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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q/A







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

For the quarterly period ended September 30, 2007

OR



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

For the transition period from              to

Commission file number 000-32469





THE PRINCETON REVIEW, INC.

(Exact name of registrant as specified
in its charter)







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



|                                         |  |           
|---------------------------------------- |  | ----------
|2315 Broadway New York, New York         |  | 10024     
|(Address of principal executive offices) |  | (Zip Code)

Registrants telephone number, including area code:

(212) 874-8282





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

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

Large accelerated filer   ̈    Accelerated filer  x    Non-accelerated filer   ̈

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 Company had 28,140,468 shares of $0.01 par value common stock outstanding at November 5, 2007.









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EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A amends Part I, Items 1 and 2 and Part II, Item 6 of the Quarterly Report on Form 10-Q of The Princeton Review, Inc. (the Company) for the third quarter ended
September 30, 2007 and 2006, as filed with the Securities and Exchange Commission on November 9, 2007 (the Quarterly Report) to correct errors which occurred when the company did not properly account for deferred income taxes
relating to goodwill and intangibles that are amortizable for tax purposes but not accounting purposes. This Amendment also includes certain reclassifications in connection with the financial results associated with the SES Services division
previously reported in the Test Preparation Services division. The condensed financial statements have been recasted for all periods presented to include Test Preparation Services and SES separately.

For convenience and ease of reference, the Company is filing the Quarterly Report in its entirety with the applicable changes. Unless otherwise stated,
all information contained in this amendment is as of November 9, 2007, the filing date of the Quarterly Report. This Form 10-Q/A does not reflect events or transactions occurring after such filing date or modify or update those disclosures in
the Quarterly Report that may have been affected by events or transactions occurring subsequent to such filing date. No information in the Quarterly Report other than as set forth above is amended hereby. Currently-dated certifications from our
President and Chief Executive Officer and our Chief Operating Officer and Chief Financial Officer have been included as exhibits to this amendment.



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TABLE OF CONTENTS



|           |  |                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                       |  | Page
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  | 4   
|Item 1.    |  | Condensed Consolidated Financial Statements                                           |  | 4   
|           |  | Condensed Consolidated Balance Sheets                                                 |  | 4   
|           |  | Condensed Consolidated Statements of Operations                                       |  | 5   
|           |  | Condensed Consolidated Statements of Cash Flows                                       |  | 6   
|           |  | Notes to Condensed Consolidated Financial Statements                                  |  | 7   
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21  
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 26  
|Item 4.    |  | Controls and Procedures                                                               |  | 26  
|PART II.   |  | OTHER INFORMATION                                                                     |  | 27  
|Item 1.    |  | Legal Proceedings                                                                     |  | 27  
|Item 1A.   |  | Risk Factors                                                                          |  | 28  
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 28  
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 28  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 28  
|Item 5.    |  | Other Information                                                                     |  | 28  
|Item 6.    |  | Exhibits                                                                              |  | 28  
|SIGNATURES |  | 29                                                                                   



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PART I. FINANCIAL INFORMATION



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

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share data)



|                                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                   |  | September 30,2007 |         |   | December 31,2006 |  
|                                                                                                                                                                                   |  | As Restated       |         |   | As Restated      |  
|                                                                                                                                                                                   |  | (unaudited)       |         |   |                  |  
|ASSETS:                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                    |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                          |  | $                 | 44,230  |   |                  | $ | 10,822  |  
|Accounts receivable, net of allowance of $5,188 in 2007 and $2,848 in 2006                                                                                                         |  |                   | 11,692  |   |                  |   | 31,020  |  
|Other receivables                                                                                                                                                                  |  |                   | 3,454   |   |                  |   | 2,123   |  
|Inventory                                                                                                                                                                          |  |                   | 2,701   |   |                  |   | 2,950   |  
|Prepaid expenses                                                                                                                                                                   |  |                   | 1,199   |   |                  |   | 1,653   |  
|Other current assets                                                                                                                                                               |  |                   | 1,189   |   |                  |   | 2,612   |  
|Other current assets related to discontinued operations                                                                                                                            |  |                   |        |   |                  |   | 4,258   |  
|                                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                                                                               |  |                   | 64,465  |   |                  |   | 55,438  |  
|Furniture, fixtures, equipment and software development, net                                                                                                                       |  |                   | 20,523  |   |                  |   | 18,340  |  
|Goodwill                                                                                                                                                                           |  |                   | 31,006  |   |                  |   | 31,006  |  
|Investment in affiliates                                                                                                                                                           |  |                   | 1,639   |   |                  |   | 1,639   |  
|Other intangibles, net                                                                                                                                                             |  |                   | 9,506   |   |                  |   | 11,527  |  
|Other assets                                                                                                                                                                       |  |                   | 1,384   |   |                  |   | 1,744   |  
|Other assets related to discontinued operations                                                                                                                                    |  |                   |        |   |                  |   | 1,980   |  
|                                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                                                       |  | $                 | 128,523 |   |                  | $ | 121,674 |  
|                                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                   |  |                  
|LIABILITIES & STOCKHOLDERS EQUITY:                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Line of credit                                                                                                                                                                     |  | $                 |        |   |                  | $ | 3,000   |  
|Accounts payable                                                                                                                                                                   |  |                   | 3,916   |   |                  |   | 15,220  |  
|Accrued expenses                                                                                                                                                                   |  |                   | 13,763  |   |                  |   | 11,277  |  
|Current maturities of long-term debt                                                                                                                                               |  |                   | 1,227   |   |                  |   | 1,369   |  
|Deferred income                                                                                                                                                                    |  |                   | 16,059  |   |                  |   | 24,238  |  
|Liabilities related to discontinued operations                                                                                                                                     |  |                   |        |   |                  |   | 2,541   |  
|                                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                          |  |                   | 34,965  |   |                  |   | 57,645  |  
|Deferred rent                                                                                                                                                                      |  |                   | 2,508   |   |                  |   | 2,557   |  
|Long-term debt                                                                                                                                                                     |  |                   | 1,347   |   |                  |   | 14,127  |  
|Deferred Tax Liability                                                                                                                                                             |  |                   | 4,214   |   |                  |   | 3,703   |  
|Fair value of derivatives and warrant                                                                                                                                              |  |                   |        |   |                  |   | 181     |  
|Series B-1 Preferred Stock, $0.01 par value; 10,000 shares authorized; none issued and outstanding at September 30, 2007, 6,000 shares
issued and outstanding at December 31, 2006 |  |                   |        |   |                  |   | 6,000   |  
|Series C Preferred Stock, $0.01 par value; 60,000 shares authorized; 60,000 shares issued and outstanding at September 30, 2007 none
issued and outstanding at December 31, 2006   |  |                   | 56,785  |   |                  |   |        |  
|Preferred stock, $0.01 par value; 4,930,000 shares authorized, none issued and outstanding                                                                                         |  |                   |        |   |                  |   |        |  
|Common stock, $0.01 par value; 100,000,000 shares authorized; 28,092,100 and 27,601,268 issued and outstanding at September 30, 2007 and
December 31, 2006, respectively           |  |                   | 280     |   |                  |   | 276     |  
|Additional paid-in capital                                                                                                                                                         |  |                   | 119,317 |   |                  |   | 117,082 |  
|Accumulated deficit                                                                                                                                                                |  |                   | (90,645 | ) |                  |   | (79,573 | )
|Accumulated other comprehensive loss                                                                                                                                               |  |                   | (248    | ) |                  |   | (324    | )
|                                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                         |  |                   | 28,704  |   |                  |   | 37,461  |  
|                                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                         |  | $                 | 128,523 |   |                  | $ | 121,674 |  
|                                                                                                                                                                                   |  |                   |         |   |                  |   |         |  

See accompanying notes to the condensed consolidated financial statements.



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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

(In thousands, except
per share data)



|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ----------- |  | - | ----------- | - |  | - | ------- | -
|                                                                  |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                  |  | 2007                            |         |   | 2006                           |   |        | 2007        |  |   | 2006        |  
|                                                                  |  | As restated                     |         |   | As restated                    |   |        | As restated |  |   | As restated |  
|Revenue                                                           |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Test Preparation Services                                         |  | $                               | 26,502  |   |                                | $ | 27,026 |             |  | $ | 72,439      |   |  | $ | 71,433  |  
|SES Services                                                      |  |                                 | (31     | ) |                                |   | (318   | )           |  |   | 8,651       |   |  |   | 3,708   |  
|K-12 Services                                                     |  |                                 | 7,167   |   |                                |   | 7,588  |             |  |   | 29,102      |   |  |   | 26,001  |  
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Total revenue                                                     |  |                                 | 33,638  |   |                                |   | 34,296 |             |  |   | 110,192     |   |  |   | 101,142 |  
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Cost of revenue                                                   |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Test Preparation Services                                         |  |                                 | 10,350  |   |                                |   | 9,421  |             |  |   | 26,852      |   |  |   | 23,786  |  
|SES Services                                                      |  |                                 | 86      |   |                                |   | 57     |             |  |   | 3,716       |   |  |   | 1,887   |  
|K-12 Services                                                     |  |                                 | 3,627   |   |                                |   | 5,838  |             |  |   | 16,069      |   |  |   | 16,402  |  
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Total cost of revenue                                             |  |                                 | 14,063  |   |                                |   | 15,316 |             |  |   | 46,637      |   |  |   | 42,075  |  
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Gross Profit                                                      |  |                                 | 19,575  |   |                                |   | 18,980 |             |  |   | 63,555      |   |  |   | 59,067  |  
|Operating expenses                                                |  |                                 | 23,611  |   |                                |   | 21,523 |             |  |   | 67,975      |   |  |   | 63,942  |  
|Restructuring                                                     |  |                                 | 1,725   |   |                                |   |       |             |  |   | 1,725       |   |  |   |        |  
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Total Operating expenses                                          |  |                                 | 25,336  |   |                                |   | 21,523 |             |  |   | 69,700      |   |  |   | 63,942  |  
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Income (loss) from operations                                     |  |                                 | (5,761  | ) |                                |   | (2,543 | )           |  |   | (6,145      | ) |  |   | (4,875  | )
|Interest income (expense)                                         |  |                                 | 165     |   |                                |   | (168   | )           |  |   | (677        | ) |  |   | (390    | )
|Other income (expense)                                            |  |                                 | (3,788  | ) |                                |   | 18     |             |  |   | (7,551      | ) |  |   | (77     | )
|Equity in the income (loss) of affiliates                         |  |                                 |        |   |                                |   |       |             |  |   |            |   |  |   | (50     | )
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Income (loss) before income taxes                                 |  |                                 | (9,384  | ) |                                |   | (2,693 | )           |  |   | (14,373     | ) |  |   | (5,392  | )
|(Provision) benefit for income taxes                              |  |                                 | 630     |   |                                |   | (42    | )           |  |   | 767         |   |  |   | (500    | )
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Net income (loss) from continuing operations                      |  |                                 | (8,754  | ) |                                |   | (2,735 | )           |  |   | (13,606     | ) |  |   | (5,892  | )
|Discontinued operations                                           |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Income (loss) from discontinued operations                        |  |                                 | (1,267  | ) |                                |   | 302    |             |  |   | (314        | ) |  |   | (3      | )
|Gain from disposal of discontinued operations                     |  |                                 |        |   |                                |   |       |             |  |   | 4,539       |   |  |   |        |  
|(Provision) benefit for income taxes                              |  |                                 | (1,117  | ) |                                |   | (124   | )           |  |   | (1,689      | ) |  |   | 1       |  
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Income (loss) from discontinued operations                        |  |                                 | (2,384  | ) |                                |   | 178    |             |  |   | 2,536       |   |  |   | (2      | )
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Net income (loss)                                                 |  |                                 | (11,138 | ) |                                |   | (2,557 | )           |  |   | (11,070     | ) |  |   | (5,894  | )
|Dividends and accretion on Series C and B-1 Preferred Stock       |  |                                 | (883    | ) |                                |   | (106   | )           |  |   | (1,090      | ) |  |   | (411    | )
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Income (loss) attributed to common stockholders                   |  | $                               | (12,021 | ) |                                | $ | (2,663 | )           |  | $ | (12,160     | ) |  | $ | (6,305  | )
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Earnings (loss) per share                                         |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Basic and Diluted                                                 |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Income (loss) from continuing operations                          |  | $                               | (0.34   | ) |                                | $ | (0.11  | )           |  | $ | (0.53       | ) |  | $ | (0.23   | )
|Income (loss) from discontinued operations                        |  | $                               | (0.09   | ) |                                | $ | 0.01   |             |  | $ | 0.09        |   |  | $ | (0.00   | )
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Income (loss) attributed to common shareholders                   |  | $                               | (0.43   | ) |                                | $ | (0.10  | )           |  | $ | (0.44       | ) |  | $ | (0.23   | )
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  
|Weighted average shares used in computing income (loss) per share |  |                                 | 28,031  |   |                                |   | 27,575 |             |  |   | 27,823      |   |  |   | 27,574  |  
|                                                                  |  |                                 |         |   |                                |   |        |             |  |   |             |   |  |   |         |  

See accompanying notes to the condensed consolidated financial statements.



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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)



|                                                                                        |  |                                        |         |   |             |   |        |  
|--------------------------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ----------- | - | ------ | -
|                                                                                        |  | For the Nine MonthsEnded September 30, |        
|                                                                                        |  | 2007                                   |         |   | 2006        |  
|                                                                                        |  | As Restated                            |         |   | As Restated |  
|Cash flows provided by (used for) operating activities:                                 |  |                                        |         |   |             |   |        |  
|Net income (loss) from continuing operations                                            |  | $                                      | (13,606 | ) |             | $ | (5,892 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities |  |                                        |         |   |             |   |        |  
|Depreciation                                                                            |  |                                        | 2,169   |   |             |   | 1,669  |  
|Amortization                                                                            |  |                                        | 4,013   |   |             |   | 4,592  |  
|Bad debt expense                                                                        |  |                                        | 1,648   |   |             |   | 878    |  
|Write-off of deferred financing costs                                                   |  |                                        | 24      |   |             |   |       |  
|Write-off of inventory                                                                  |  |                                        |        |   |             |   | 280    |  
|Change in fair value of derivatives                                                     |  |                                        | 7,615   |   |             |   | (299   | )
|Deferred Income Tax Liability                                                           |  |                                        | 511     |   |             |   | 499    |  
|Deferred rent                                                                           |  |                                        | (51     | ) |             |   | 231    |  
|Stock based compensation                                                                |  |                                        | 2,740   |   |             |   | 669    |  
|Other, net                                                                              |  |                                        | 184     |   |             |   | 433    |  
|Net change in operating assets and liabilities:                                         |  |                                        |         |   |             |   |        |  
|Accounts receivable                                                                     |  |                                        | 20,426  |   |             |   | 2,331  |  
|Inventory                                                                               |  |                                        | 249     |   |             |   | (343   | )
|Prepaid expenses                                                                        |  |                                        | 455     |   |             |   | 273    |  
|Other assets                                                                            |  |                                        | 1,280   |   |             |   | (529   | )
|Accounts payable and accrued expenses                                                   |  |                                        | (8,815  | ) |             |   | (6,556 | )
|Deferred income                                                                         |  |                                        | (8,179  | ) |             |   | 4,738  |  
|                                                                                        |  |                                        |         |   |             |   |        |  
|Net cash provided by (used for) operating activities                                    |  |                                        | 10,663  |   |             |   | 2,974  |  
|                                                                                        |  |                                        |         |   |             |   |        |  
|Cash provided by (used for) investing activities:                                       |  |                                        |         |   |             |   |        |  
|Purchases of furniture, fixtures, equipment and software development                    |  |                                        | (6,365  | ) |             |   | (5,158 | )
|Additions to capitalized K-12 content, capitalized course costs                         |  |                                        | (42     | ) |             |   | (1,249 | )
|Payment of related party loan                                                           |  |                                        | 293     |   |             |   | 345    |  
|Payment of note receivable                                                              |  |                                        | 86      |   |             |   | 266    |  
|Payment of loan receivable                                                              |  |                                        |        |   |             |   | 250    |  
|                                                                                        |  |                                        |         |   |             |   |        |  
|Net cash provided by (used for) investing activities                                    |  |                                        | (6,028  | ) |             |   | (5,546 | )
|                                                                                        |  |                                        |         |   |             |   |        |  
|Cash flows provided by (used for) financing activities:                                 |  |                                        |         |   |             |   |        |  
|Redemption of Series B-1 Preferred Stock                                                |  |                                        | (6,000  | ) |             |   | (4,377 | )
|Termination of fair value of derivatives and warrants                                   |  |                                        | (7,796  | ) |             |   |       |  
|Proceeds from the sale of Series C Preferred Stock, net of issuance cost                |  |                                        | 55,929  |   |             |   |       |  
|Proceeds from revolving credit facility                                                 |  |                                        |        |   |             |   | 10,000 |  
|Payments of borrowings under revolving credit facility                                  |  |                                        | (15,000 | ) |             |   |       |  
|Payment of credit facility deferred financing costs                                     |  |                                        |        |   |             |   | (168   | )
|Capital lease payments                                                                  |  |                                        | (520    | ) |             |   | (607   | )
|Dividends on Series B-1 Preferred Stock                                                 |  |                                        | (233    | ) |             |   | (411   | )
|Notes payable related to acquisitions                                                   |  |                                        | (410    | ) |             |   | (560   | )
|Proceeds from exercise of options                                                       |  |                                        | 586     |   |             |   | 11     |  
|                                                                                        |  |                                        |         |   |             |   |        |  
|Net cash provided by (used for) financing activities                                    |  |                                        | 26,556  |   |             |   | 3,888  |  
|                                                                                        |  |                                        |         |   |             |   |        |  
|Total cash flows used in continuing operations                                          |  |                                        | 31,191  |   |             |   | 1,316  |  
|                                                                                        |  |                                        |         |   |             |   |        |  
|Cash Flows from Discontinued Operations                                                 |  |                                        |         |   |             |   |        |  
|Income from discontinued operations                                                     |  |                                        | (2,004  | ) |             |   | (2     | )
|Gain on disposal of discontinued operations                                             |  |                                        | (4,539  | ) |             |   |       |  
|Other adjustments to reconcile net income to net cash provided by operating activities  |  |                                        | (220    | ) |             |   | (1,040 | )
|                                                                                        |  |                                        |         |   |             |   |        |  
|Net cash provided by (used for) operating activities                                    |  |                                        | (6,763  | ) |             |   | (1,042 | )
|                                                                                        |  |                                        |         |   |             |   |        |  
|Cash received from disposal of discontinued operations                                  |  |                                        | 7,000   |   |             |   |       |  
|Other cash provided by investing activities                                             |  |                                        | 1,980   |   |             |   | 92     |  
|                                                                                        |  |                                        |         |   |             |   |        |  
|Net cash provided by (used for) investing activities                                    |  |                                        | 8,980   |   |             |   | 92     |  
|                                                                                        |  |                                        |         |   |             |   |        |  
|Net cash provided by (used for) discontinued operations                                 |  |                                        | 2,217   |   |             |   | (950   | )
|                                                                                        |  |                                        |         |   |             |   |        |  
|Increase (decrease) in cash and cash equivalents                                        |  |                                        | 33,408  |   |             |   | 366    |  
|Cash and cash equivalents, beginning of period                                          |  |                                        | 10,822  |   |             |   | 8,002  |  
|                                                                                        |  |                                        |         |   |             |   |        |  
|Cash and cash equivalents, end of period                                                |  | $                                      | 44,230  |   |             | $ | 8,368  |  
|                                                                                        |  |                                        |         |   |             |   |        |  

See accompanying notes to the condensed consolidated financial statements.



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##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

The
accompanying unaudited interim consolidated financial statements include the accounts of The Princeton Review, Inc. and its wholly-owned subsidiaries, The Princeton Review Canada Inc. and Princeton Review Operations L.L.C., as well as the
Companys national advertising fund (together, the Company).

The unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures reflect all adjustments, consisting only of normal recurring accruals, that are, in the opinion of management,
necessary for a fair presentation of the interim financial statements and are adequate to make the information not misleading. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and
related notes for the year ended December 31, 2006 included in the Companys Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. The results of operations for the three-month and nine-month periods ended
September 30, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Products and
Services

The following table summarizes the Companys revenue and cost of revenue for the three-month and nine-month periods ended
September 30, 2007 and 2006:



|                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|--------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                      |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                      |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|                      |  | (in thousands)                 
|Revenue               |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Services              |  | $                               | 29,157 |                                | $ | 30,127 |  | $    | 97,233  |  | $ | 85,685 
|Products              |  |                                 | 2,325  |                                |   | 2,272  |  |      | 5,907   |  |   | 9,361  
|Other                 |  |                                 | 2,156  |                                |   | 1,897  |  |      | 7,052   |  |   | 6,096  
|                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Total revenue         |  | $                               | 33,638 |                                | $ | 34,296 |  | $    | 110,192 |  | $ | 101,142
|                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Cost of Revenue       |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Services              |  | $                               | 13,372 |                                | $ | 13,920 |  | $    | 44,576  |  | $ | 37,362 
|Products              |  |                                 | 691    |                                |   | 1,368  |  |      | 1,726   |  |   | 4,365  
|Other                 |  |                                 |       |                                |   | 28     |  |      | 335     |  |   | 348    
|                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Total cost of revenue |  | $                               | 14,063 |                                | $ | 15,316 |  | $    | 46,637  |  | $ | 42,075 
|                      |  |                                 |        |                                |   |        |  |      |         |  |   |        

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

Seasonality in Results of Operations

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



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##### Table of Contents

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

New Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
 including an amendment of FASB Statement No. 115, (SFAS No. 159). This standard permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of
SFAS No. 159 are effective beginning in our fiscal year 2008 and are currently not expected to have a material effect on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), to establish a consistent framework for measuring fair value and expand disclosures on
fair value measurements. The provisions of SFAS No. 157 are effective beginning in our fiscal year 2008 and are currently not expected to have a material effect on our consolidated financial statements.

In July 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109(FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in income taxes and prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 prescribes a two-step evaluation process for tax positions. The first step is recognition based on a
determination of whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is to
measure a tax position that meets the more-likely-than-not threshold. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. If a tax position does not meet the
more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 is effective as of the beginning of the Companys 2007 fiscal year. The cumulative effect, if any, of applying FIN 48
is to be reported as an adjustment to the opening balance of retained earnings in the year of adoption. The Companys policy is to charge any interest and penalties associated with past due income tax assessments to interest expense in the
statement of operations. The Company does not have any significant uncertain contingent tax liabilities as September 30, 2007 and as a result, the adoption of FIN No. 48 did not have a significant impact on the Companys financial
statements. In addition, there was no adjustment to accumulated deficit relating to the cumulative effect of the adoption of FIN 48 as of January 1, 2007.

The Company is subject to income taxes in the United States and in certain foreign jurisdictions and, in the ordinary course of business, there are many transactions and calculations where the ultimate tax
determination is uncertain. The statute of limitations for adjustments to the Companys historic tax obligations will vary from jurisdiction to jurisdiction. The tax years 2003 to 2006 remain open to examination by the major tax jurisdictions
to which the Company is subject. At January 1, 2007, the Company does not anticipate that its total unrecognized tax benefits, if any, will significantly change due to any settlement of examination or expiration of statute of limitation within
the next twelve months.

In February 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments  an
Amendment of FASB Statements No. 133 and 140(SFAS No. 155). SFAS No. 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on
a fair value basis, at the holders election. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for fiscal years ending after September 15, 2006.
The adoption of this pronouncement did not have a significant impact on the Companys consolidated financial statements.

Use of Estimates

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



8



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##### Table of Contents

Reclassifications

In connection with the transaction more fully described in Note 2 below, financial results associated with the admissions publications and college counseling services previously reported in the Admission Services
division have been recasted for all periods presented into Test Preparation Services and K-12 Services, respectively.

Certain prior year
balances have been reclassified to conform to the current quarters presentation including reclassification of activity related to discontinued operations.

2. Restatement to 2006 and prior financial statements

The Company has restated its 2006 and 2005 consolidated financial
statements to correct its accounting for income taxes and more specifically, to record a deferred tax liability for its territorial marketing rights and increase its valuation allowance related to deferred tax assets.

Territorial marketing rights represent an indefinite-lived intangible asset for which the tax basis is zero. When the Company converted from a Subchapter
S to C-corporation in 2000, deferred taxes were required to be recognized for temporary differences pursuant to SFAS No. 109; however, it was determined that the Company did not record a deferred tax liability for the territorial marketing rights.
The correction amounted to $600,000, which is reflected in the consolidated financial statements as a restatement of the opening retained earnings as of January 1, 2005.

In 2004, as a result of the cumulative historical losses incurred and uncertainty as to when the Company would generate sufficient taxable income, the Company established a full valuation allowance against its
deferred tax assets. In determining the required valuation allowance, the Company inappropriately offset the deferred tax liability for goodwill against the deferred tax assets. However, due to uncertainty as to the timing of its reversal, the
deferred tax liability should not have been included as a source of future taxable income in ultimately determining the required valuation allowance. The correction increases the valuation allowance by $3.1 million and $2.4 million as of December
31, 2006 and 2005. The cumulative impact for prior years of $1.8 million is reflected as a restatement of the opening retained earnings as of January 1, 2005.

Accordingly, the following changes have been made to the Companys consolidated balance sheet, statements of operations, as of September 30, 2007 and December 31, 2006 and for the three and nine months
ended September 30, 2007 and 2006. Changes to the statements of cash flows have not been separately presented as they have no effect on cash provided by operations. Disclosures in Note 11 Income Taxes have also been restated.
Additionally, any other footnotes reflected by the restatement have been noted as such.



|                                                        |  |                       |         |   |          |   |         |  
|------------------------------------------------------- |  | --------------------- | ------- | - | -------- | - | ------- | -
|(amounts in thousands, except for share)                |  |                       |         |   |          |  
|                                                        |  | As PreviouslyReported |         |   | Restated |  
|Nine months ended September 30, 2007 (Income Statement) |  |                       |         |   |          |   |         |  
|(Provision) benefit for income taxes                    |  | $                     | 1,278   |   |          | $ | 767     |  
|Net loss attributable to common shareholders            |  | $                     | (11,650 | ) |          | $ | (12,160 | )
|Net loss per share                                      |  | $                     | (0.42   | ) |          | $ | (0.44   | )
|                                                        |  |                      
|Nine months ended September 30, 2006 (Income Statement) |  |                       |         |   |          |   |         |  
|(Provision) benefit for income taxes                    |  | $                     |        |   |          | $ | (500    | )
|Net loss attributable to common shareholders            |  | $                     | (5,806  | ) |          | $ | (6,305  | )
|Net loss per share                                      |  | $                     | (0.21   | ) |          | $ | (0.23   | )
|                                                        |  |                      
|Balance sheet data as of September 30, 2007             |  |                       |         |   |          |   |         |  
|Deferred income taxes                                   |  | $                     |        |   |          | $ | 4,214   |  
|Shareholders equity                                     |  | $                     | 32,918  |   |          | $ | 28,704  |  
|                                                        |  |                      
|Balance sheet data as of December 31, 2006              |  |                       |         |   |          |   |         |  
|Deferred income taxes                                   |  | $                     |        |   |          | $ | 3,703   |  
|Shareholders equity                                     |  | $                     | 41,163  |   |          | $ | 37,461  |  



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##### Table of Contents

|                                                         |  |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | - | ------- | - |  | - | ------- | -
|Three months ended September 30, 2007 (Income Statement) |  |   |         |   |  |   |         |  
|(Provision) benefit for income taxes                     |  | $ | 800     |   |  | $ | 630     |  
|Net loss attributable to common shareholders             |  | $ | (11,851 | ) |  | $ | (12,021 | )
|Net loss per share                                       |  | $ | (0.42   | ) |  | $ | (0.43   | )
|                                                         |  |  
|Three months ended September 30, 2006 (Income Statement) |  |   |         |   |  |   |         |  
|(Provision) benefit for income taxes                     |  | $ |        |   |  | $ | (42     | )
|Net loss attributable to common shareholders             |  | $ | (2,497  | ) |  | $ | (2,663  | )
|Net loss per share                                       |  | $ | (0.09   | ) |  | $ | (0.10   | )

3. Disposal of Assets

Admissions Tech Business

On February 16, 2007, the Company completed its sale of certain assets
of the Companys Admissions Services Division for purchase price of $7.0 million. The Company sold to Embark Corp. the assets related to providing electronic application and prospect management tools to schools and higher education institution
customers (the Admissions Tech Business). Additionally, the Company is entitled to an earn-out of up to an additional $1.25 million based upon certain achievements of the Admissions Tech Business in 2007. The Company recorded a gain on
the sale of these assets in the amount of $4.5 million.

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



|                                           |  |                                 |        |                                |      |   |       |  |   |       |   |  |   |       |  
|------------------------------------------ |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ----- |  | - | ----- | - |  | - | ----- | -
|                                           |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30, |     
|                                           |  | 2007                            |        |                                | 2006 |   | 2007  |  |   | 2006  |  
|                                           |  | (in thousands)                  |       
|Revenues                                   |  | $                               |       |                                |      | $ | 1,616 |  | $ | 2,406 |   |  | $ | 3,905 |  
|Cost of revenues                           |  |                                 |       |                                |      |   | 4     |  |   | 392   |   |  |   | 879   |  
|                                           |  |                                 |        |                                |      |   |       |  |   |       |   |  |   |       |  
|Gross margin                               |  |                                 |       |                                |      |   | 1,612 |  |   | 2,014 |   |  |   | 3,026 |  
|Operating expenses (a)                     |  |                                 | 1,267  |                                |      |   | 1,310 |  |   | 2,328 |   |  |   | 3,029 |  
|                                           |  |                                 |        |                                |      |   |       |  |   |       |   |  |   |       |  
|Income (loss) from discontinued operations |  | $                               | (1,267 | )                              |      | $ | 302   |  | $ | (314  | ) |  | $ | (3    | )
|                                           |  |                                 |        |                                |      |   |       |  |   |       |   |  |   |       |  



|(a) | Excludes corporate overhead expense previously allocated to the Admissions Tech Business in accordance with Emerging Issues Task Force Issue No. 87-24, Allocation of
Interest Expense to Discontinued Operations.The amount of corporate overhead expense added back to the Companys continuing operations totaled $325,000, for the three months ended September 30, 2006, and $69,800, $1,055,000 for
the nine months ended September 30, 2007 and 2006, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Embark Corp did not purchase the accounts receivable
balances that existed at the closing date. At September 30, 2007, the Company has approximately $1.7 million of accounts receivable and a related allowance for doubtful accounts of approximately $1.7 million related to the Admission Services
business. The accounts receivable and allowance for doubtful account balance is included in accounts receivable on the accompanying consolidated balance sheet. The $1.3 million of operating expense incurred during the third quarter of 2007 primarily
relates to an increase in the allowance for doubtful accounts for balances which were determined to be uncollectible.

The net assets of
the discontinued operations were as follows as of December 31, 2006:



|                                                             |  |                  |      
|------------------------------------------------------------ |  | ---------------- | -----
|                                                             |  | December 31,2006
|                                                             |  | (in thousands)  
|Current assets                                               |  | $                | 4,258
|                                                             |  |                  |      
|Furniture, fixtures, equipment and software development, net |  |                  | 138  
|Goodwill                                                     |  |                  | 500  
|Other intangibles, net                                       |  |                  | 1,283
|Other assets                                                 |  |                  | 59   
|                                                             |  |                  |      
|Non-current assets                                           |  |                  | 1,980
|                                                             |  |                  |      
|Total assets related to discontinued operations              |  | $                | 6,238
|                                                             |  |                  |      



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|                                                     |  |   |      
|---------------------------------------------------- |  | - | -----
|Current liabilities                                  |  | $ | 2,541
|                                                     |  |   |      
|Total liabilities related to discontinued operations |  | $ | 2,541
|                                                     |  |   |      



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##### Table of Contents

Services and License Agreement

The Company entered into a Services and License Agreement, dated as of April 27, 2007 (the Agreement), with Higher Edge Marketing Services, Inc. (the Licensee), a company controlled by
Young Shin, a former executive officer and head of the Companys Admissions Services division. Pursuant to the terms of the Agreement, the Licensee will provide ongoing collection and management services to the Company in connection with
certain of the Companys marketing agreements with post-secondary institutions. The term of the Agreement is seven years, and it provides for renewal at the end of the term under certain circumstances.

The Company will pay the Licensee certain collection and management fees for outstanding amounts collected by Licensee and for other services provided in
managing the agreements. The Licensee will pay the Company a variable royalty from 30% to 50% on amounts collected by the Licensee under new marketing agreements entered into by the Licensee after the date of the Agreement. The Licensees
payments to the Company are subject to increasing annual minimum amounts. In addition, the Licensee will pay the Company a 5% royalty on all amounts received by the Licensee generated from the sale of any other goods or services to any
post-secondary educational institution.

4. Stock-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS No. 123), using the modified prospective
transition application method. SFAS 123R requires the recognition of the fair value of stock-based compensation in its statements of operations. Stock-based compensation expense primarily relates to stock options and restricted stock under the
Companys 2000 Stock Incentive Plan. Compensation expense is recognized on a straight-line method over the requisite service period. The fair value of stock options are estimated using the Black-scholes option pricing formula which uses the
following assumptions in its fair value calculation at the date of grant for the three and nine months ended September 30:



|                         |  |                                  |  |                                 |  |                    |  |                 
|------------------------ |  | -------------------------------- |  | ------------------------------- |  | ------------------ |  | ----------------
|                         |  | Three Months ended September 30, |  | Nine Months ended September 30,
|                         |  | 2007                             |  | 2006                            |  | 2007               |  | 2006            
|Risk free interest rates |  | 4.30%                            |  | 5.00%                           |  | 4.30% to 5.00%     |  | 5.00%           
|Expected forfeiture rate |  | 15%                              |  | 15%                             |  | 15%                |  | 15%             
|Expected life            |  | 5.0 years                        |  | 5.0 years                       |  | 5.0 years 29.3% to |  | 5.0 years       
|Expected volatility      |  | 45.91%                           |  | 39.62%                          |  | 45.91%             |  | 39.62% to 44.92%

Information concerning all stock option activity for the nine months ended September 30, 2007
is summarized as follows:



|                                                  |  |                                             |   |  |                                          |      |                                                     |      |                                        |   |       
|------------------------------------------------- |  | ------------------------------------------- | - |  | ---------------------------------------- | ---- | --------------------------------------------------- | ---- | -------------------------------------- | - | ------
|                                                  |  | Shares ofCommon StockAttributable toOptions |   |  | WeightedAverage ExercisePrice of Options |      | WeightedAverage RemainingContractual Term(in years) |      | AggregateIntrinsic Value(in thousands)
|Outstanding at December 31, 2006                  |  | 3,155,527                                   |   |  | $                                        | 6.97 |                                                     |      |                                        |   |       
|Granted at market                                 |  | 3,510,000                                   |   |  | $                                        | 5.55 |                                                     |      |                                        |   |       
|Options forfeited                                 |  | (425,057                                    | ) |  | $                                        | 7.25 |                                                     |      |                                        |   |       
|Options exercised                                 |  | (140,634                                    | ) |  | $                                        | 4.04 |                                                     |      |                                        |   |       
|                                                  |  |                                             |   |  |                                          |      |                                                     |      |                                        |   |       
|Outstanding at September 30, 2007                 |  | 6,099,836                                   |   |  | $                                        | 6.21 |                                                     | 7.46 |                                        | $ | 12,409
|                                                  |  |                                             |   |  |                                          |      |                                                     |      |                                        |   |       
|Vested and expected to vest at September 30, 2007 |  | 5,064,076                                   |   |  | $                                        | 6.33 |                                                     | 6.99 |                                        | $ | 9,716 
|                                                  |  |                                             |   |  |                                          |      |                                                     |      |                                        |   |       
|Exercisable at September 30, 2007                 |  | 2,425,039                                   |   |  | $                                        | 7.13 |                                                     | 3.99 |                                        | $ | 2,841 
|                                                  |  |                                             |   |  |                                          |      |                                                     |      |                                        |   |       

As of September 30, 2007, the total unrecognized compensation cost related to nonvested stock
option awards amounted to approximately $4.3 million, including estimated forfeitures which will be recognized over the weighted-average remaining requisite service period of approximately 3.74 years.

Of the 3,510,000 options granted during the nine months ended September 30, 2007, 2,450,000 were granted outside of the 2000 Stock Incentive Plan.

During 2007, the Board of Directors approved the granting of 280,940 shares of Restricted Stock under the Companys 2000 Stock
Incentive Plan to the senior management of the Company and the outside members of the Board of Directors, having a grant-date fair value of $1.4 million. These Restricted Stock awards generally vest quarterly over a two year period. As of
September 30, 2007, 238,846 shares of Restricted Stock were outstanding with unrecognized compensation cost of $890,000 to be recognized over a period of 1.25 years.



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##### Table of Contents

The Board of Directors also approved the granting of 257,519 shares of Restricted Stock, which vested
immediately, as payment of bonuses to employees, in lieu of payment in cash resulting in a compensation cost of $1.6 million. Additionally, the Company registered an additional 1,550,468 shares for issuance under the 2000 Stock Incentive Plan.

Total stock-based compensation expense recorded for the three months ended September 30, 2007 and 2006 was $736,000 and $360,000,
respectively. Total stock-based compensation expense recorded for the nine months ended September 30, 2007 and 2006 was $2.7 million and $660,000, respectively. Stock-based compensation is recorded as operating expense within the accompanying
consolidated statements of operations.

5. Line of Credit

Credit Agreement

On July 24, 2007, the Company paid down $15 million of debt outstanding including all
accumulated interest and other charges and terminated the credit facility.

Prior to that date, the Company entered into a Credit Agreement
(the Credit Agreement), among the Company, Princeton Review Operations, L.L.C., a wholly owned subsidiary of the Company (Operations), Golub Capital CP Funding, LLC and such other lenders who become signatory from time to
time, and Golub Capital Incorporated (Golub), as Administrative Agent.

6. Preferred Stock

Series C Preferred Stock

On July 23, 2007, the
Company entered into a Series C Preferred Stock Purchase Agreement (the Purchase Agreement) with Bain Capital Venture Fund 2007, L.P., and its affiliates, Prides Capital Fund I, L.P. (Prides) and RGIP, LLC (collectively, the
Purchasers), providing for the issuance and sale of $60,000,000 of the Companys Series C Convertible Preferred Stock (60,000 shares) at a purchase price of $1,000 per share (the Series C Preferred Stock). Each share of
Series C Preferred Stock is convertible into shares of the Companys common stock at an initial conversion price of $6.00 per share, subject to adjustment. The Series C Preferred Stock contains a compounding, cumulative 6% per annum
dividend payable upon conversion of the Series C Preferred Stock. Following the fourth anniversary of the issuance of the Series C Preferred Stock the dividend shall no longer accrue unless declared by the Board of Directors of the Company (the
Board). Additionally, on or at any time after the eighth anniversary of the Issue Date, if requested by the holders of at least 10% of the then outstanding Series C Preferred Stock, each holder of Series C Preferred Stock shall have the
right to require the Company to redeem all of such holders Series C Preferred Stock, for cash, at a redemption price equal to the Original Purchase Price plus accrued and unpaid dividends. The Company also has the right to redeem the then
outstanding Series C Preferred Stock following the eighth anniversary of the issue date, for cash, at a redemption price equal to the Original Purchase Price plus accrued and unpaid dividends.

The Purchase Agreement allows the holders of the Series C Preferred Stock to elect two directors to the Board who were elected on July 23, 2007.

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

Series
B-1 Preferred Stock

On July 23, 2007, Prides and the Company agreed to terminate the Agreement (the Fletcher
Agreement), dated May 28, 2004, by and among the Company and Prides, as the assignee of Fletcher International, Ltd. (Fletcher) pertaining to the Companys outstanding Series B-1 Preferred Stock, and all related rights,
effective as of the closing date of the Purchase Agreement. Prides had acquired the Series B-1 Preferred Stock and the rights under the Fletcher Agreement from an unaffiliated third party on June 8, 2007. The Fletcher Agreement was terminated
and the Series B-1 Preferred Stock and all its related rights were cancelled and retired when the Series B-1 Preferred Stock was exchanged as partial consideration for the purchase by Prides of the Series C Preferred Stock noted above.



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##### Table of Contents

Prior to that date, the Company sold 10,000 shares of its Series B-1 Preferred Stock to Fletcher
International, Ltd. (Fletcher) for proceeds of $10,000,000. In May 2006, 4,000 shares of Series B-1 Preferred Stock were redeemed in cash, leaving 6,000 shares outstanding. These shares were convertible into common stock at any time (the
Holder Conversion Option). Prior to conversion, each share accrued dividends at an annual rate of the greater of 5% and the 90-day LIBOR plus 1.5%, subject to adjustment. Dividends were payable, whether or not declared by the Board of
Directors out of funds legally available therefore, in cash or registered shares of common stock, at the Companys option. At the time of issuance of the Series B-1 Preferred Stock, each share of Series B-1 Preferred Stock was convertible into
a number of shares of common stock equal to: (1) the stated value of one share of Series B-1 Preferred Stock plus accrued and unpaid dividends, divided by (2) the conversion price of $11.00, subject to adjustment. In accordance with the
terms of the agreement with the holder, the conversion price was decreased to $6.9327 per share, because effectiveness of the registration statement relating to the Series B-1 Preferred Stock shares was delayed and, once it was declared effective,
the Company thereafter failed to maintain its effectiveness. The conversion price was subject to further reduction upon certain events such as the issuance of common stock at a price below the conversion price or if the Company fails to keep the
registration statement current.

In addition, the Company granted the holder certain rights entitling the holder to purchase up to 20,000
shares of additional preferred stock, at a price of $1,000 per share, for an aggregate additional consideration of $20,000,000 (the Warrant). These rights to purchase additional shares are legally detachable from the Series B-1 Preferred
Stock and may be exercised by the holder separately from actions taken with regard to the originally issued Series B-1 Preferred Stock. The agreement with the holder provides that any shares of additional preferred stock will have the same
conversion ratio as the Series B-1 Preferred Stock, except that the conversion price will be the greater of (1) $11.00, or (2) 120% of the prevailing price of common stock at the time of exercise of the rights (based on an average daily
trading price formula), subject to adjustment upon the occurrence of certain events. Due to the delay in the effectiveness of the registration statement relating to the Series B-1 Preferred Stock, and the Companys failure to maintain its
effectiveness as required by the agreement with the holder, the conversion price for any such additional series of preferred stock was reduced to the greater of (1) $6.9327 or (2) 75.63% of the prevailing price of common stock at the time
of exercise of the rights. These rights may be exercised by the holder on one or more occasions commencing July 1, 2005, and for the 24-month period thereafter, which period may be extended under certain circumstances, including extension by
one day for each day the registration requirements are not met. The Agreement with the holder also provides that shares of additional preferred stock will be redeemable upon terms substantially similar to those of the Series B-1 Preferred Stock.

Embedded derivatives and warrant

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

The Holder Conversion Option meets SFAS 133s definition of an embedded derivative. In addition, the Holder Conversion Option is not considered
conventional because the number of shares received by the holder upon exercise of the option could change under certain conditions. The Holder Conversion Option is considered an equity derivative and its economic characteristics are not
considered to be clearly and closely related to the economic characteristics of the Series B-1 Preferred Stock, which is a considered more akin to a debt instrument than equity.

Similarly, the embedded Make-whole Provision also must be accounted for separately from the Series B-1 Preferred Stock. The Make-whole Provision
specifies if certain events (such as a business combination) that constitute a change of control occur; the Company may be required to settle the Series B-1 Preferred Stock at 160% of its face amount. Accordingly, the Make-whole Provision meets SFAS
133s definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of the Series B-1 Preferred Stock.

Accordingly, under SFAS 133, these two embedded derivatives are required to be bundled into a single derivative instrument and accounted for separately
from the Series B-1 Preferred Stock at fair value.

In addition, as described above, when the Company issued the Series B-1 Preferred
Stock, it granted the holder the Warrant to purchase up to 20,000 shares of additional preferred stock at a price of $1,000 per share.



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##### Table of Contents

The preferred shares that the holder is entitled to receive, upon exercise of the Warrant, may be
redeemed at a future date. Statement of Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity(SFAS 150), requires that a warrant which contains an
obligation that may require the issuer to redeem the shares in cash, be classified as a liability and accounted for at fair value.

The
Company determined that the fair value of the combined embedded derivatives and Warrant at inception was $2.6 million and increased long-term liabilities by $1.7 million for the embedded derivatives and $854,000 for the fair value of the Warrant. In
subsequent periods, these liabilities are accounted for at fair value, with changes in fair value recognized as other income (expense) on the income statement. During the nine months ended September 30, 2007, the Company recognized $7.5 million
of other expense related to the final adjustment of the fair value for the embedded derivatives and Warrant. In addition, the Company recognized a discount to the recorded value of the Series B-1 Preferred Stock resulting from the allocation of
proceeds to the embedded derivatives and Warrant. This discount was accreted as a preferred stock dividend to increase the recorded balance of the Series B-1 Preferred Stock to it redemption value at its earliest possible redemption date (November
28, 2005).

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

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

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

Dividends

For the three and nine
months ended September 30, 2007, cash dividends in the amount of $26,000 and $233,000, respectively, were paid to the Series B-1 Preferred stockholder. For the three and nine months ended September 30, 2006, cash dividends in the amount of
$106,000 and $411,000, respectively, were paid to the Series B-1 Preferred stockholder.

Additionally, the Company is accreting the accrued
unpaid dividends and issuance costs of $4.1 million related to the Series C Preferred Stock over a four year period and is shown on the income statement below net income (loss) and above income (loss) attributed to common stockholders.

7. Income Taxes

Pursuant to SFAS No. 109,
Accounting for Income Taxes(FAS 109), the Company has recorded an income tax benefit related to continuing operations for the nine months ended September 30, 2007 in the amount of $767,000. A corresponding provision for
income taxes for the nine months ended September 30, 2007 of $1.7 million has been recorded as part of the Companys Income from Discontinued Operations.

The Company has recorded an income tax benefit related to continuing operations for the three months ended September 30, 2007 in the amount of $630,000. A corresponding provision of $1.1 million has been recorded
as part of the Companys Income from Discontinued Operations.



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##### Table of Contents

Net operating losses may be subject to certain limitations of Internal Revenue Code Section 382
(Section 382) due to the Series C Preferred Stock issuance. The Company is evaluating the effect on the limitations on the future use of its net operating loss carryforwards and whether this issuance will result in an ownership change
under Section 382. This analysis does not impact the income tax provision for the three and nine month periods ended September 30, 2007.

8.
Segment Information

The Companys operations are aggregated into three reportable segments, reduced from four as a result of the
sale of substantially all of the former Admissions Services division. The operating segments reported below are the segments of the Company for which separate financial information is available and for which EBITDA is evaluated regularly by
executive management in deciding how to allocate resources and in assessing performance.

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

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

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



|                                                            |  |                                                     |        |             |   |        |              |  |           |        |  |       |         |   |  |   |         |  
|----------------------------------------------------------- |  | --------------------------------------------------- | ------ | ----------- | - | ------ | ------------ |  | --------- | ------ |  | ----- | ------- | - |  | - | ------- | -
|                                                            |  | Three Months Ended September 30, 2007 (As Restated) |       
|                                                            |  | (in thousands)                                      |       
|                                                            |  | TestPreparationServices                             |        | SESServices |   |        | K-12Services |  | Corporate |        |  | Total |        
|Revenue                                                     |  | $                                                   | 26,502 |             |   | (31    | )            |  | $         | 7,167  |  | $     |        |   |  | $ | 33,638  |  
|                                                            |  |                                                     |        |             |   |        |              |  |           |        |  |       |         |   |  |   |         |  
|Operating expense (including depreciation and amortization) |  |                                                     | 10,891 |             |   | 2,290  |              |  |           | 2,673  |  |       | 9,482   |   |  |   | 25,336  |  
|                                                            |  |                                                     |        |             |   |        |              |  |           |        |  |       |         |   |  |   |         |  
|Operating income (loss)                                     |  |                                                     | 5,255  |             |   | (2,406 | )            |  |           | 872    |  |       | (9,482  | ) |  |   | (5,761  | )
|Depreciation and amortization                               |  |                                                     | 490    |             |   | 2      |              |  |           | 926    |  |       | 534     |   |  |   | 1,952   |  
|Other income (expense)                                      |  |                                                     |       |             |   |       |              |  |           |       |  |       | (3,788  | ) |  |   | (3,788  | )
|                                                            |  |                                                     |        |             |   |        |              |  |           |        |  |       |         |   |  |   |         |  
|Segment EBITDA                                              |  |                                                     | 5,745  |             |   | (2,404 | )            |  |           | 1,798  |  |       | (12,736 | ) |  |   | (7,597  | )
|                                                            |  |                                                     |        |             |   |        |              |  |           |        |  |       |         |   |  |   |         |  
|Total segment assets                                        |  | $                                                   | 48,746 |             |   | 82     |              |  | $         | 21,200 |  | $     | 58,495  |   |  | $ | 128,523 |  
|                                                            |  |                                                     |        |             |   |        |              |  |           |        |  |       |         |   |  |   |         |  
|Segment goodwill                                            |  | $                                                   | 31,006 |             | $ |       |              |  | $         |       |  | $     |        |   |  | $ | 31,006  |  
|                                                            |  |                                                     |        |             |   |        |              |  |           |        |  |       |         |   |  |   |         |  
|Expenditures for long lived assets                          |  | $                                                   | 1,596  |             | $ | 46     |              |  | $         | 2,638  |  | $     | 1,026   |   |  | $ | 5,306   |  
|                                                            |  |                                                     |        |             |   |        |              |  |           |        |  |       |         |   |  |   |         |  



16



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##### Table of Contents

|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|----------------------------------------------------------- |  | --------------------------------------------------- | ------ | ----------- | - | ------ | ------------ |  | - | --------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                            |  | Three Months Ended September 30, 2006 (As Restated) |       
|                                                            |  | (in thousands)                                      |       
|                                                            |  | TestPreparationServices                             |        | SESServices |   |        | K-12Services |  |   | Corporate |   |  | Total |        
|Revenue                                                     |  | $                                                   | 27,026 |             |   | (318   | )            |  | $ | 7,588     |   |  | $     |        |   |  | $ | 34,296  |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Operating expense (including depreciation and amortization) |  |                                                     | 10,378 |             |   | 1,573  |              |  |   | 4,664     |   |  |       | 4,908   |   |  |   | 21,523  |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Operating income (loss)                                     |  |                                                     | 7,227  |             |   | (1,948 | )            |  |   | (2,914    | ) |  |       | (4,908  | ) |  |   | (2,543  | )
|Depreciation and amortization                               |  |                                                     | 604    |             |   | 1      |              |  |   | 996       |   |  |       | 503     |   |  |   | 2,104   |  
|Other income (expense)                                      |  |                                                     |       |             |   |       |              |  |   |          |   |  |       | 18      |   |  |   | 18      |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Segment EBITDA                                              |  |                                                     | 7,831  |             |   | (1,947 | )            |  |   | (1,918    | ) |  |       | (4,387  | ) |  |   | (421    | )
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Total segment assets                                        |  | $                                                   | 52,218 |             |   | 9      |              |  | $ | 22,746    |   |  | $     | 24,637  |   |  | $ | 99,610  |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Segment goodwill                                            |  | $                                                   | 31,006 |             | $ |       |              |  | $ |          |   |  | $     |        |   |  | $ | 31,006  |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Expenditures for long lived assets                          |  | $                                                   | 719    |             | $ |       |              |  | $ | 2,637     |   |  | $     | 19      |   |  | $ | 3,375   |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|                                                            | 
|                                                            |  | Nine Months Ended September 30, 2007 (As Restated)  |       
|                                                            |  | (in thousands)                                      |       
|                                                            |  | TestPreparationServices                             |        | SESServices |   |        | K-12Services |  |   | Corporate |   |  | Total |        
|Revenue                                                     |  | $                                                   | 72,439 |             |   | 8,651  |              |  | $ | 29,102    |   |  | $     |        |   |  | $ | 110,192 |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Operating expense (including depreciation and amortization) |  |                                                     | 33,920 |             |   | 4,861  |              |  |   | 10,862    |   |  |       | 20,059  |   |  |   | 69,702  |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Operating income (loss)                                     |  |                                                     | 11,664 |             |   | 73     |              |  |   | 2,177     |   |  |       | (20,059 | ) |  |   | (6,145  | )
|Depreciation and amortization                               |  |                                                     | 1,587  |             |   | 4      |              |  |   | 2,959     |   |  |       | 1,632   |   |  |   | 6,182   |  
|Other income (expense)                                      |  |                                                     | 0      |             |   |       |              |  |   |          |   |  |       | (7,551  | ) |  |   | (7,551  | )
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Segment EBITDA                                              |  |                                                     | 13,251 |             |   | 77     |              |  |   | 5,136     |   |  |       | (25,978 | ) |  |   | (7,514  | )
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Total segment assets                                        |  | $                                                   | 48,746 |             | $ | 82     |              |  | $ | 21,200    |   |  | $     | 58,495  |   |  | $ | 128,523 |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Segment goodwill                                            |  | $                                                   | 31,006 |             | $ |       |              |  | $ |          |   |  | $     |        |   |  | $ | 31,006  |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Expenditures for long lived assets                          |  | $                                                   | 1,881  |             | $ | 60     |              |  | $ | 2,865     |   |  | $     | 1,601   |   |  | $ | 6,407   |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|                                                            | 
|                                                            |  | Nine Months Ended September 30, 2006 (As Restated)  |       
|                                                            |  | (in thousands)                                      |       
|                                                            |  | TestPreparationServices                             |        | SESServices |   |        | K-12Services |  |   | Corporate |   |  | Total |        
|Revenue                                                     |  | $                                                   | 71,433 |             | $ | 3,708  |              |  | $ | 26,001    |   |  | $     |        |   |  | $ | 101,142 |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Operating expense (including depreciation and amortization) |  |                                                     | 34,231 |             |   | 3,355  |              |  |   | 13,459    |   |  |       | 12,896  |   |  |   | 63,941  |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Operating income (loss)                                     |  |                                                     | 13,501 |             |   | (1,534 | )            |  |   | (3,946    | ) |  |       | (12,896 | ) |  |   | (4,875  | )
|Depreciation and amortization                               |  |                                                     | 2,180  |             |   | 2      |              |  |   | 2,737     |   |  |       | 1,342   |   |  |   | 6,261   |  
|Other income (expense)                                      |  |                                                     |       |             |   |       |              |  |   |          |   |  |       | (77     | ) |  |   | (77     | )
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Segment EBITDA                                              |  |                                                     | 15,681 |             |   | (1,532 | )            |  |   | (1,209    | ) |  |       | (11,631 | ) |  |   | 1,309   |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Total segment assets                                        |  | $                                                   | 52,218 |             | $ | 9      |              |  | $ | 22,746    |   |  | $     | 24,637  |   |  | $ | 99,610  |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Segment goodwill                                            |  | $                                                   | 31,006 |             | $ |       |              |  | $ |          |   |  | $     |        |   |  | $ | 31,006  |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  
|Expenditures for long lived assets                          |  | $                                                   | 1,241  |             | $ | 9      |              |  | $ | 3,707     |   |  | $     | 1,450   |   |  | $ | 6,407   |  
|                                                            |  |                                                     |        |             |   |        |              |  |   |           |   |  |       |         |   |  |   |         |  

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



|                                                        |  |                                 |        |   |                                |   |        |             |  |   |             |   |  |   |        |  
|------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ----------- |  | - | ----------- | - |  | - | ------ | -
|                                                        |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                        |  | 2007                            |        |   | 2006                           |   |        | 2007        |  |   | 2006        |  
|                                                        |  | As Restated                     |        |   | As Restated                    |   |        | As Restated |  |   | As Restated |  
|Segment EBITDA                                          |  | $                               | (7,597 | ) |                                | $ | (421   | )           |  | $ | (7,514      | ) |  | $ | 1,309  |  
|Depreciation and amortization                           |  |                                 | (1,952 | ) |                                |   | (2,104 | )           |  |   | (6,182      | ) |  |   | (6,261 | )
|Equity in the income (loss) of affiliates               |  |                                 |       |   |                                |   |       |             |  |   |            |   |  |   | (50    | )
|Interest income                                         |  |                                 | 165    |   |                                |   | (168   | )           |  |   | (677        | ) |  |   | (390   | )
|                                                        |  |                                 |        |   |                                |   |        |             |  |   |             |   |  |   |        |  
|Net loss from continuing operations before income taxes |  | $                               | (9,384 | ) |                                | $ | (2,693 | )           |  | $ | (14,373     | ) |  | $ | (5,392 | )
|                                                        |  |                                 |        |   |                                |   |        |             |  |   |             |   |  |   |        |  



17



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##### Table of Contents

9. Income (loss) Per Share

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

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



|                                                          |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                          |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                          |  | 2007                            |         |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|                                                          |  | (in thousands)                  |        
|                                                          |  | As Restated                     |        
|Income (loss) from continuing operations                  |  | $                               | (8,754  | ) |                                | $ | (2,735 | )    |  | $ | (13,606 | ) |  | $ | (5,892 | )
|Income (loss) from discontinued operations                |  |                                 | (2,384  | ) |                                |   | 178    |      |  |   | 2,536   |   |  |   | (2     | )
|Less preferred dividends and accretion of issuance costs  |  |                                 | (883    | ) |                                |   | (106   | )    |  |   | (1,090  | ) |  |   | (411   | )
|                                                          |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss) attributed to common stockholders       |  | $                               | (12,021 | ) |                                | $ | (2,663 | )    |  | $ | (12,160 | ) |  | $ | (6,305 | )
|                                                          |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Weighted average common shares outstanding for the period |  |                                 | 28,031  |   |                                |   | 27,575 |      |  |   | 27,823  |   |  |   | 27,574 |  
|                                                          |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Basic earnings per share:                                 |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Income (loss) from continuing operations                  |  | $                               | (0.34   | ) |                                | $ | (0.11  | )    |  | $ | (0.53   | ) |  | $ | (0.23  | )
|Income (loss) from discontinued operations                |  |                                 | (0.09   | ) |                                |   | 0.01   |      |  |   | 0.09    |   |  |   | (0.00  | )
|                                                          |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss) attributed to common stockholders       |  | $                               | (0.43   | ) |                                | $ | (0.10  | )    |  | $ | (0.44   | ) |  | $ | (0.23  | )
|                                                          |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  

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



|                                                                        |  |                                 |  |                                |  |       |  |      
|----------------------------------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ----- |  | -----
|                                                                        |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                                                        |  | 2007                            |  | 2006                           |  | 2007  |  | 2006 
|Net effect of dilutive stock options-based on the treasury stock method |  | 149                             |  | 161                            |  | 160   |  | 164  
|Effect of convertible preferred stock-based on the if-converted method  |  | 7,730                           |  | 1,165                          |  | 2,577 |  | 1,354
|                                                                        |  |                                 |  |                                |  |       |  |      
|                                                                        |  | 7,879                           |  | 1,326                          |  | 2,737 |  | 1,518
|                                                                        |  |                                 |  |                                |  |       |  |      

10. Comprehensive Income (Loss)

The components of comprehensive (loss) for the three and nine months ended September 30, 2007 and 2006 are as follows:



|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|----------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                      |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                      |  | 2007                            |         |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|                                                      |  | (in thousands)                  |        
|                                                      |  | As Restated                     |        
|Net income (loss) attributable to common stockholders |  | $                               | (12,021 | ) |                                | $ | (2,663 | )    |  | $ | (12,160 | ) |  | $ | (6,305 | )
|Foreign currency translation adjustment               |  |                                 | 61      |   |                                |   | 5      |      |  |   | 76      |   |  |   | (20    | )
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total comprehensive income (loss)                     |  | $                               | (11,960 | ) |                                | $ | (2,658 | )    |  | $ | (12,084 | ) |  | $ | (6,325 | )
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  

11. Restructuring

The Company announced and commenced a restructuring initiative in the third quarter ended September 30, 2007. The restructuring is due to the relocation of the Companys finance and some legal operations
from New York City to offices located near Boston, Massachusetts and position eliminations resulting from the loss of a K-12 customer. The relocation of finance and legal operations was undertaken in order to improve the financial reporting process
and to continue remediation efforts related to material weaknesses previously reported by the Company in its annual report on form 10-K, filed with the SEC for fiscal 2006. Total restructuring costs are anticipated to be $2.4 million including $1.7
million severance pay and termination benefits recognized in the quarter ended September 30, 2007 and an additional charge of $0.7 million anticipated in the fourth quarter ended December 31, 2007.



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The restructuring activities are expected to be completed by December 31, 2007.

In April 2006, the Company announced and commenced implementation of a restructuring program. The restructuring included, among other things,
streamlining our software development groups and reducing staff in some administrative functions to better align the cost structure with revenue and growth expectations. The restructuring charge incurred during 2006 was approximately $827,000 and
consists of severance-related payments for all employees terminated in connection with the restructuring. At December 31, 2006, substantially all of the severance payments had been made.

12. Legal Matters

On August 3, 2005,
CollegeNet, Inc. filed a lawsuit against the Company in federal district court in Portland, Oregon, alleging infringement of U.S. Patent No. 6,460,042 (the 042 Patent), which is entitled Universal Forms Engine. On
November 21, 2005, CollegeNet filed an amended complaint that added a second patent to the lawsuit, U.S. Patent No. 6,910,045 (the 045 Patent), which is entitled Automatic Data Transmission in Response to Content of
Electronic Forms Satisfying Criteria. The 042 and 045 patents relate to the processing of on-line applications. CollegeNets complaint seeks injunctive relief and unspecified monetary damages. In its responsive pleadings, the
Company has denied infringement and has asserted that 042 and 045 Patents are invalid.

On September 1, 2005, prior to
answering CollegeNets complaint, the Company filed a request with the United States Patent and Trademark Office (PTO) for ex partereexamination of CollegeNets 042 Patent. On December 12, 2005, the Company
filed another request with the PTO for ex partereexamination of CollegeNets 045 Patent. The PTO granted the Companys requests and ordered reexamination of all claims of CollegeNets 042 Patent on October 31,
2005 and ordered reexamination of all claims of the 045 Patent on January 27, 2006.

On March 29, 2006, the court granted
the Companys motion to stay all proceedings in the lawsuit pending completion of the PTOs reexaminations of CollegeNets 042 and 045 patents.

CollegeNet owns a third patent that is related to the 042 Patent and the 045 Patent. The third patent is U.S. Patent No. 6,345,278 (the 278 Patent) and is entitled Universal
Forms Engine. Although CollegeNet has not pursued any claims against the Company on the 278 Patent, the Company filed another request with the PTO for ex partereexamination of claims 1-18, 21-29, 31-39, 41 and 42 of the 278
Patent on November 8, 2006. The PTO ordered reexamination of those claims on February 2, 2007.

In the ex partereexamination of the 042 Patent, the PTO issued a Notice of Intent to Issue Ex ParteReexamination Certificate on July 20, 2007. The PTOs July 20th notice indicated an intent to confirm the validity of
claims 1-31 of the 042 Patent as originally issued, allow new claims 45-53, and allow other claims with certain amendments. The PTOs July 20th decision to allow claims 1-31 of the 042 Patent as originally issued is in conflict
with a jury verdict rendered on October 5, 2006 in the case of CollegeNet v. XAP Corporation (Civil Action No. 03-129-BR), which found that claims 16, 18-22, 28, 32, 33, 36 and 38 of the 042 patent are invalid, but a final judgment
has not yet been entered in the CollegeNet v. XAP Corporation lawsuit. On August 31, 2007, the Company filed a request with the PTO for inter partes reexamination of all claims of the 042 Patent. The PTO must decide whether to
order inter partesreexamination of the 042 Patent within three months of the date the request was filed.

In the other
pending ex partereexaminations, the PTO issued a Non-Final Office Action rejecting all 16 claims of the 045 Patent on September 27, 2007. The PTO has not yet taken any substantive action on the reexamination of the 278
Patent, other than instituting the reexamination proceedings.

On October 4, 2007, the court lifted the stay in the lawsuit, and
discovery is underway. However, the court has not yet entered a comprehensive scheduling order or set a trial date.

The Company believes
that it has meritorious defenses to CollegeNETs claims and intends to vigorously defend itself against them.

13. Stockholders Equity



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The change in the Companys issued and outstanding common stock for the nine months ended
September 30, 2007 includes the issuances of approximately 350,000 shares of common stock under the Companys 2000 Stock Incentive Plan and 140,000 shares resulting from the exercise of the Companys stock options.

The change in the additional paid-in-capital account for the nine months ended September 30, 2007 include $2.7 million related to stock compensation
expense and $585,000 related to the exercise of stock options reduced by $857,000 related to accrued unpaid dividends and accreted issuance costs on the Series C Preferred stock and $233,000 related to paid dividends on the Series B-1 Preferred
stock.



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14. Subsequent Events

In October of 2007, the Company acquired its western Massachusetts franchise, Hunter Educational Services, Inc., and its Providence, RI franchise, The Princeton Review of Rhode Island, Inc, in separate transactions.
The purchase price for the western Massachusetts franchise was $1.0 million plus an additional earnout payment based on receipts for the next five years of at least $650,000. The purchase price for the Providence, RI franchise was $935,000 plus an
additional earnout payment based on receipts for the next five years of not more than $1,065,000. The acquisitions are part of an ongoing effort to consolidate operations by buying back the companys domestic franchises.



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

All statements in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by words such as believe, intend, expect, may, could,
would, will, should, plan, project, contemplate, anticipate or similar statements. Because these statements reflect our current views concerning future events, these
forward-looking statements are subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to demand for our
products and services; our ability to compete effectively and adjust to rapidly changing market dynamics; the timing of revenue recognition from significant contracts with schools and school districts; market acceptance of our newer products and
services; continued federal and state focus on assessment and remediation in K-12 education; and the other factors described under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006, as
such factors may be amended in subsequently filed Quarterly Reports on Form 10-Q, filed with the SEC. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other
events occur in the future.

Overview

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

Test Preparations 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. Additionally, Test Preparation Services receives royalties from its independent
franchisees, which provide classroom-based courses under the Princeton Review brand. This division has historically accounted for the majority of our overall revenue and was approximately 66% of our overall revenue in the first three quarters of
2007.

SES Services Division

The Supplemental Educational Services (SES), provides state aligned research based academic tutoring instruction to students in public school districts.

K12 Services Division

The K-12 Services division provides a number of services to K-12
schools and school districts, including assessment, professional development, intervention materials (workbooks and related products) and college counseling services. As a result of the increased emphasis on accountability and the measurement of
student performance in public schools, this division continues to see growing demand by the public school market for its products and services as evidenced by the number of new contracts and the continued growth in sales prospects.

Former Admissions Services Division

Until
February 2007, the Companys former Admissions Services division derived most of its revenue from the sale of web-based admissions and related application management products to educational institutions (Higher Education Technology
Services). In



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February 2007, we sold our web-based admissions and application management business for $7.0 million in cash and a potential earn-out of up to $1.25 million.
In connection with the sale of the Higher Education Technology Services business, financial results associated with this business have been reclassified as discontinued operations. In connection with this transaction, two other businesses operated
by this division (college counseling and admissions publications) were transferred to the K-12 Services and Test Preparation Services divisions, respectively. The only remaining business operated by the former Admissions Services division was
providing higher education marketing services to post secondary schools. In April 2007, the Company outsourced the business of selling these marketing services to post secondary schools to Higher Edge Marketing, Inc., as more fully described in Note
2 to our condensed consolidated financial statements. Under this new arrangement, the sales and customer support functions related to this business will be performed by Higher Edge Marketing, Inc. and the Company will be responsible solely for the
fulfillment function. Accordingly, all of the remaining employees in this division were transferred to other divisions, or terminated and re-hired by Higher Edge Marketing, Inc. As a result, Higher Edge Marketing, Inc. will contract with post
secondary schools directly and will pay us a royalty on the fees it receives from post secondary schools for marketing services. Financial results associated with admissions publications and marketing services, including any royalties from Higher
Edge Marketing Services, Inc, previously reported in the Admissions Services division, have been reclassified for all periods presented into Test Preparation Services. College counseling services previously reported in the Admissions Services
division have been reclassified for all periods and are presented with K-12 Services.

Results of Operations

Comparison of Three Months Ended September 30, 2007 and 2006

Revenue

For the three months ended
September 30, 2007, total revenue decreased by $658,000, or 1.9%, from $34.3 million in 2006 to $33.6 million in 2007.

Test
Preparation Services revenue decreased by $524,000, or 1.9%, to $26.5 million in 2007 from $27.0 million in 2006. This decrease is due primarily to lower institutional revenue of $445,000 and lower residual revenue of $1.4 from admission services, a
business that is being phased out, offset by increased tutoring revenue of $1.8 million.

SES Services revenue were marginalized by
$287,000 to a ($31,000) in 2007 from ($318,000) in 2006. The balance consists of credits and refunds processed in the period where no revenue was generated. The decrease is one that we expect due to the seasonal fluctuations we experience based upon
when schools are in session.

K-12 Services revenue decreased by $421,000, or 5.6%, to $7.2 million in 2007 from $7.6 million in 2006.
Revenue decreased primarily due the non-renewal of a significant assessment account partially offset by some new intervention accounts.

Cost of Revenue

For the three months ended September 30, 2007, total cost of revenue decreased by $1.3 million or
8.2%, to $14.0 million in 2007 from $15.3 million in 2006.

Test Preparation Services cost of revenue increased by $929,000, or 9.9% to
$10.3 million in 2007 from $9.4 million in 2006. Teacher pay increased approximately $1.1 million primarily due to increased teacher hours, pay increases related to a certification and qualification review, as well as an increase in tutoring teacher
hours related to the increased tutoring revenue partially offset by decreased course materials expense. Cost of revenue as a percentage of revenue, increased from 34.9% to 39.0% due to increased teacher pay as a result of pay scale increases and an
increase in site rent costs.

SES Services cost of revenue increased by $29,000, or 51% to $86,000 in 2007 from $57,000 in 2006.

K-12 Services cost of revenue decreased by $2.2 million, or 37.9%, from $5.8 million in 2006 to $3.6 million in 2007. Decreased costs
related primarily to reductions in headcount due to increased operating efficiencies and due to a non-renewal of a significant assessment and counseling account. Cost of revenue as a percentage of revenue decreased from 76.9% to 50.6% as a result of
productivity gains.



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Operating Expenses

For the three months ended September 30, 2007, operating expenses increased by $3.8 million, or 17.7%, from $21.5 million in 2006 to $25.3 million in 2007:



| |  |  | Test Preparation Services operating expenses increased by $513,000, or 4.9%, from $10.4 million in 2006 to $10.9 million in 2007. The increase is primarily
due to salaries and marketing expenses
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SES Services Operating expenses increased $716,000, or 45.5%, from $1.6 million in 2006 to $2.3 million in 2007. This increase is due to bad debts expense
and salaries related to increased headcount in SES business in anticipation of the fall sales cycle.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | K-12 Services operating expenses decreased by $2.0 million, or 42.7%, from $4.7 million in 2006 to $2.7 million in 2007. Salaries and related expense
decreased $887,000 primarily as a result of headcount reductions, lower commissions and bonuses and increased operational efficiencies. Research and development costs decreased $711,000. Other general administrative cost decreased by $435,000
primarily as a result of lower bad debt expense and travel costs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corporate operating expenses increased by $4.6 million or 93.2%, from $4.9 million in 2006 to $9.5 million in 2007. Corporate operating expenses included
severance costs of $1.7 million as part of the restructuring charge incurred to move the finance operations and general counsel from New York City to Boston. The Company also incurred $400,000 of higher professional fees and $350,000 related to a
litigation settlement.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other income (expense)

Other income (expense) includes an expense of $3.8 million resulting from the change in fair value of the embedded derivative liability related to the
Series B-1 Preferred Stock. This derivative was terminated July 23, 2007 as part of the Series C preferred stock transaction. (See note 5, in the accompanying financial statements).

Comparison of Nine Months Ended September 30, 2007 and 2006

Revenue

For the nine months ended
September 30, 2007, total revenue increased by $9.1 million, or 9.0%, from $101.1 million in 2006 to $110.2 million in 2007.

Test
Preparation Services revenue increased by $1.0 million, or 1.4%, from $71.4 million in 2006 to $72.4 million in 2007. This increase is primarily related an increase in tutoring revenues of $4.4 million and an increase in licensing and royalty
revenue of $1.4 million. These increases were partially offset by a decrease in retail classroom revenues of $1.9 million and a decrease in residual revenues of $1.7 million in the admission services business, a business that is being phased out.

SES Services revenue increased by $4.9 million, from $3.7 million in 2006 to $8.6 million in 2007 due to the increased numbers of students
enrolled in the New York and Chicago markets.

K-12 Services revenue increased by $3.1 million, or 11.9%, from $26.0 million in 2006 to
$29.1 million in 2007 primarily related to the increase in assessment revenues due to several new and renewal accounts partially offset by lower intervention revenues and lower counseling revenues resulting primarily from contracts that were not
renewed.



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##### Table of Contents

Cost of Revenue

For the nine months ended September 30, 2007, total cost of revenue increased by $4.6 million, or 10.8%, from $42.1 million in 2006 to $46.6 million in 2007.

Test Preparation Services cost of revenue increased by $3.1 million, or 13.0%, from $23.8 million in 2006 to $26.9 million in 2007. Teacher pay increased
by $1.5 million primarily due to increased teacher hours, pay increases related to a certification and qualification review, as well as increase in tutoring teacher hours related to the increased tutoring revenue. Site rent increased by
approximately $799,000 due to an increase in classroom space rentals. Cost of revenue as a percentage of revenue, increased from 33.3% to 37.1% due to increased teacher pay as a result of pay scale increases and increased site rent costs.

SES Services cost of revenue increased by $1.8 million from $1.9 million in 2006 to $3.7 million in 2007. This increase is primarily due
to increased rental fees charged for SES classes by schools and the increases in number of students enrolled in our classes. SES courses cost increased by $2.7 million related to the increased volume.

K-12 Services cost of revenue decreased by $333,000, or approximately 2.0%, from $16.4 million in 2006 to $16.1 million in 2007 primarily to reduced
headcount driven by productivity gains and headcount reductions due to the non-renewal of a significant customer. Cost of revenue as a percentage of revenue decreased from 63.1% to 55.2% as a result of productivity gains in the assessment cost of
revenue.

Operating Expenses

For the nine months ended September 30, 2007, operating expenses increased by $5.8 million, or 9.0%, from $63.9 million in 2006 to $69.7 million in 2007:



| |  |  | Test Preparation Services operating expenses decreased by approximately $0.3 million from $34.2 million in 2006 to $33.9 million in 2007.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SES Services operating expenses increased by $1.5 million, or 44.8% from $3.4 million in 2006 to $4.9 million in 2007. This increase is primarily due to bad debts
expense and salaries and related expenses due to increased SES headcount to support increased SES revenue.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | K-12 Services operating expenses decreased by $2.6 million, or 19.3%, from $13.5 million in 2006 to $10.9 million in 2007. Salaries and related costs decreased as a
result of headcount reductions, lower commissions and increased operational efficiencies partially offset by overhead costs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corporate operating expenses increased by $7.2 million or 55.5%, from $12.9 million in 2006 to $20.1 million in 2007. The increase is primarily due to severance
costs of $1.7 million for the restructuring charge described above, $1.1 million of higher professional service fees as well as $1.6 million of other non-recurring costs related to the restatement of the 2006 financial statements, a litigation
settlement and other costs to move the finance department, and duplicate technology costs due to the consolidation of certain data center activities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other income (expense)

Other income (expense) includes an expense of $7.5 million resulting from the
increase in the fair value of the embedded derivative liability related to the Series B-1 Preferred Stock, this derivative was terminated July 23, 2007 as part of the Series C preferred stock transaction. (See note 5, in the accompanying
financial statements).

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents on hand and collections from customers. At September 30, 2007, we had $44.2 million of cash and cash equivalents compared to $10.8 million at
December 31, 2006. The $33.4 million increase in cash from the December 31, 2006 balance is primarily attributed to approximately $42.1 million net cash provided from the issuance of Series C Preferred Stock. As part of this issuance the
Company terminated the Fletcher Agreement pertaining to our Series B-1 Preferred Stock, and all related rights (see Note 5). The Company also paid down the $15.0 million of debt outstanding and terminated our existing credit facility. Additional
sources of cash included funds from the sale of the Higher Education Technology Services business in February 2007, which resulted in net proceeds of $5.0 million. Additionally, $10.7 million was provided for by operating activities, $6.4 million
used for the purchase of furniture, fixtures, equipment and software development, $520,000 related to capital lease payments and $233,000 in dividends paid on the Series B-1 Preferred Stock.

Our Test Preparation Services division has historically generated, and continues to generate, the largest portion of our cash flow from its retail
classroom and tutoring courses. These customers usually pay us in advance or contemporaneously with the services we provide, thereby supporting our short-term liquidity needs. Increasingly, however, across all of our divisions, we are generating a
greater percentage of our cash from contracts with institutions such as 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 provided by operating activities from continuing operations is our net income (loss) adjusted for certain non-cash
items and changes in operating assets and liabilities. During the first nine months of 2007, cash provided by operating activities from continuing operations was $10.7 million, compared to cash provided by operating activities from continuing
operations of $3.0 million during the first nine months of 2006.

During the first nine months of 2007, investing activities from
continuing operations used $6.0 million of cash as compared to $5.5 million used during the comparable period in 2006.

Financing cash
flows from continuing operations consist primarily of transactions related to our debt and equity structure. During the first nine months of 2007, financing activities from continuing operations provided $26.6 million of cash as compared to
approximately $3.9 million in the first nine months of 2006. During the nine months ended September 30, 2007, net proceeds of $42.1 million from the July 2007 issuance of the Series C preferred stock was the primary source of cash. The net
proceeds from the Series C preferred stock was used in part to repay the $15.0 million revolving credit facility. During the same nine month period in 2006, we borrowed $10 million under a new credit facility. Of this amount, $4.4 million was used
to redeem 4,000 shares of Series B-1 Preferred Stock. The remaining amount borrowed under the credit facility was used for working capital purposes. In addition, there were financing expenditures of approximately $753,000 and $1.1 million for the
first nine months of 2007 and 2006, respectively, principally related to capital lease payments and dividends paid on our Series B-1 Preferred Stock.



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

Seasonality in Results of Operations

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



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

Our portfolio of marketable securities includes primarily short-term money market funds. The fair value of our portfolio of marketable securities would not be significantly impacted by either a 100 basis point
increase or decrease in interest rates due primarily to the short-term nature of the portfolio. Our Series B-1 Preferred Stock required the payment of quarterly dividends at the greater of 5% or 1.5% above 90-day LIBOR (5.36% at September 30,
2007). As the Series B-1 Preferred Stock was retired in July 2007, changes in the dividend rate will no longer impact this.

During July
2007 we also terminated our credit agreement and will not be impacted by future changes in the interest rates related to this agreement.

As more fully described in Note 5 to our condensed consolidated financial statements, we previously accounted for the embedded derivatives and warrants related to our Series B-1 Preferred Stock. As these obligations have been retired we
will not be impacted by future changes in the interest rates related to these securities.

We do not hold any derivative financial
instruments. Revenue from our international operations and royalty payments from our international franchisees constitute an insignificant percentage of our revenue. Accordingly, our exposure to exchange rate fluctuations is minimal.



|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 Principal Accounting Officer (PAO).

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 PAO, 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.



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Conclusions

As described in detail in Item 9A of the companys 2006 Form 10-K, (Form 10-K) the companys management assessed the effectiveness of the Companys internal control over financial reporting as of
December 31, 2006. Managements assessment identified four material weaknesses in internal control over financial reporting as of that date. These material weaknesses were identified in the areas of financial statement close process,
estimating the collectibility of accounts receivable, revenue recognition and the accounting for embedded derivatives contained within the Series B-1 Preferred Stock and the related warrant. In light of these material weaknesses identified by
management, which have not been fully remediated as of the end of the period covered by this Quarterly Report, our CEO and PAO concluded, after the evaluation described above, that our Disclosure Controls were not effective, as of the end of the
period covered by this Quarterly Report, in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms.

Changes in Internal Control over Financial Reporting

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

On September 5, 2007, we determined to move our accounting and
finance operations from our office in New York City to our offices located near Boston, Massachusetts. In addition, the office of the General Counsel will also be relocated to the Boston area. We expect to complete the relocation during the fourth
quarter. The relocation was undertaken in connection with our efforts to improve the financial reporting process and to continue remediation efforts to address the material weaknesses previously reported in the 2006 Form 10-K. In order to address
these material weaknesses, a more qualified and experienced financial team was hired late in the third quarter and continuing into the fourth quarter. This new team includes a new Chief Financial Officer, Principal Accounting Officer, Corporate
Controller and Assistant Controller, among others. The new finance team is currently assessing the month end closing, reconciliation, and review processes and has implemented some additional remediation actions, including increasing management
oversight of the financial statement close process. Based on our assessment of the financial reporting processes through September 30, 2007, we have concluded that our previous remediation efforts this year will likely not result in the
elimination of certain of these material weaknesses by December 31, 2007. The nature and extent of material weaknesses can not be concluded upon until we complete our annual evaluation of our internal controls over the financial reporting
process as of December 31, 2007, and it is possible that we will determine that there are additional material weaknesses.

PART II. OTHER INFORMATION



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

On
August 3, 2005, CollegeNet, Inc. filed a lawsuit against the Company in federal district court in Portland, Oregon, alleging infringement of U.S. Patent No. 6,460,042 (the 042 Patent), which is entitled Universal
Forms Engine. On November 21, 2005, CollegeNet filed an amended complaint that added a second patent to the lawsuit, U.S. Patent No. 6,910,045 (the 045 Patent), which is entitled Automatic Data Transmission in
Response to Content of Electronic Forms Satisfying Criteria. The 042 and 045 patents relate to the processing of on-line applications. CollegeNets complaint seeks injunctive relief and unspecified monetary damages. In its
responsive pleadings, the Company has denied infringement and has asserted that 042 and 045 Patents are invalid.

On
September 1, 2005, prior to answering CollegeNets complaint, the Company filed a request with the United States Patent and Trademark Office (PTO) for ex partereexamination of CollegeNets 042 Patent. On
December 12, 2005, the Company filed another request with the PTO for ex partereexamination of CollegeNets 045 Patent. The PTO granted the Companys requests and ordered reexamination of all claims of CollegeNets
042 Patent on October 31, 2005 and ordered reexamination of all claims of the 045 Patent on January 27, 2006.

On
March 29, 2006, the court granted the Companys motion to stay all proceedings in the lawsuit pending completion of the PTOs reexaminations of CollegeNets 042 and 045 patents.



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CollegeNet owns a third patent that is related to the 042 Patent and the 045 Patent. The
third patent is U.S. Patent No. 6,345,278 (the 278 Patent) and is entitled Universal Forms Engine. Although CollegeNet has not pursued any claims against the Company on the 278 Patent, the Company filed
another request with the PTO for ex partereexamination of claims 1-18, 21-29, 31-39, 41 and 42 of the 278 Patent on November 8, 2006. The PTO ordered reexamination of those claims on February 2, 2007.

In the ex partereexamination of the 042 Patent, the PTO issued a Notice of Intent to Issue Ex ParteReexamination
Certificate on July 20, 2007. The PTOs July 20th notice indicated an intent to confirm the validity of claims 1-31 of the 042 Patent as originally issued, allow new claims 45-53, and allow other claims with certain
amendments. The PTOs July 20th decision to allow claims 1-31 of the 042 Patent as originally issued is in conflict with a jury verdict rendered on October 5, 2006 in the case of CollegeNet v. XAP Corporation (Civil Action
No. 03-129-BR), which found that claims 16, 18-22, 28, 32, 33, 36 and 38 of the 042 patent are invalid, but a final judgment has not yet been entered in the CollegeNet v. XAP Corporation lawsuit. On August 31, 2007, the Company filed
a request with the PTO for inter partes reexamination of all claims of the 042 Patent. The PTO must decide whether to order inter partesreexamination of the 042 Patent within three months of the date the request was filed.

In the other pending ex partereexaminations, the PTO issued a Non-Final Office Action rejecting all 16 claims of the 045
Patent on September 27, 2007. The PTO has not yet taken any substantive action on the reexamination of the 278 Patent, other than instituting the reexamination proceedings.

On October 4, 2007, the court lifted the stay in the lawsuit, and discovery is underway. However, the court has not yet entered a comprehensive
scheduling order or set a trial date.

The Princeton Review believes that it has meritorious defenses to CollegeNETs claims and
intends to vigorously defend itself against them.



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

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, 2006.



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

Not applicable.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable.



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

None



|Item 5. | Other Information
|------- | -----------------

Not
applicable.



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



|               |  |                                                                                                                                                                  
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                      
|10.54          |  | Amendment, dated as of September 7, 2007, to Service and License Agreement dated as of April 27 2007 between the Company and Higher Edge Marketing Services, Inc.
|               | 
|31.1           |  | Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                  
|               | 
|31.2           |  | Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                  
|               | 
|32.1           |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                          



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SIGNATURES

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



THE PRINCETON REVIEW, INC.By:

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


March 17, 2008



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