.
These actions included continuing to increase the level of detail and quality of monthly management reviews of financial results including comparisons of financial results versus budget and prior periods. We will continue to design and implement
additional policies, procedures and controls as required during the remediation of our reported material weakness.

We believe
that the steps outlined above will strengthen our internal control over financial reporting and address the material weakness described above. As part of our 2009 assessment of internal control over financial reporting, our management will test and
evaluate these additional controls to be implemented to assess whether they are operating effectively.



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PART II. OTHER INFORMATION



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

From
time to time and in the ordinary course of business, we are subject to various claims, charges and litigation. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of
unfavorably to us, we do not believe that we are currently a party to any material legal proceedings other than described in Item 1.

In August 2008, the Company learned that certain of the Companys web pages that appeared to contain confidential information were available to the public on the Internet for a short period of time
(the Security Incident). The Company discovered that due to an operational error or errors that occurred in connection with a change in information system architecture and concurrent change of hosting providers, an Internet web page that
was intended to be, and historically has been, password protected, had inadvertently ceased to be password protected for a 7-8 week period. Although the web page was shut down the day the Company learned about the matter, prior to that time some
files that contained personal information about students from schools that used the Companys assessment center product (or its predecessor product) under license from the K-12 Services division were accessible. With the exception of one school
district in Sarasota, Florida that included social security numbers for some students, the K-12 student data accessible during the Security Incident did not include financially sensitive information such as social security numbers, credit card
information or other financial information. The Company notified the Sarasota school district as well as Sarasota students who may have had such sensitive data accessible during the incident and has procured credit monitoring for those students
requesting it and for whom such monitoring is available because they are over 18. In some cases, the Company also notified other school districts and students whose information was subject to compromise, even where the Company was not legally
obligated to do so because the nature of the information did not trigger notification statutes. Other than the Security Incident, the Company believes its systems remain secure.

On September 19, 2008, a putative class action captioned Virginia B. Townsend v. The Princeton Review, Inc.(Case
No. 8:08-CIV-1879-T-33TBM) was filed against the Company in the United States District Court for the Middle District of Florida, Tampa Division relating to the Security Incident alleging negligence, breach of contract and unfair trade
practices. The complaint seeks unspecified monetary damages and other relief including the provision of personal data monitoring and identity theft insurance and unspecified enhancement of the security of the Companys computer data systems,
together with attorneys fees and costs. In July 2009 the parties entered into a settlement agreement which was approved preliminarily by the Court on August 5, 2009. Under the settlement agreement, subject to final approval by the
Court, the Company will provide a specified identity protection service to the class members that elect to participate and pay the fees and expenses of plaintiffs counsel as approved by the Court. The Company believes that the full cost of the
settlement will be within the limits of its applicable insurance policies.



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

We operate
in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this
Quarterly Report on Form 10-Q, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008.

In addition, our actual results could differ materially from those anticipated by us as a result of
risks related to the proposed acquisition of Penn Foster, including, but not limited to, satisfaction of closing conditions for the acquisition and related financings; the possibility that the acquisition or related financings will not be completed,
or if completed, not completed on a timely basis; demand for our products and services; our ability to assimilate and integrate certain of the operations of Penn Foster; unanticipated acquisition related costs and negative effects on our reported
results of operations from acquisition-related charges; our ability to achieve expected synergies and operating efficiencies in the acquisition within the expected time-frames or at all; the potential negative effects from the substantial amount of
outstanding indebtedness to be incurred to finance the acquisition; the ability to meet debt service requirements; availability and terms of capital, including following the transaction; and general liquidity uncertainties. We can give no assurance
that the acquisition will be completed or that the conditions to the acquisition will be satisfied.

Except as described
above, there have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or
which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the foregoing risks or uncertainties actually occurs, our business, financial condition and operating
results would likely suffer.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

Not applicable.



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|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
|------- | --------



|               |  |                                                                                                                                                                                                                                                                                                              
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                  
|               | 
|10.1           |  | Stock Purchase Agreement, dated October 16, 2009, by and among The Princeton Review, Inc., Penn Foster Holdings, LLC and Penn Foster Education Group, Inc. (incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-32469), filed with the SEC on October 21, 2009).
|               | 
|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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##### Table of Contents

SIGNATURES

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



THE PRINCETON REVIEW, INC.By:

/S/ STEPHEN C.
RICHARDSStephen C. RichardsChief Operating Officer and Chief Financial Officer(Duly Authorized Officer and Principal Financial Officer)


November 6, 2009



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##### Table of Contents

Exhibit Index



|               |  |                                                                                                                                                                                                                                                                                                              
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                  
|               | 
|10.1           |  | Stock Purchase Agreement, dated October 16, 2009, by and among The Princeton Review, Inc., Penn Foster Holdings, LLC and Penn Foster Education Group, Inc. (incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-32469), filed with the SEC on October 21, 2009).
|               | 
|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.                                                                                                                                                                                      



27