---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended March 31, 2005

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                                                            
|(State or   other jurisdiction of   incorporation or organization)  
|                                                                    
|2315 Broadway   New York, New York                                  
|(Address   of principal executive offices)                          
|                                                                    
|Registrants telephone number,   including area code: (212) 874-8282

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

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

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

The Company had 27,569,764 shares of $0.01 par value common stock outstanding at May 6, 2005.

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TABLE OF CONTENTS

|PART I.  FINANCIAL INFORMATION |        
|------------------------------ | -------
|                               |        
|                               | Item 1.
|                               |        
|                               |        
|                               |        
|                               |        
|                               |        
|                               |        
|                               |        
|                               |        
|                               |        
|                               | Item 2.
|                               |        
|                               | Item 3.
|                               |        
|                               | Item 4.
|                               |        
|PART II.  OTHER INFORMATION    |        
|                               |        
|                               | Item 1.
|                               |        
|                               | Item 2.
|                               |        
|                               | Item 3.
|                               |        
|                               | Item 4.
|                               |        
|                               | Item 5.
|                               |        
|                               | Item 6.
|                               |        
|SIGNATURES                     | 21     

2



PART I.  FINANCIAL INFORMATIONItem 1.  Consolidated Financial Statements (unaudited)

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

|                                                                                                                             |  | March 31,   2005 |         | December 31,
2004(1) |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | -------------------- | -
|                                                                                                                             |  |                  |         |                      |  
|                                                                                                                             |  | Unaudited        |         |                      |  
|ASSETS                                                                                                                       |  |                  |         |                      |  
|Current   assets:                                                                                                            |  |                  |         |                      |  
|Cash   and cash equivalents                                                                                                  |  | $                | 11,522  |                      | $
|Accounts   receivable, net                                                                                                   |  |                  | 25,478  |                      |  
|Prepaid   expenses                                                                                                           |  |                  | 1,677   |                      |  
|Inventory                                                                                                                    |  |                  | 922     |                      |  
|Other   assets                                                                                                               |  |                  | 974     |                      |  
|                                                                                                                             |  |                  |         |                      |  
|Total   current assets                                                                                                       |  |                  | 40,573  |                      |  
|Furniture, fixtures,   equipment and software development, net                                                               |  |                  | 14,093  |                      |  
|Investment in affiliates                                                                                                     |  |                  | 1,747   |                      |  
|Goodwill                                                                                                                     |  |                  | 31,511  |                      |  
|Other intangibles, net                                                                                                       |  |                  | 10,223  |                      |  
|Other assets                                                                                                                 |  |                  | 3,247   |                      |  
|                                                                                                                             |  |                  |         |                      |  
|Total   assets                                                                                                               |  | $                | 101,394 |                      | $
|                                                                                                                             |  |                  |         |                      |  
|LIABILITIES   AND STOCKHOLDERS EQUITY                                                                                       |  |                  |         |                      |  
|Current   liabilities:                                                                                                       |  |                  |         |                      |  
|Accounts   payable                                                                                                           |  | $                | 6,079   |                      | $
|Accrued   expenses                                                                                                           |  |                  | 8,963   |                      |  
|Current   maturities of long-term debt                                                                                       |  |                  | 1,771   |                      |  
|Deferred   income                                                                                                            |  |                  | 14,492  |                      |  
|                                                                                                                             |  |                  |         |                      |  
|Total   current liabilities                                                                                                  |  |                  | 31,305  |                      |  
|Deferred rent                                                                                                                |  |                  | 1,431   |                      |  
|Long-term debt                                                                                                               |  |                  | 4,042   |                      |  
|                                                                                                                             |  |                  |         |                      |  
|Series B-1 Preferred Stock,   $.01 par value; 10,000 shares authorized issued and outstanding (liquidation value of $10,296) |  |                  | 9,757   |                      |  
|Stockholders   equity                                                                                                       |  |                  |         |                      |  
|Preferred   stock, $.01 par value; 4,990,000 shares authorized; none issued and   outstanding                                |  |                  |        |                      |  
|Common   stock, $.01 par value; 100,000,000 shares authorized; 27,569,764 issued and   outstanding                           |  |                  | 276     |                      |  
|Additional   paid-in capital                                                                                                 |  |                  | 116,267 |                      |  
|Accumulated   deficit                                                                                                        |  |                  | (61,442 | )                    |  
|Accumulated   other comprehensive loss                                                                                       |  |                  | (242    | )                    |  
|                                                                                                                             |  |                  |         |                      |  
|Total   stockholders equity                                                                                                 |  |                  | 54,859  |                      |  
|                                                                                                                             |  |                  |         |                      |  
|Total   liabilities and stockholders equity                                                                                 |  | $                | 101,394 |                      | $
|                                                                                                                             |  |                  |         |                      |  

|   
|---
|(1)

See accompanying notes.

3



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

|                                                           |  | Three Months Ended March 31, |       
|---------------------------------------------------------- |  | ---------------------------- | ------
|                                                           |  |                              |       
|                                                           |  | 2005                         |       
|                                                           |  |                              |       
|Revenue                                                    |  |                              |       
|Test   Preparation Services                                |  | $                            | 22,885
|K-12   Services                                            |  |                              | 7,919 
|Admissions   Services                                      |  |                              | 2,794 
|                                                           |  |                              |       
|Total   revenue                                            |  |                              | 33,598
|                                                           |  |                              |       
|Cost of   revenue                                          |  |                              |       
|Test   Preparation Services                                |  |                              | 7,037 
|K-12   Services                                            |  |                              | 4,245 
|Admissions   Services                                      |  |                              | 861   
|                                                           |  |                              |       
|Total   cost of revenue                                    |  |                              | 12,143
|Gross profit                                               |  |                              | 21,455
|                                                           |  |                              |       
|Operating   expenses                                       |  |                              | 21,265
|                                                           |  |                              |       
|Income (loss) from   operations                            |  |                              | 190   
|                                                           |  |                              |       
|Interest expense                                           |  |                              | (309  
|Other income                                               |  |                              | 41    
|Equity in the loss of   affiliates                         |  |                              | (67   
|                                                           |  |                              |       
|Loss before benefit for   income taxes                     |  |                              | (145  
|Benefit for income taxes                                   |  |                              |      
|                                                           |  |                              |       
|Net loss                                                   |  |                              | (145  
|Dividends and accretion on   Series B-1 Preferred Stock    |  |                              | (195  
|                                                           |  |                              |       
|Net loss attributed to   common stockholders               |  | $                            | (340  
|                                                           |  |                              |       
|Net loss per share - basic   and diluted                   |  | $                            | (0.01 
|                                                           |  |                              |       
|Weighted average shares   used in computing loss per share |  |                              | 27,570
|                                                           |  |                              |       

See accompanying notes.

4



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

|                                                                              |  | Three Months Ended March 31, |       
|----------------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                              |  |                              |       
|                                                                              |  | 2005                         |       
|                                                                              |  |                              |       
|Cash flows   from operating activities:                                       |  |                              |       
|Net loss                                                                      |  |                              | (145  
|Adjustments to reconcile   net loss to net cash used in operating activities: |  |                              |       
|Depreciation                                                                  |  |                              | 400   
|Amortization                                                                  |  |                              | 1,336 
|Write-off   of deferred financing costs                                       |  |                              | 117   
|Bad   debt expense                                                            |  |                              | 165   
|Deferred   income taxes                                                       |  |                              |      
|Other,   net                                                                  |  |                              | 91    
|Net   change in operating assets and liabilities:                             |  |                              |       
|Accounts   receivable                                                         |  |                              | (2,202
|Prepaid   expenses                                                            |  |                              | 342   
|Other   assets                                                                |  |                              | 579   
|Accounts   payable and accrued expenses                                       |  |                              | (659  
|Deferred   income                                                             |  |                              | (3,145
|                                                                              |  |                              |       
|Net cash used in operating   activities                                       |  |                              | (3,121
|                                                                              |  |                              |       
|Cash flows   from investing activities:                                       |  |                              |       
|Purchase of furniture,   fixtures, equipment and software development         |  |                              | (1,931
|Notes receivable                                                              |  |                              | 250   
|Additions to capitalized   development costs and other assets                 |  |                              | (587  
|                                                                              |  |                              |       
|Net cash used in investing   activities                                       |  |                              | (2,268
|                                                                              |  |                              |       
|Cash flows   from financing activities:                                       |  |                              |       
|Repayment of revolving   credit facility                                      |  |                              | (2,000
|Capital lease payments                                                        |  |                              | (168  
|Dividends on Series B-1   Preferred Stock                                     |  |                              | (125  
|Notes payable related to   acquisitions                                       |  |                              |      
|Proceeds from exercise of   options                                           |  |                              | 7     
|                                                                              |  |                              |       
|Net cash used in financing   activities                                       |  |                              | (2,286
|                                                                              |  |                              |       
|Net decrease in cash and   cash equivalents                                   |  |                              | (7,675
|Cash and cash equivalents,   beginning of period                              |  |                              | 19,197
|                                                                              |  |                              |       
|Cash and cash equivalents,   end of period                                    |  |                              | 11,522
|                                                                              |  |                              |       

See accompanying notes.

5



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

1.  Basis of Presentation

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

These
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information and reflect
all adjustments, consisting only of normal recurring accruals, that are, in the
opinion of management, necessary for a fair presentation of the interim
financial statements. The interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
for the year ended December 31, 2004 included in the Companys Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission. The
results of operations for the three-month period ended March 31, 2005 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-months ended March 31, 2005 and 2004:

|                        |  | Three Months Ended March 31, |       
|----------------------- |  | ---------------------------- | ------
|                        |  |                              |       
|                        |  | 2005                         |       
|                        |  |                              |       
|                        |  | (in   thousands)             |       
|Revenue                 |  |                              |       
|Services                |  | $                            | 30,186
|Products                |  |                              | 1,708 
|Other                   |  |                              | 1,704 
|                        |  |                              |       
|Total   revenue         |  | $                            | 33,598
|                        |  |                              |       
|Cost of   Revenue       |  |                              |       
|Services                |  | $                            | 11,140
|Products                |  |                              | 824   
|Other                   |  |                              | 179   
|                        |  |                              |       
|Total   cost of revenue |  | $                            | 12,143
|                        |  |                              |       

6



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

Stock-Based Compensation

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

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

|                                                                                                                                    |  | Three Months Ended March 31,          |      
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | -----
|                                                                                                                                    |  |                                       |      
|                                                                                                                                    |  | 2005                                  |      
|                                                                                                                                    |  |                                       |      
|                                                                                                                                    |  | (in thousands, except per share data) |      
|Net loss attributed to common stockholders, as reported                                                                             |  | $                                     | (340 
|Total stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects |  | $                                     | (513 
|                                                                                                                                    |  |                                       |      
|Pro forma net loss attributed to common stockholders                                                                                |  | $                                     | (853 
|                                                                                                                                    |  |                                       |      
|Basic and diluted net loss per share, as reported                                                                                   |  | $                                     | (0.01
|                                                                                                                                    |  |                                       |      
|Basic and diluted net loss per share, pro forma                                                                                     |  | $                                     | (0.03
|                                                                                                                                    |  |                                       |      

During the three months ended March 31, 2005, there were no stock options exercised.

Adoption of New Accounting Pronouncements

In December 2004, the FASB replaced SFAS No. 123 with SFAS No. 123(R), Share-Based Payments, which requires all share-based payments to employees, including employee stock options, to be recognized in the income statement based on their fair values.  In April, 2005, the SEC extended the effective date of the adoption until January 1, 2006, for calendar year companies.  Based on the options outstanding as of March 31, 2005 and the SFAS No. 123 pro forma information presented above, the Company expects SFAS No. 123(R) to have a material impact on its Consolidated Statement of Operations. However, the Company has not yet completed its evaluation as to the full impact.

7



Use of Estimates

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

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

Actual results could differ from those estimated.

Reclassification

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

2.  Accounts Receivable, Net

Accounts receivable, net consists of the following components:

|                                       |  | March 31,   2005 |        | December 31,   2004 |  
|-------------------------------------- |  | ---------------- | ------ | ------------------- | -
|                                       |  |                  |        |                     |  
|                                       |  | (in   thousands) |       
|Accounts receivable                    |  | $                | 25,096 |                     | $
|Accounts receivable   related parties  |  |                  | 1,778  |                     |  
|Other accounts receivable              |  |                  | 14     |                     |  
|Less allowance for   doubtful accounts |  |                  | (1,410 | )                   |  
|                                       |  |                  |        |                     |  
|Accounts   receivable, net             |  | $                | 25,478 |                     | $
|                                       |  |                  |        |                     |  

3.  Lines of Credit

In February 2005, the Company repaid the entire outstanding balance and terminated the three-year revolving credit facility the Company had entered into in May of 2004 with Commerce Bank, N.A.  The outstanding balance at the time of payment was $2.0 million.  Additionally, the Company wrote off  unamortized deferred financing costs of approximately $117,000.

8



4.  Series B-1 Preferred Stock

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

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

In addition, the Company granted Fletcher certain rights entitling Fletcher to purchase up to 20,000 shares of additional preferred stock, at a price of $1,000 per share, for an aggregate additional consideration of $20,000,000. The agreement with Fletcher provides that any shares of additional preferred stock will have the same conversion ratio as the Series B-1 Preferred Stock, except that the conversion price will be the greater of (1) $11.00, or (2) 120% of the prevailing price of common stock at the time of exercise of the rights (based on an average daily trading price formula), subject to adjustment upon the occurrence of certain events. Due to the delay in the effectiveness of the registration statement relating to the Series B-1 Preferred Stock, the conversion price for any such additional series of preferred stock was reduced to the greater of (1) $9.9275, or (2) 108.3% of the prevailing
price of common stock at the time of exercise of the rights. These rights may be exercised by Fletcher on one or more occasions commencing July 1, 2005, and for the 24-month period thereafter, which period may be extended under certain circumstances. The agreement with Fletcher also provides that shares of additional preferred stock will also be redeemable upon terms substantially similar to those of the Series B-1 Preferred Stock.

9



The voting rights of the Series B-1 Preferred stockholders are limited to voting with regard to: (1) any changes to the rights, preferences or privileges of the Series B-1 Preferred stockholders, (2) authorizing, creating or issuing any senior securities or securities that rank pari passu with the Series B-1 Preferred Stock, or any securities issued by a subsidiary of the Company, (3) changing the number of authorized shares of preferred stock, and (4) amending any provision of any security of the Company so as to make such security redeemable by the Company.

On March 31, 2005, dividends in the amount of $125,000 were paid to the Series B-1 Preferred stockholders.

5.  Segment Information

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

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

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

10



|                                                               |  | Three Months Ended March 31, 2005   |       
|-------------------------------------------------------------- |  | ----------------------------------- | ------
|                                                               |  |                                     |       
|                                                               |  | (In thousands)                      |       
|                                                               |  | Test   Preparation   Services       |       
|                                                               |  |                                     |       
|Revenue                                                        |  | $                                   | 22,885
|                                                               |  |                                     |       
|Operating Expenses (including depreciation and   amortization) |  | $                                   | 11,374
|                                                               |  |                                     |       
|Segment operating income (loss)                                |  | $                                   | 4,474 
|Depreciation & Amortization                                    |  |                                     | 468   
|Equity in the loss of affiliate                                |  |                                     |      
|                                                               |  |                                     |       
|Segment EBITDA                                                 |  | $                                   | 4,942 
|                                                               |  |                                     |       
|                                                               |  |                                     |       
|                                                               |  | As of March   31, 2005              |       
|                                                               |  |                                     |       
|                                                               |  | (In   thousands)                    |       
|Segment assets                                                 |  | $                                   | 30,585
|                                                               |  |                                     |       
|                                                               |  |                                     |       
|                                                               |  | Three   Months Ended March 31, 2004 |       
|                                                               |  |                                     |       
|                                                               |  | (In   thousands)                    |       
|                                                               |  | Test   Preparation   Services       |       
|                                                               |  |                                     |       
|Revenue                                                        |  | $                                   | 18,830
|                                                               |  |                                     |       
|Operating Expenses (including depreciation and   amortization) |  | $                                   | 11,357
|                                                               |  |                                     |       
|Segment operating income (loss)                                |  | $                                   | 1,653 
|Depreciation & Amortization                                    |  |                                     | 378   
|                                                               |  |                                     |       
|Segment EBITDA                                                 |  | $                                   | 2,031 
|                                                               |  |                                     |       
|                                                               |  |                                     |       
|                                                               |  | As of   December 31, 2004           |       
|                                                               |  |                                     |       
|                                                               |  | (In   thousands)                    |       
|Segment assets                                                 |  | $                                   | 29,529
|                                                               |  |                                     |       

11



Reconciliation of operating income (loss) to net loss:

|                                             |  | Three   Months Ended March 31, |     
|-------------------------------------------- |  | ------------------------------ | ----
|                                             |  |                                |     
|                                             |  | 2005                           |     
|                                             |  |                                |     
|Total income (loss) from reportable segments |  | $                              | 190 
|Interest expense                             |  |                                | (309
|Other income (expense),   net                |  |                                | 41  
|Equity in loss of   affiliate                |  |                                | (67 
|Benefit from income   taxes                  |  |                                |    
|                                             |  |                                |     
|Net loss                                     |  | $                              | (145
|                                             |  |                                |     

6. Loss Per Share

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

For the three months ended March 31, 2005 and 2004, 27,569,764 and 27,391,453 common stock shares were used in the computations of net loss per basic and diluted share, respectively.  Excluded from the computation of diluted earnings per common share because of their antidilutive effect were, 1,007,303 shares of Series B-1 Preferred stock, 112,578 stock options and 9 of other for the three months ended March 31, 2005 and 438,288 stock options and 9 of other for the three months ended March 31, 2004.

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7. Comprehensive Loss

The components of comprehensive loss for the three-months ended March 31, 2005 and 2004 are as follows:

|                                                                                                             |  | Three Months Ended March 31, |     
|------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ----
|                                                                                                             |  |                              |     
|                                                                                                             |  | 2005                         |     
|                                                                                                             |  |                              |     
|                                                                                                             |  | (in thousands)               |     
|Net loss attributable to   common stockholders                                                               |  | $                            | (340
|Foreign currency   translation adjustment                                                                    |  |                              | (5  
|Unrealized gain (loss) on   available-for-sale securities, net of tax benefits of $0 and $12,   respectively |  |                              |    
|                                                                                                             |  |                              |     
|Total comprehensive loss                                                                                     |  | $                            | (345
|                                                                                                             |  |                              |     

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

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

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

Overview

We develop, market and sell integrated classroom-based, print and online products and services to students, parents, educators and educational institutions. We operate our businesses through three divisions, which correspond to our business segments.

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

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Our K-12 Services division provides a number of services to K-12 schools and school districts, including assessment, professional development and face-to-face instruction.  As a result of the increased emphasis on accountability and the measurement of student performance in public schools in this country and the centralization of school districts purchasing of assessment, professional development and supplemental educational products and services, this division has seen growing demand by the public school market for its products.

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

In the first
quarter of 2005, we had strong top line revenue growth, when compared with the
corresponding prior year period.  After two weak quarters, the Test
Preparation Services division rebounded with 22% revenue growth, driven by
enrollment increases across its retail classroom courses, tutoring and SES
programs.  The K-12 Services division also posted solid revenue growth,
increasing revenue by 26% on strong sales of assessment materials and
face-to-face instruction programs.  While revenue in the Admissions
Services division remained unchanged from the prior year period, early
indicators point to customer interest in the divisions performance-based
marketing services.  We now have approximately 250 post-secondary school
customers with whom we have lead generation contracts, up from 5 as of March 31,
2004.  While we still must prove the business model by delivering on thes e
leads, we feel that this is a positive sign for the division.

On the expense side, SG&A increased by 12% over the prior year as we continued to incur significant professional fees, primarily relating to Sarbanes-Oxley compliance and the audit of our financial statements and internal control over financial reporting. Increases in headcount in our K-12 Services division and in corporate were a large contributor to this increase as well.

Results of Operations

Comparison of Three Months Ended March 31, 2005 and 2004

Revenue

Our total revenue increased from $27.9 million in 2004 to $33.6 million in 2005, representing a 20% increase.

Test Preparation Services revenue increased from $18.8 million in 2004 to $22.9 million in 2005, representing a 22% increase, comprised primarily of an increase of approximately $3.8 million in revenue from our company-owned operations. This increase in revenue is primarily attributable to enrollment increases across substantially all retail, classroom courses, tutoring and SES programs.  The largest contributor to the increase in revenue this quarter was the SAT course, where enrollment was up more than 25% over the same period in 2004, primarily due to the introduction of the new SAT this

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year. Additionally, LSAT course enrollment is rebounding after a weak introduction of the new Hyperlearning LSAT course, which is now generating not only positive feedback, but increased enrollment as well. Early indications are that enrollment for four out of five of our major courses (SAT, LSAT, GRE and MCAT) will increase from 2004 levels.  There is still some continuing weakness in GMAT enrollment, which is running at about 2004 levels.

K-12 Services revenue increased from $6.3 million in 2004 to $7.9 million in 2005, representing a 26% increase.  The increase was primarily due to increased after school instruction programs and sales of printed materials.  Additionally, we are seeing increased interest in sales presentations and proposals for interim assessment services and expect that this will translate into sales later in the year.

Admissions Services revenue remained unchanged at $2.8 million in both periods.  There was an increase of approximately $430,000 in marketing services as well as a $150,000 increase in counseling fees, which were offset by lower school technology subscription fees and application transaction fees.  The increase in marketing revenue is primarily attributable to the new marketing product. Application transaction fees have decreased primarily as applications to graduate schools have slowed.  Additionally, we had fewer customers subscribed for technology services in the first quarter of 2005 than in the corresponding 2004 period.  Based upon first quarter contracting patterns for our performance-based marketing services, we anticipate that revenue in 2005 from these services should more than offset any decrease in technology and application based fees.

Cost of Revenue

Our total cost of revenue increased from $10.1 million in 2004 to $12.1 million in 2005, representing a 21% increase.

Test Preparation Services cost of revenue increased from $5.8 million in 2004 to $7.0 million in 2005, representing a 21% increase, with gross margins in both periods at approximately 69%.

K-12 Services cost of revenue increased from $3.7 million in 2004 to $4.2 million in 2005, representing a 16% increase.  Gross margins increased to 46% from 42% in the first quarter of 2004 as a result of an increase in revenue from sales of materials and live instruction, which have higher gross margins than professional development services.

Admissions Services cost of revenue increased from $0.6 million in 2004 to $0.9 million in 2005, representing a 44% increase, primarily due to the increased expenditures for customer support costs and costs of providing high school counseling.  Gross margins decreased to 69% from 79% in the first quarter of 2004 primarily as a result of increased revenue from sales of counseling services, which have lower gross margins than our technology products.

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Operating Expenses

Selling, general and administrative expenses increased from $19.0 million in 2004 to $21.3 million in 2005, representing a 12% increase.  This increase resulted from the following:

|                                                                              |  | an increase of approximately $1.9 million in   salaries and payroll taxes, due largely to increased headcount, primarily in   the K-12 Services division and in corporate; and                                        
|----------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                              |  | an increase of approximately $1.4 million in   professional fees, comprised primarily of financial statement and internal   control audit fees and accounting consultant fees relating to Sarbanes-Oxley   compliance.
|                                                                              |  
|Theses increases were partially offset by decreases   in the following areas:
|                                                                              |   |                                                                                                                                                                                                                       
|                                                                              |  | a decrease of approximately $734,000 in personnel   related costs, primarily attributable to lower entertainment and meetings   expenses; and                                                                         
|                                                                              |  | a decrease of approximately $344,000 in advertising   expense.                                                                                                                                                        

We anticipate that professional fees related to Sarbanes-Oxley compliance will continue to be significant in 2005, with at least $1 million in such fees anticipated in the second half of 2005 as we conduct our Section 404 internal control evaluation for 2005 and implement remediation efforts where necessary.

Income Taxes

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

Liquidity and Capital Resources

Our current primary sources of liquidity are cash and cash equivalents on hand and collections from customers.  At March 31, 2005, we had approximately $11.5 million of cash and cash equivalents.  Our Test Preparation Services division has historically generated, and continues to generate, the largest portion of our cash 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 K-12 schools and school districts and post-secondary institutions, which pay us in arrears.  Typical payment terms for these institutional customers, once invoiced, range from 60 to 90 days.  Additionally, the long contract
approval cycles of some of our contracts with large institutions or school districts can contribute to the level of variability in the timing of our cash receipts, as these contracts sometimes require performance to begin significantly in advance of collection of payments.

During 2004 and the first quarter of 2005, we also experienced a significant increase in the aging of receivables from many of these customers, partially as a result of decreased focus on collections due to enormous strains on accounting resources required by the internal controls assessment mandated by Section 404 of Sarbanes-Oxley.  We have recently hired additional employees to collect these outstanding amounts.  However, our days sales outstanding increased to 78 days at March 31, 2005, from 73 days at the end of 2004.

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Cash used by operating activities is net loss adjusted for certain non-cash items and changes in assets and liabilities.  During the first quarter of 2005, cash used in operating activities was $3.1 million, compared to $4.1 million used in the first quarter of 2004.   In 2005, the majority of the cash used in operating activities was due to greater working capital requirements as receivables increased and previously deferred income was recognized.

Investing cash flows consist primarily of capital expenditures.  We used $2.3 million in net cash for investing activities during the first quarter of 2005, compared to $1.7 million during the first quarter of 2004.  The increase in capital expenditures is due primarily to software purchased, increased development projects and new office construction.

Financing cash flows consist primarily of transactions related to our debt structure.  During the first quarter of 2005 we repaid approximately $2.0 million of debt we borrowed under a bank credit facility.

We anticipate that our cash balances, together with cash generated from operations, will be sufficient to meet our normal operating requirements for at least the next 12 months.  Our future capital requirements will depend on a number of factors, including market acceptance of our products and services and the resources we devote to developing, marketing, selling and supporting these products and services. We expect to continue to devote substantial capital resources to product development and support and advertising, marketing and promotional activities. We may also seek another credit facility to buffer our working capital requirements.

Impact of Inflation

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

Seasonality in Results of Operations

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Included in our cash and cash equivalants are short-term money market funds.  The fair value of these money market funds would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due primarily to the short-term nature of the portfolio.  Our Series B-1 Preferred Stock requires the payment of quarterly dividends at the greater of 5% or 1.5% above 90-day LIBOR.  During the three months ended March 31, 2005, we paid dividends on the Series B-1 Preferred Stock in an aggregate amount of $125,000, at the rate of 5%.  A 100 basis point increase in the dividend rate would have resulted in a $25,000 increase in dividends paid during this period.  We do not currently hold or issue derivative financial instruments.

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Revenue from our international operations and royalty payments from our international franchisees constitute an insignificant percentage of our revenue.  Accordingly, our exposure to exchange rate fluctuations is minimal.

Item 4.  Controls and Procedures

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

Scope of the Controls Evaluation

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

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

Conclusions

As described in detail in Item 9A of the companys Form 10-K/A, dated May 2, 2005 (Form 10-K/A), the companys management assessed the effectiveness of the companys internal control over financial reporting as of December 31, 2004.  Managements assessment identified three material weaknesses in internal control over financial reporting as of that date.  These material weaknesses were identified in the areas of capitalized software development costs, financial statement close process and revenue recognition.  In light of these material weaknesses identified by management, which have not

18



been remediated as of the end of the period covered by this Quarterly Report, our CEO and CFO concluded, after the evaluation described above, that our Disclosure Controls were not effective, as of the end of the period covered by this Quarterly Report, in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.  Notwithstanding this conclusion, the companys preparation of its financial statements for the period covered by this report, and its evaluation of Disclosure Controls as of the end of such period, were conducted with particular attention to the material weaknesses identified by management in the Form 10-K/A, and management continued to retain third party consultants and hire additional accounting personnel during the period to provide certain compensating controls and other
assistance in areas where material weaknesses were identified.  Accordingly, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects our financial condition, results of operations and cash flows as of and for the periods presented.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the period covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for the activities described below, all of which began in the fourth quarter of 2004 and continued into the first quarter of 2005.

We have implemented certain remediation measures and are in the process of designing and implementing additional remediation measures for the material weaknesses described in the Form 10-K/A. Such remediation activities include the following:

| | We have   hired and continue to hire more qualified and experienced accounting   personnel to perform the month end review and closing processes as well as provide   additional oversight and supervision within the accounting department.                                                                                                                                                              
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | We are in   the process of implementing a tier one accounting and financial reporting   software system to further automate and integrate and thereby improve the   companys financial reporting processes and systems by removing unnecessary   manual interfaces and to facilitate the revenue recognition of multiple   element contracts.  This system is   expected to be fully implemented in 2006.
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | We are in   the process of establishing written policies and procedures to ensure that   account reconciliations and amounts recorded, as well as the review of these   areas, are substantiated by detailed and contemporaneous documentary support   and that reconciling items are investigated, resolved and recorded in a   timely manner.                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | We are   initiating programs providing ongoing training and professional education and   development plans for the accounting department and improving internal   communications procedures throughout the company.                                                                                                                                                                                       

In addition to the foregoing remediation efforts, we retained a consulting firm to assist with the documentation of our internal control processes, including more formal month-end review processes, as well as to provide a compensating control for our K-12 and Admissions Services revenue recognition process, while we are in the process of acquiring needed internal staff in this area.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, we are involved in legal proceedings incidental to the conduct of our business.  We are not currently a party to any legal proceeding, which, in the opinion of our management, is likely to have a material adverse effect on us.

Item 2.  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

Not applicable.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

(a)   Exhibits:

|Exhibit   Number |  | Description                                                                                                              
|---------------- |  | -------------------------------------------------------------------------------------------------------------------------
|                 |  |                                                                                                                          
|31.1             |  | Certification Pursuant to Rule 13a-14(a), as Adopted   Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        
|                 |  |                                                                                                                          
|31.2             |  | Certification Pursuant to Rule 13a-14(a), as Adopted   Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        
|                 |  |                                                                                                                          
|32.1             |  | Certification Pursuant to 18 U.S.C. Section 1350, as   Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

20



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:                         
|               |                             
|               |                             
|May 10,   2005 |                             

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