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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 June 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 28,105,005 shares of $0.01 par value common stock outstanding at August 8, 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 second quarter ended
June 30, 2007 and 2006, as filed with the Securities and Exchange Commission on August 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 August 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                                                                 |  |     
|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 |  | 18  
|Item 3.                                              |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 24  
|Item 4.                                              |  | Controls and Procedures                                                               |  | 24  
|PART II.                                             |  | OTHER INFORMATION                                                                     |  |     
|Item 1.                                              |  | Legal Proceedings                                                                     |  | 25  
|Item 1A.                                             |  | Risk Factors                                                                          |  | 26  
|Item 2.                                              |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 26  
|Item 3.                                              |  | Defaults Upon Senior Securities                                                       |  | 26  
|Item 4.                                              |  | Submission of Matters to a Vote of Security Holders                                   |  | 26  
|Item 5.                                              |  | Other Information                                                                     |  | 27  
|Item 6.                                              |  | Exhibits                                                                              |  | 27  
|SIGNATURES                                           |  | 28                                                                                   
|EX-10.1: MICHAEL PERIK EMPLOYMENT AGREEMENT          |  |                                                                                      
|EX-10.2: MARK CHERNIS EMPLOYMENT AGREEMENT AMENDMENT |  |                                                                                      
|EX-10-3: MICHAEL PERIK OPTION AGREEMENT              |  |                                                                                      
|EX-31.1: CERTIFICATION                               |  |                                                                                      
|EX-31.2: CERTIFICATION                               |  |                                                                                      
|EX-32.1: CERTIFICATION                               |  |                                                                                      



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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)



|                                                                                                                                                                    |  |                         |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                    |  | June 30,2007            |         |   | December 31,2006 |  
|                                                                                                                                                                    |  | As Restated (unaudited) |         |   | As Restated      |  
|ASSETS:                                                                                                                                                             |  |                         |         |   |                  |   |         |  
|Current assets:                                                                                                                                                     |  |                         |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                           |  | $                       | 11,179  |   |                  | $ | 10,822  |  
|Accounts receivable, net of allowance of $4,331 in 2007 and $2,848 in 2006                                                                                          |  |                         | 25,040  |   |                  |   | 31,020  |  
|Other receivables                                                                                                                                                   |  |                         | 2,529   |   |                  |   | 2,123   |  
|Inventory                                                                                                                                                           |  |                         | 2,409   |   |                  |   | 2,950   |  
|Prepaid expenses                                                                                                                                                    |  |                         | 1,068   |   |                  |   | 1,653   |  
|Other current assets                                                                                                                                                |  |                         | 1,200   |   |                  |   | 2,612   |  
|Other current assets related to discontinued operations                                                                                                             |  |                         |        |   |                  |   | 4,258   |  
|                                                                                                                                                                    |  |                         |         |   |                  |   |         |  
|Total current assets                                                                                                                                                |  |                         | 43,425  |   |                  |   | 55,438  |  
|Furniture, fixtures, equipment and software development, net                                                                                                        |  |                         | 14,204  |   |                  |   | 18,340  |  
|Goodwill                                                                                                                                                            |  |                         | 31,006  |   |                  |   | 31,006  |  
|Investment in affiliates                                                                                                                                            |  |                         | 1,639   |   |                  |   | 1,639   |  
|Other intangibles, net                                                                                                                                              |  |                         | 10,217  |   |                  |   | 11,527  |  
|Other assets                                                                                                                                                        |  |                         | 7,661   |   |                  |   | 1,744   |  
|Other assets related to discontinued operations                                                                                                                     |  |                         |        |   |                  |   | 1,980   |  
|                                                                                                                                                                    |  |                         |         |   |                  |   |         |  
|Total assets                                                                                                                                                        |  | $                       | 108,152 |   |                  | $ | 121,674 |  
|                                                                                                                                                                    |  |                         |         |   |                  |   |         |  
|                                                                                                                                                                    |  |                        
|LIABILITIES & STOCKHOLDERS EQUITY:                                                                                                                                 |  |                         |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                |  |                         |         |   |                  |   |         |  
|Line of credit                                                                                                                                                      |  | $                       | 15,000  |   |                  | $ | 3,000   |  
|Accounts payable                                                                                                                                                    |  |                         | 4,457   |   |                  |   | 15,220  |  
|Accrued expenses                                                                                                                                                    |  |                         | 10,381  |   |                  |   | 11,277  |  
|Current maturities of long-term debt                                                                                                                                |  |                         | 1,127   |   |                  |   | 1,369   |  
|Deferred income                                                                                                                                                     |  |                         | 19,328  |   |                  |   | 24,238  |  
|Liabilities related to discontinued operations                                                                                                                      |  |                         |        |   |                  |   | 2,541   |  
|                                                                                                                                                                    |  |                         |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                           |  |                         | 50,293  |   |                  |   | 57,645  |  
|Deferred rent                                                                                                                                                       |  |                         | 2,520   |   |                  |   | 2,557   |  
|Long-term debt                                                                                                                                                      |  |                         | 1,665   |   |                  |   | 14,127  |  
|Deferred Tax Liability                                                                                                                                              |  |                         | 4,044   |   |                  |   | 3,703   |  
|Fair value of derivatives and warrant                                                                                                                               |  |                         | 4,007   |   |                  |   | 181     |  
|Series B-1 Preferred Stock, $0.01 par value; 10,000 shares authorized; 6,000 shares issued and outstanding at June 30, 2007 and
December 31, 2006, respectively     |  |                         | 6,000   |   |                  |   | 6,000   |  
|Stockholders equity                                                                                                                                                |  |                         |         |   |                  |   |         |  
|Preferred stock, $0.01 par value; 4,990,000 shares authorized, none issued and outstanding                                                                          |  |                         |        |   |                  |   |        |  
|Common stock, $0.01 par value; 100,000,000 shares authorized; 28,105,005 and 27,601,268 issued and outstanding at June 30, 2007 and
December 31, 2006, respectively |  |                         | 281     |   |                  |   | 276     |  
|Additional paid-in capital                                                                                                                                          |  |                         | 119,361 |   |                  |   | 117,082 |  
|Accumulated deficit                                                                                                                                                 |  |                         | (79,710 | ) |                  |   | (79,573 | )
|Accumulated other comprehensive loss                                                                                                                                |  |                         | (309    | ) |                  |   | (324    | )
|                                                                                                                                                                    |  |                         |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                          |  |                         | 39,623  |   |                  |   | 37,461  |  
|                                                                                                                                                                    |  |                         |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                          |  | $                       | 108,152 |   |                  | $ | 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

(In thousands, except per share data)



|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|----------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ----------- |  | - | ----------- | - |  | - | ------ | -
|                                                                  |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                  |  | 2007                       |        |   | 2006                     |   |        | 2007        |  |   | 2006        |  
|                                                                  |  | As Restated                |        |   | As Restated              |   |        | As Restated |  |   | As Restated |  
|                                                                  |  | (Unaudited)                |       
|Revenue                                                           |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Test Preparation Services                                         |  | $                          | 25,074 |   |                          | $ | 21,274 |             |  | $ | 45,937      |   |  | $ | 44,410 |  
|SES Services                                                      |  |                            | 2,457  |   |                          |   | 1,266  |             |  |   | 8,684       |   |  |   | 4,023  |  
|K-12 Services                                                     |  |                            | 8,854  |   |                          |   | 10,695 |             |  |   | 21,935      |   |  |   | 18,413 |  
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Total revenue                                                     |  |                            | 36,385 |   |                          |   | 33,235 |             |  |   | 76,556      |   |  |   | 66,846 |  
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Cost of revenue                                                   |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Test Preparation Services                                         |  |                            | 8,133  |   |                          |   | 7,102  |             |  |   | 16,500      |   |  |   | 14,366 |  
|SES Services                                                      |  |                            | 787    |   |                          |   | 911    |             |  |   | 3,632       |   |  |   | 1,830  |  
|K-12 Services                                                     |  |                            | 5,514  |   |                          |   | 5,369  |             |  |   | 12,443      |   |  |   | 10,564 |  
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Total cost of revenue                                             |  |                            | 14,434 |   |                          |   | 13,382 |             |  |   | 32,575      |   |  |   | 26,760 |  
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Gross Profit                                                      |  |                            | 21,951 |   |                          |   | 19,853 |             |  |   | 43,981      |   |  |   | 40,086 |  
|Operating expenses                                                |  |                            | 21,713 |   |                          |   | 20,191 |             |  |   | 44,364      |   |  |   | 42,418 |  
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Income (loss) from operations                                     |  |                            | 238    |   |                          |   | (338   | )           |  |   | (383        | ) |  |   | (2,332 | )
|Interest income (expense)                                         |  |                            | (497   | ) |                          |   | (192   | )           |  |   | (841        | ) |  |   | (220   | )
|Other income (expense)                                            |  |                            | (3,687 | ) |                          |   | (156   | )           |  |   | (3,763      | ) |  |   | (96    | )
|Equity in the income (loss) of affiliates                         |  |                            |       |   |                          |   | 17     |             |  |   |            |   |  |   | (50    | )
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Income (loss) before income taxes                                 |  |                            | (3,946 | ) |                          |   | (669   | )           |  |   | (4,987      | ) |  |   | (2,698 | )
|(Provision) benefit for income taxes                              |  |                            | 129    |   |                          |   | (342   | )           |  |   | 137         |   |  |   | (458   | )
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Net income (loss) from continuing operations                      |  |                            | (3,817 | ) |                          |   | (1,011 | )           |  |   | (4,850      | ) |  |   | (3,156 | )
|Discontinued operations                                           |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Net income (loss) from discontinued operations                    |  |                            | (246   | ) |                          |   | (428   | )           |  |   | 952         |   |  |   | (306   | )
|Gain from disposal of discontinued operations                     |  |                            |       |   |                          |   |       |             |  |   | 4,539       |   |  |   |       |  
|(Provision) benefit for income taxes                              |  |                            | (394   | ) |                          |   | 175    |             |  |   | (572        | ) |  |   | 125    |  
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Net income (loss) from discontinued operations                    |  |                            | (640   | ) |                          |   | (253   | )           |  |   | 4,919       |   |  |   | (181   | )
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Net income (loss)                                                 |  |                            | (4,457 | ) |                          |   | (1,264 | )           |  |   | 69          |   |  |   | (3,337 | )
|Dividends and accretion on Series B-1 Preferred Stock             |  |                            | (104   | ) |                          |   | (147   | )           |  |   | (207        | ) |  |   | (305   | )
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Income (loss) attributed to common stockholders                   |  | $                          | (4,561 | ) |                          | $ | (1,411 | )           |  | $ | (138        | ) |  | $ | (3,642 | )
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Earnings (loss) per share                                         |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Basic and diluted                                                 |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Income (loss) from continuing operations                          |  | $                          | (0.14  | ) |                          | $ | (0.04  | )           |  | $ | (0.17       | ) |  | $ | (0.12  | )
|Income (loss) from discontinued operations                        |  |                            | (0.02  | ) |                          |   | (0.01  | )           |  |   | 0.18        |   |  |   | (0.01  | )
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Net income (loss) attributed to common shareholders               |  | $                          | (0.16  | ) |                          | $ | (0.05  | )           |  | $ | (0.01       | ) |  | $ | (0.13  | )
|                                                                  |  |                            |        |   |                          |   |        |             |  |   |             |   |  |   |        |  
|Weighted average shares used in computing income (loss) per share |  |                            | 27,890 |   |                          |   | 27,574 |             |  |   | 27,837      |   |  |   | 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

(In thousands)



|                                                                                         |  |                                  |         |   |             |   |        |  
|---------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ----------- | - | ------ | -
|                                                                                         |  | For the Six MonthsEnded June 30, |        
|                                                                                         |  | 2007                             |         |   | 2006        |  
|                                                                                         |  | As Restated                      |         |   | As Restated |  
|                                                                                         |  | (Unaudited)                      |        
|Cash flows provided by (used for) operating activities:                                  |  |                                  |         |   |             |   |        |  
|Net income (loss) from continuing operations                                             |  | $                                | (4,850  | ) |             | $ | (3,156 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                  |         |   |             |   |        |  
|Depreciation                                                                             |  |                                  | 1,464   |   |             |   | 1,116  |  
|Amortization                                                                             |  |                                  | 2,766   |   |             |   | 3,041  |  
|Bad debt expense                                                                         |  |                                  | 1,151   |   |             |   | 484    |  
|Write-off of deferred financing costs                                                    |  |                                  | 33      |   |             |   |       |  
|Write-off of inventory                                                                   |  |                                  |        |   |             |   | 265    |  
|Change in fair value of derivatives                                                      |  |                                  | 3,826   |   |             |   | (281   | )
|Deferred Income Tax Liability                                                            |  |                                  | 341     |   |             |   | 333    |  
|Deferred rent                                                                            |  |                                  | (38     | ) |             |   | 146    |  
|Stock based compensation                                                                 |  |                                  | 2,005   |   |             |   | 300    |  
|Other, net                                                                               |  |                                  | (28     | ) |             |   | (89    | )
|Net change in operating assets and liabilities:                                          |  |                                  |         |   |             |   |        |  
|Accounts receivable                                                                      |  |                                  | 8,500   |   |             |   | (2,918 | )
|Inventory                                                                                |  |                                  | 541     |   |             |   | (561   | )
|Prepaid expenses                                                                         |  |                                  | 585     |   |             |   | 333    |  
|Other assets                                                                             |  |                                  | (2,421  | ) |             |   | (2,138 | )
|Accounts payable and accrued expenses                                                    |  |                                  | (11,656 | ) |             |   | (5,147 | )
|Deferred income                                                                          |  |                                  | (4,910  | ) |             |   | 5,280  |  
|                                                                                         |  |                                  |         |   |             |   |        |  
|Net cash provided by (used for) operating activities                                     |  |                                  | (2,691  | ) |             |   | (2,992 | )
|                                                                                         |  |                                  |         |   |             |   |        |  
|Cash provided by (used for) investing activities:                                        |  |                                  |         |   |             |   |        |  
|Purchases of furniture, fixtures, equipment and software development                     |  |                                  | (1,074  | ) |             |   | (2,022 | )
|Additions to capitalized K-12 content, capitalized course costs                          |  |                                  | (42     | ) |             |   | (1,010 | )
|Payment of related party loan                                                            |  |                                  | 120     |   |             |   | 345    |  
|Payment of note receivable                                                               |  |                                  | 86      |   |             |   | 266    |  
|Payment of loan receivable                                                               |  |                                  |        |   |             |   | 250    |  
|                                                                                         |  |                                  |         |   |             |   |        |  
|Net cash provided by (used for) investing activities                                     |  |                                  | (910    | ) |             |   | (2,171 | )
|                                                                                         |  |                                  |         |   |             |   |        |  
|Cash flows provided by (used for) financing activities:                                  |  |                                  |         |   |             |   |        |  
|Redemption of Series B-1 Preferred Stock                                                 |  |                                  |        |   |             |   | (4,377 | )
|Proceeds from revolving credit facility                                                  |  |                                  |        |   |             |   | 10,000 |  
|Payment of credit facility deferred financing costs                                      |  |                                  |        |   |             |   | (168   | )
|Capital lease payments                                                                   |  |                                  | (392    | ) |             |   | (403   | )
|Dividends on Series B-1 P referred Stock                                                 |  |                                  | (207    | ) |             |   | (305   | )
|Notes payable related to acquisitions                                                    |  |                                  | (313    | ) |             |   | (318   | )
|Proceeds from exercise of options                                                        |  |                                  | 279     |   |             |   | 11     |  
|                                                                                         |  |                                  |         |   |             |   |        |  
|Net cash provided by (used for) financing activities                                     |  |                                  | (633    | ) |             |   | 4,440  |  
|                                                                                         |  |                                  |         |   |             |   |        |  
|Total cash flows used in continuing operations                                           |  |                                  | (4,234  | ) |             |   | (723   | )
|                                                                                         |  |                                  |         |   |             |   |        |  
|Cash Flows from Discontinued Operations                                                  |  |                                  |         |   |             |   |        |  
|Income from discontinued operations                                                      |  |                                  | 380     |   |             |   | (306   | )
|Gain on disposal of discontinued operations                                              |  |                                  | (4,539  | ) |             |   |       |  
|Other adjustments to reconcile net income to net cash provided by operating activities   |  |                                  | 1,750   |   |             |   | (2,056 | )
|                                                                                         |  |                                  |         |   |             |   |        |  
|Net cash provided by (used for) operating activities                                     |  |                                  | (2,409  | ) |             |   | (2,362 | )
|                                                                                         |  |                                  |         |   |             |   |        |  
|Cash received from disposal of discontinued operations                                   |  |                                  | 7,000   |   |             |   |       |  
|Other cash provided by investing activities                                              |  |                                  |        |   |             |   | 2,410  |  
|                                                                                         |  |                                  |         |   |             |   |        |  
|Net cash provided by (used for) investing activities                                     |  |                                  | 7,000   |   |             |   | 2,410  |  
|                                                                                         |  |                                  |         |   |             |   |        |  
|Net cash provided by (used for) discontinued operations                                  |  |                                  | 4,591   |   |             |   | 48     |  
|                                                                                         |  |                                  |         |   |             |   |        |  
|Increase (decrease) in cash and cash equivalents                                         |  |                                  | 357     |   |             |   | (675   | )
|Cash and cash equivalents, beginning of period                                           |  |                                  | 10,822  |   |             |   | 8,002  |  
|                                                                                         |  |                                  |         |   |             |   |        |  
|Cash and cash equivalents, end of period                                                 |  | $                                | 11,179  |   |             | $ | 7,327  |  
|                                                                                         |  |                                  |         |   |             |   |        |  

See accompanying notes to the condensed consolidated financial statements.



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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 six-month periods ended June 30, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Prior periods were recast to reflect the operations of certain of the Companys Admissions Services Division. The Company sold the assets related to
providing electronic application and prospect management tools to schools and higher education institution customers (the Admissions Tech Business) which have been classified as discontinued operations. See Note 12  Disposal of
Assets.

Products and Services

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



|                      |  |                            |        |                          |   |        |  |      |        |  |   |       
|--------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                      |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                      |  | 2007                       |        | 2006                     |   | 2007   |  | 2006
|                      |  | (In thousands)            
|Revenue               |  |                            |        |                          |   |        |  |      |        |  |   |       
|Services              |  | $                          | 31,182 |                          | $ | 25,625 |  | $    | 68,078 |  | $ | 55,558
|Products              |  |                            | 1,989  |                          |   | 5,563  |  |      | 3,582  |  |   | 7,089 
|Other                 |  |                            | 3,214  |                          |   | 2,047  |  |      | 4,896  |  |   | 4,199 
|                      |  |                            |        |                          |   |        |  |      |        |  |   |       
|Total revenue         |  | $                          | 36,385 |                          | $ | 33,235 |  | $    | 76,556 |  | $ | 66,846
|                      |  |                            |        |                          |   |        |  |      |        |  |   |       
|Cost of Revenue       |  |                            |        |                          |   |        |  |      |        |  |   |       
|Services              |  | $                          | 13,647 |                          | $ | 11,064 |  | $    | 31,204 |  | $ | 23,442
|Products              |  |                            | 487    |                          |   | 2,131  |  |      | 1,035  |  |   | 2,997 
|Other                 |  |                            | 300    |                          |   | 187    |  |      | 336    |  |   | 321   
|                      |  |                            |        |                          |   |        |  |      |        |  |   |       
|Total cost of revenue |  | $                          | 14,434 |                          | $ | 13,382 |  | $    | 32,575 |  | $ | 26,760
|                      |  |                            |        |                          |   |        |  |      |        |  |   |       

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 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.



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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 2009 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 2009 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 beginning in the first
quarter of fiscal 2007 and the adoption of this pronouncement did not have a significant impact on the Companys consolidated financial statements.

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 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 fair value of assets and liabilities. Actual results
could differ from those estimated.

Reclassifications

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

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.



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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 June 30, 2007 and December 31, 2006 and for the three and six months ended June 30, 2007 and 2006. Changes to the statements of cashflows has not been separately presented as they have no effect on the cash provided
by or used in operating activities. 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 |  
|Six months ended June 30, 2007 (Income Statement)     |  |                       |        |   |          |   |        |  
|(Provision) benefit for income taxes                  |  | $                     | 478    |   |          | $ | 137    |  
|Net income (loss) attributable to common shareholders |  | $                     | 203    |   |          | $ | (138   | )
|Net income (loss) per share                           |  | $                     | 0.01   |   |          | $ | (0.01  | )
|                                                      |  |                      
|Six months ended June 30, 2006 (Income Statement)     |  |                       |        |   |          |   |        |  
|(Provision) benefit for income taxes                  |  | $                     |       |   |          | $ | (458   | )
|Net loss attributable to common shareholders          |  | $                     | (3,309 | ) |          | $ | (3,642 | )
|Net loss per share                                    |  | $                     | (0.12  | ) |          | $ | (0.13  | )
|                                                      |  |                      
|Balance sheet data June 30, 2007                      |  |                       |        |   |          |   |        |  
|Deferred income taxes                                 |  | $                     |       |   |          | $ | 4,404  |  
|Shareholders equity                                   |  | $                     | 43,667 |   |          | $ | 39,623 |  
|                                                      |  |                      
|Balance sheet data December 31, 2006                  |  |                       |        |   |          |   |        |  
|Deferred income taxes                                 |  | $                     |       |   |          | $ | 3,703  |  
|Shareholders equity                                   |  | $                     | 41,163 |   |          | $ | 37,461 |  
|                                                      |  |                      
|Three months ended June 30, 2007 (Income Statement)   |  |                       |        |   |          |   |        |  
|(Provision) benefit for income taxes                  |  | $                     | 300    |   |          | $ | 129    |  
|Net loss attributable to common shareholders          |  | $                     | (4,390 | ) |          | $ | (4,561 | )
|Net loss per share                                    |  | $                     | (0.15  | ) |          | $ | (0.16  | )
|                                                      |  |                      
|Three months ended June 30, 2006 (Income Statement)   |  |                       |        |   |          |   |        |  
|(Provision) benefit for income taxes                  |  | $                     |       |   |          | $ | (342   | )
|Net loss attributable to common shareholders          |  | $                     | (1,244 | ) |          | $ | (1,411 | )
|Net loss per share                                    |  | $                     | (0.05  | ) |          | $ | (0.05  | )

3. 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. Under this method, compensation expense is recognized for employee awards granted, modified, or settled subsequent to December 31, 2005, and the unvested portion of awards granted to employees in prior years.
Compensation expense is recognized on a straight-line method over the requisite service period.



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During 2007, the Board of Directors approved the granting of 155,454 shares of Restricted Stock under the
Stock Incentive Plan to the senior management of the Company (on May 25, 2007) and the outside members of the Board of Directors (on June 30, 2007), having a grant-date value of $865,000. These Restricted Stock awards generally vest
quarterly over a two year period. As of June 30, 2007, 207,400 shares of Restricted Stock were outstanding with unrecognized compensation cost of $801,000 to be recognized over a period of 1.25 years.

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 having a compensation cost of $1.6 million.

There were no stock options or restricted stock awards in the first
quarter of 2007.

Total stock-based compensation expense recorded for the three and six months ended June 30, 2007 and 2006 was $1.9
million and $130,000 and $2.0 million and $300,000, respectively.

4. Line of Credit

Credit Agreement

On
April 10, 2006, 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.

The Credit Agreement, as amended, provides for a revolving credit facility with a term of five years and a maximum aggregate principal amount of $15.0 million (the Credit Facility). Operations is a guarantor of the
Companys obligations under the Credit Agreement.

The Companys borrowings under the Credit Facility are secured by a first
priority lien on all of the Companys and Operations assets. In addition, the Company pledged all of its equity interests in its subsidiaries, and all other equity investments held by the Company to Golub as security for the Credit
Facility.

The Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type, including,
among other things, limits on the Companys ability to make investments and incur indebtedness and liens, maintenance of a minimum level of EBITDA of the Companys Test Preparation Services Division, and maintenance of a minimum net worth.
The Credit Agreement contains customary events of default for facilities of this type (with customary grace periods and materiality thresholds, as applicable) and provides that, upon the occurrence and continuation of an event of default, the
interest rate on all outstanding obligations will be increased and payment of all outstanding loans may be accelerated and/or the lenders commitments may be terminated.

At December 31, 2006, the Company failed the minimum net worth covenant and obtained a waiver of that covenant through January 1, 2008. On
February 16, 2007, the Company entered into a third amendment of the Credit Agreement (the Third Amendment). The Third Amendment required the Company to (i) repay to Golub $3.0 million from the proceeds of the sale of the
Companys Admissions Services technology business and (ii) set the amount of the Credit Facility at $12.0 million. This $3.0 million payment was made by the Company on February 19, 2007.

Pursuant to the Third Amendment which increased the annual interest rate of the Credit Facility, outstanding amounts under the Credit Facility up to
$10.0 million bear interest at rates based on either (A) 300 basis points over the greater of (x) the prime rate and (y) the Federal Funds Rate plus 50 basis points or (B) 400 basis points over the London Interbank Offered Rate
(LIBOR), at the Companys election and in accordance with the terms of the Credit Agreement. Outstanding amounts under the Credit Facility in excess of $10.0 million (or the borrowing base amount, if lower) bear the following annual
interest rates: either (A) 400 basis points over the greater of (x) the prime rate and (y) the Federal Funds Rate plus 50 basis points or (B) 500 basis points over the LIBOR rate, at the Companys election and in accordance
with the terms of the Credit Agreement.



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On March 29, 2007, the Company entered into a further amendment of the Credit Agreement (the
Fourth Amendment). Under the Fourth Amendment, the maximum borrowing amount was increased to $15.0 million, and the Company drew down the full available amount on March 30, 2007. The term of the Credit Facility remains unchanged at
five years from the date of the original Credit Agreement. The terms for the annual interest rate for the facility are the same as those under the Third Amendment. On July 24, 2007 the Company paid down the $15 million of debt outstanding and
any accumulated interest with Golub Capital and terminated the credit facility. (See Note 12  Subsequent Events).

5. Series B-1 Preferred Stock

On June 4, 2004, the Company sold 10,000 shares of its Series B-1 Preferred Stock to Fletcher International, Ltd.
(Fletcher) for proceeds of $10,000,000. In May 2006, 4,000 shares of Series B-1 Preferred Stock were redeemed in cash, leaving 6,000 shares outstanding. These shares are convertible into common stock at any time (the Holder
Conversion Option). Prior to conversion, each share accrues dividends at an annual rate of the greater of 5% and the 90-day LIBOR plus 1.5% (6.93% at June 30, 2007), subject to adjustment. Dividends are payable, whether or not declared by
the Board of Directors out of funds legally available therefor, 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 (as of June 30, 2007), 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.

The holder may redeem its shares of the Series B-1 Preferred
Stock, in lieu of converting such shares at any time for shares of common stock unless the Company satisfies the conditions for cash redemption. If the holder 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 the holder elects to redeem its shares and the Company elects to make such redemption in
cash, then the holder will receive funds equal to the product of: (1) the number of shares of common stock that would have been issuable if the holder 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 Global 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, the holder 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 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, and, as of June 30, 2007, 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.

The Series B-1 Preferred Stock also contains a provision (the Make-whole Provision) that
indicates that if the Company is party to a certain acquisition, asset sale, capital reorganization or other transaction in which the power to cast the majority of the eligible votes at a meeting of the Companys shareholders is transferred to
a single entity or group, upon consummation of the transaction, the holder is entitled to receive (at the holders election)

a) the
consideration to which the holder would have been entitled had it converted the Series B-1 Preferred Stock into common stock immediately prior to consummation,



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##### Table of Contents

b) the consideration to which the holder would have been entitled had it redeemed the Series B-1
Preferred Stock for common stock immediately prior to consummation, or

c) cash, initially equal to 160% of the aggregate redemption amount
of the Series B-1 Preferred Stock less 5% of the redemption amount for each full year the Series B-1 Preferred Stock was outstanding.

On
July 24, 2007, the Company terminated the Series B-1 Preferred Stock, together with the embedded derivatives and warrant. (See Note 13  Subsequent Events).

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.

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 in earnings. 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 June 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.



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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 six months ended June 30, 2007, cash dividends in the amount of $104,000 and $207,000, respectively, were paid to the Series B-1 Preferred stockholder. For the three and six months ended
June 30, 2006, cash dividends in the amount of $147,000 and $304,000, respectively, were paid to the Series B-1 Preferred stockholder.

6. Income
Taxes

During the current quarter, pursuant to FAS 109, the Company has recorded an income tax benefit related to continuing operations
for the three and six months ended June 30, 2007 in the amount of $129,000 and $137,000. A corresponding provision for income taxes for the three and six months ended June 30, 2007 of $394,000 and $572,000 has been recorded as part of the
Companys Income from Discontinued Operations.

7. 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 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. The allocations are made to the divisions on the basis of equivalent bought-in third
party 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, 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.

In connection with the transaction described in Note 10, financial results associated with the admissions publications and college
counseling services previously reported in the Admissions Services division have been recasted for all periods presented into Test Preparation Services and K-12 Services, respectively.

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, or as an alternative to any other measure of performance calculated in conformity with GAAP.



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|                                                            |  |                                                |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|----------------------------------------------------------- |  | ---------------------------------------------- | ------ | ------------ | - | ------------ |  | - | --------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                            |  | Three Months Ended June 30, 2007 (As Restated) |       
|                                                            |  | TestPreparationServices                        |        | SES Services |   | K-12Services |  |   | Corporate |   |  | Total |       
|                                                            |  | (In thousands)                                 |       
|Revenue                                                     |  | $                                              | 25,074 |              | $ | 2,457        |  | $ | 8,854     |   |  | $     |       |   |  | $ | 36,385  |  
|                                                            |  |                                                |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Operating expense (including depreciation and amortization) |  |                                                | 12,083 |              |   | 1,140        |  |   | 3,817     |   |  |       | 4,673  |   |  |   | 21,713  |  
|                                                            |  |                                                |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Operating income (loss)                                     |  |                                                | 4,858  |              |   | 530          |  |   | (477      | ) |  |       | (4,673 | ) |  |   | 238     |  
|Depreciation and amortization                               |  |                                                | 573    |              |   | 1            |  |   | 921       |   |  |       | 543    |   |  |   | 2,038   |  
|Other income (expense)                                      |  |                                                |       |              |   |             |  |   |          |   |  |       | (3,688 | ) |  |   | (3,688  | )
|                                                            |  |                                                |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Segment EBITDA                                              |  |                                                | 5,431  |              |   | 531          |  |   | 444       |   |  |       | (7,818 | ) |  |   | (1,412  | )
|                                                            |  |                                                |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Total segment assets                                        |  | $                                              | 53,411 |              | $ | 23           |  | $ | 29,413    |   |  | $     | 25,305 |   |  | $ | 108,152 |  
|                                                            |  |                                                |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Segment goodwill                                            |  | $                                              | 31,006 |              | $ |             |  | $ |          |   |  | $     |       |   |  | $ | 31,006  |  
|                                                            |  |                                                |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Expenditures for long lived assets                          |  | $                                              | 139    |              | $ |             |  | $ | 164       |   |  | $     | 288    |   |  | $ | 591     |  
|                                                            |  |                                                |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  



|                                                            |  |                                                |        |              |   |              |  |           |        |  |       |        |   |  |   |         |  
|----------------------------------------------------------- |  | ---------------------------------------------- | ------ | ------------ | - | ------------ |  | --------- | ------ |  | ----- | ------ | - |  | - | ------- | -
|                                                            |  | Three Months Ended June 30, 2006 (As Restated) |       
|                                                            |  | TestPreparationServices                        |        | SES Services |   | K-12Services |  | Corporate |        |  | Total |       
|                                                            |  | (In thousands)                                 |       
|Revenue                                                     |  | $                                              | 21,274 |              | $ | 1,266        |  | $         | 10,695 |  | $     |       |   |  | $ | 33,235  |  
|                                                            |  |                                                |        |              |   |              |  |           |        |  |       |        |   |  |   |         |  
|Operating expense (including depreciation and amortization) |  |                                                | 11,512 |              |   | 283          |  |           | 4,672  |  |       | 3,724  |   |  |   | 20,191  |  
|                                                            |  |                                                |        |              |   |              |  |           |        |  |       |        |   |  |   |         |  
|Operating income (loss)                                     |  |                                                | 2,659  |              |   | 72           |  |           | 655    |  |       | (3,724 | ) |  |   | (338    | )
|Depreciation and amortization                               |  |                                                | 848    |              |   | 2            |  |           | 927    |  |       | 529    |   |  |   | 2,306   |  
|Other income (expense)                                      |  |                                                |       |              |   |             |  |           |       |  |       | (140   | ) |  |   | (140    | )
|                                                            |  |                                                |        |              |   |              |  |           |        |  |       |        |   |  |   |         |  
|Segment EBITDA                                              |  |                                                | 3,507  |              |   | 74           |  |           | 1,582  |  |       | (3,335 | ) |  |   | 1,828   |  
|                                                            |  |                                                |        |              |   |              |  |           |        |  |       |        |   |  |   |         |  
|Total segment assets                                        |  | $                                              | 57,851 |              | $ | 9            |  | $         | 28,049 |  | $     | 21,611 |   |  | $ | 107,520 |  
|                                                            |  |                                                |        |              |   |              |  |           |        |  |       |        |   |  |   |         |  
|Segment goodwill                                            |  | $                                              | 31,506 |              | $ | 0            |  | $         |       |  | $     |       |   |  | $ | 31,506  |  
|                                                            |  |                                                |        |              |   |              |  |           |        |  |       |        |   |  |   |         |  
|Expenditures for long lived assets                          |  | $                                              | 50     |              | $ | 0            |  | $         | 10     |  | $     | 630    |   |  | $ | 690     |  
|                                                            |  |                                                |        |              |   |              |  |           |        |  |       |        |   |  |   |         |  



|                                                            |  |                                             |        |              |   |              |  |           |        |  |       |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------------------------------------------- | ------ | ------------ | - | ------------ |  | --------- | ------ |  | ----- | ------- | - |  | - | ------- | -
|                                                            |  | Six Month Ended June 30, 2007 (As Restated) |       
|                                                            |  | TestPreparationServices                     |        | SES Services |   | K-12Services |  | Corporate |        |  | Total |        
|                                                            |  | (In thousands)                              |       
|Revenue                                                     |  | $                                           | 45,937 |              | $ | 8,684        |  | $         | 21,935 |  | $     |        |   |  | $ | 76,556  |  
|                                                            |  |                                             |        |              |   |              |  |           |        |  |       |         |   |  |   |         |  
|Operating expense (including depreciation and amortization) |  |                                             | 23,029 |              |   | 2,570        |  |           | 8,189  |  |       | 10,577  |   |  |   | 44,365  |  
|                                                            |  |                                             |        |              |   |              |  |           |        |  |       |         |   |  |   |         |  
|Operating income (loss)                                     |  |                                             | 6,409  |              |   | 2,479        |  |           | 1,305  |  |       | (10,577 | ) |  |   | (384    | )
|Depreciation and amortization                               |  |                                             | 1,097  |              |   | 2            |  |           | 2,033  |  |       | 1,098   |   |  |   | 4,230   |  
|Other income (expense)                                      |  |                                             | 0      |              |   |              |  |           |       |  |       | (3,763  | ) |  |   | (3,763  | )
|                                                            |  |                                             |        |              |   |              |  |           |        |  |       |         |   |  |   |         |  
|Segment EBITDA                                              |  |                                             | 7,506  |              |   | 2,481        |  |           | 3,338  |  |       | (13,242 | ) |  |   | 83      |  
|                                                            |  |                                             |        |              |   |              |  |           |        |  |       |         |   |  |   |         |  
|Total segment assets                                        |  | $                                           | 53,411 |              | $ | 23           |  | $         | 29,413 |  | $     | 25,305  |   |  | $ | 108,152 |  
|                                                            |  |                                             |        |              |   |              |  |           |        |  |       |         |   |  |   |         |  
|Segment goodwill                                            |  | $                                           | 31,006 |              | $ |             |  | $         |       |  | $     |        |   |  | $ | 31,006  |  
|                                                            |  |                                             |        |              |   |              |  |           |        |  |       |         |   |  |   |         |  
|Expenditures for long lived assets                          |  | $                                           | 300    |              | $ | 14           |  | $         | 227    |  | $     | 575     |   |  | $ | 1,116   |  
|                                                            |  |                                             |        |              |   |              |  |           |        |  |       |         |   |  |   |         |  



|                                                            |  |                                              |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|----------------------------------------------------------- |  | -------------------------------------------- | ------ | ------------ | - | ------------ |  | - | --------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                            |  | Six Months Ended June 30, 2006 (As Restated) |       
|                                                            |  | TestPreparationServices                      |        | SES Services |   | K-12Services |  |   | Corporate |   |  | Total |       
|                                                            |  | (In thousands)                               |       
|Revenue                                                     |  | $                                            | 44,410 |              | $ | 4,023        |  | $ | 18,413    |   |  | $     |       |   |  | $ | 66,846  |  
|                                                            |  |                                              |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Operating expense (including depreciation and amortization) |  |                                              | 23,853 |              |   | 1,782        |  |   | 8,795     |   |  |       | 7,988  |   |  |   | 42,418  |  
|                                                            |  |                                              |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Operating income (loss)                                     |  |                                              | 6,274  |              |   | 414          |  |   | (1,032    | ) |  |       | (7,988 | ) |  |   | (2,332  | )
|Depreciation and amortization                               |  |                                              | 1,576  |              |   | 2            |  |   | 1,741     |   |  |       | 839    |   |  |   | 4,158   |  
|Other income (expense)                                      |  |                                              |       |              |   |              |  |   |          |   |  |       | (146   | ) |  |   | (146    | )
|                                                            |  |                                              |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Segment EBITDA                                              |  |                                              | 7,850  |              |   | 416          |  |   | 709       |   |  |       | (7,295 | ) |  |   | 1,680   |  
|                                                            |  |                                              |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Total segment assets                                        |  | $                                            | 57,851 |              | $ | 9            |  | $ | 28,049    |   |  | $     | 21,611 |   |  | $ | 107,520 |  
|                                                            |  |                                              |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Segment goodwill                                            |  | $                                            | 31,506 |              | $ |             |  | $ |          |   |  | $     |       |   |  | $ | 31,506  |  
|                                                            |  |                                              |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  
|Expenditures for long lived assets                          |  | $                                            | 522    |              | $ | 9            |  | $ | 1,070     |   |  | $     | 1,431  |   |  | $ | 3,032   |  
|                                                            |  |                                              |        |              |   |              |  |   |           |   |  |       |        |   |  |   |         |  



14



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##### Table of Contents

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



|                                               |  |                             |        |   |                           |   |        |             |  |   |             |   |  |   |        |  
|---------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ------ | -
|                                               |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                               |  | 2007                        |        |   | 2006                      |   |        | 2007        |  |   | 2006        |  
|                                               |  | As Restated                 |        |   | As Restated               |   |        | As Restated |  |   | As Restated |  
|Total income (loss) from reportable segments   |  | $                           | 238    |   |                           | $ | (338   | )           |  | $ | (383        | ) |  | $ | (2,332 | )
|Unallocated amounts:                           |  |                             |        |   |                           |   |        |             |  |   |             |   |  |   |        |  
|Interest income (expense)                      |  |                             | (497   | ) |                           |   | (192   | )           |  |   | (841        | ) |  |   | (220   | )
|Other income (expense)                         |  |                             | (3,687 | ) |                           |   | (156   | )           |  |   | (3,763      | ) |  |   | (96    | )
|Equity in loss of affiliate                    |  |                             |       |   |                           |   | 17     |             |  |   |            |   |  |   | (50    | )
|(Provision) benefit for income taxes           |  |                             | 129    |   |                           |   | (342   | )           |  |   | 137         |   |  |   | (458   | )
|                                               |  |                             |        |   |                           |   |        |             |  |   |             |   |  |   |        |  
|Income (loss) from continuing operations       |  |                             | (3,817 | ) |                           |   | (1,011 | )           |  |   | (4,850      | ) |  |   | (3,156 | )
|Discontinued operations                        |  |                             | (246   | ) |                           |   | (428   | )           |  |   | 5,491       |   |  |   | (306   | )
|Provision for income taxes                     |  |                             | (394   | ) |                           |   | 175    |             |  |   | (572        | ) |  |   | 125    |  
|                                               |  |                             |        |   |                           |   |        |             |  |   |             |   |  |   |        |  
|Net income (loss) from discontinued operations |  |                             | (640   | ) |                           |   | (253   | )           |  |   | 4,919       |   |  |   | (181   | )
|                                               |  |                             |        |   |                           |   |        |             |  |   |             |   |  |   |        |  
|Net income (loss)                              |  | $                           | (4,457 | ) |                           | $ | (1,264 | )           |  | $ | 69          |   |  | $ | (3,337 | )
|                                               |  |                             |        |   |                           |   |        |             |  |   |             |   |  |   |        |  

8. 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 EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                          |  | 2007                       |        |   | 2006                     |   |        | 2007 |  |   | 2006   |  
|                                                          |  | (In thousands)             |       
|                                                          |  | (As Restated)              |       
|Income (loss) from continuing operations                  |  | $                          | (3,817 | ) |                          | $ | (1,011 | )    |  | $ | (4,850 | ) |  | $ | (3,156 | )
|Income (loss) from discontinued operations                |  |                            | (640   | ) |                          |   | (253   | )    |  |   | 4,919  |   |  |   | (181   | )
|Less preferred dividends                                  |  |                            | (104   | ) |                          |   | (147   | )    |  |   | (207   | ) |  |   | (305   | )
|                                                          |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) attributed to common stockholders       |  | $                          | (4,561 | ) |                          | $ | (1,411 | )    |  | $ | (138   | ) |  | $ | (3,642 | )
|                                                          |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding for the period |  |                            | 27,890 |   |                          |   | 27,574 |      |  |   | 27,837 |   |  |   | 27,574 |  
|                                                          |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic earnings per share:                                 |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                  |  | $                          | (0.14  | ) |                          | $ | (0.04  | )    |  | $ | (0.17  | ) |  | $ | (0.12  | )
|Income (loss) from discontinued operations                |  |                            | (0.02  | ) |                          |   | (0.01  | )    |  |   | 0.18   |   |  |   | (0.01  | )
|                                                          |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) attributed to common shareholders       |  | $                          | (0.16  | ) |                          | $ | (0.05  | )    |  | $ | 0.01   |   |  | $ | (0.13  | )
|                                                          |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

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



|                                                                        |  |                            |  |                          |  |       |  |      
|----------------------------------------------------------------------- |  | -------------------------- |  | ------------------------ |  | ----- |  | -----
|                                                                        |  | Three Months EndedJune 30, |  | Six Months EndedJune 30,
|                                                                        |  | 2007                       |  | 2006                     |  | 2007  |  | 2006 
|Net effect of dilutive stock options-based on the treasury stock method |  | 171                        |  | 176                      |  | 160   |  | 167  
|Effect of convertible preferred stock-based on the if-converted method  |  | 1,117                      |  | 1,069                    |  | 1,116 |  | 1,448
|                                                                        |  |                            |  |                          |  |       |  |      
|                                                                        |  | 1,288                      |  | 1,245                    |  | 1,276 |  | 1,615
|                                                                        |  |                            |  |                          |  |       |  |      



15



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##### Table of Contents

9. Comprehensive Income (Loss)

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



|                                                      |  |                             |        |   |                           |   |        |      |  |   |      |   |  |   |        |  
|----------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ---- | - |  | - | ------ | -
|                                                      |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                      |  | 2007                        |        |   | 2006                      |   |        | 2007 |  |   | 2006 |  
|                                                      |  | (In thousands)              |       
|                                                      |  | (As Restated)               |       
|Net income (loss) attributable to common stockholders |  | $                           | (4,561 | ) |                           | $ | (1,411 | )    |  | $ | (138 | ) |  | $ | (3,642 | )
|Foreign currency translation adjustment               |  |                             | 17     |   |                           |   | (5     | )    |  |   | 14   |   |  |   | (25    | )
|                                                      |  |                             |        |   |                           |   |        |      |  |   |      |   |  |   |        |  
|Total comprehensive income (loss)                     |  | $                           | (4,544 | ) |                           | $ | (1,416 | )    |  | $ | (124 | ) |  | $ | (3,667 | )
|                                                      |  |                             |        |   |                           |   |        |      |  |   |      |   |  |   |        |  

10. Restructuring

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. At June 30, 2007, no restructuring reserve remained.

11. Legal Matters

On September 10, 2003, CollegeNet, Inc. filed suit in Federal District Court
in Oregon, alleging that the Company infringed a patent owned by CollegeNet, U.S. Patent No. 6,460,042 (the 042 Patent), related to the processing of the on-line applications. CollegeNet never served the Company and no
discovery was ever conducted. However, apparently based on adverse rulings in the related lawsuits concerning the same 042 Patent (the Related Litigation), CollegeNet dismissed the 2003 case against the Company without prejudice on
January 9, 2004.

On August 2, 2005, the Court of Appeals for the Federal Circuit issued an opinion favorable to CollegeNet in
its appeal from the adverse rulings in the Related Litigation.

The next day, on August 3, 2005, CollegeNet again filed suit against
the Company alleging infringement of the same 042 Patent that was the subject of the earlier action. On November 21, 2005, CollegeNet filed an amended complaint, which added a second patent, U.S. Patent No. 6,910,045 (the
045 Patent), to the lawsuit. The Company was served with the amended complaint on November 22, 2005, and filed its answer and counterclaims on January 13, 2006, which was later amended on February 24, 2006. On
March 20, 2006 CollegeNet filed its Reply to the Companys counterclaims. CollegeNet seeks injunctive relief and unspecified monetary damages.

The Company filed a request with the United States Patent and Trademark Office (PTO) for ex partereexamination of CollegeNets 042 Patent on September 1, 2005. The Company filed
another request with the PTO for ex parte reexamination of CollegeNets 045 Patent on December 12, 2005. Although CollegeNet has not pursued any claims against the Company on a related U.S. Patent No. 6,345, 278
(the 278 Patent), the Company filed another request with the PTO for ex parte reexamination claims 1-18, 21-29, 31-39, 41 and 42 of the 278 Patent on November 8, 2006. The PTO granted the Companys requests and
ordered reexamination of all claims of the CollegeNet 042 patent on October 31, 2005, ordered reexamination of all claims of the 045 Patent on January 27, 2006, and ordered reexamination of claims 1-18, 21-29, 31-39, 41 and 42
of the 278 Patent on February 2, 2007.

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 the CollegeNet 042 and 045 patents. On November 9, 2006 the PTO issued a Non-Final Office Action rejecting all 44 claims of the 042 patent.

The PTO has not yet taken any substantive action on the reexaminations of the 045 and 278 patents, other than instituting the
proceedings.

On July 20, 2007 the PTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate in the
reexamination of the 042 patent. A reexamination certificate is expected to be issued for the 042 patent within the next several months. Based on the PTOs July 20th notice, the certificate is expected to confirm the validity
of claims 1-31 as originally issued, allow new claims 45-53 and allow the other claim 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.



16



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##### Table of Contents

03-129-BR), which found that claims 16, 18-22, 28, 32, 33, 36 and 38 of the 042 patent are invalid. However, as of July 27, 2007, a final judgment
has not been entered in the CollegeNet v. XAP Corporation lawsuit.

12. 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. 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). The purchase price consisted of $7,000,000, subject to customary closing adjustments. 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 EndedJune 30, |      |   | Six Months EndedJune 30, |  
|                                           |  | 2007                       |      |   | 2006                     |   |      | 2007 |  | 2006 |      
|                                           |  | (In thousands)             |     
|Revenues                                   |  | $                          | (48  | ) |                          | $ | 791  |      |  | $    | 2,406 |  | $ | 2,289 |  
|Cost of revenues                           |  |                            | 55   |   |                          |   | 392  |      |  |      | 392   |  |   | 875   |  
|                                           |  |                            |      |   |                          |   |      |      |  |      |       |  |   |       |  
|Gross margin                               |  |                            | (103 | ) |                          |   | 399  |      |  |      | 2,014 |  |   | 1,414 |  
|Operating expenses(a)                      |  |                            | 143  |   |                          |   | 827  |      |  |      | 1,062 |  |   | 1,720 |  
|                                           |  |                            |      |   |                          |   |      |      |  |      |       |  |   |       |  
|Income (loss) from discontinued operations |  | $                          | (246 | ) |                          | $ | (428 | )    |  | $    | 952   |  | $ | (306  | )
|                                           |  |                            |      |   |                          |   |      |      |  |      |       |  |   |       |  



|(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 $350,000 for the three months ended June 30, 2006 and $69,800, $730,800 for the six
months ended June 30, 2007 and 2006, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



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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.

The Company agreed to lend money to the Licensee for use as working capital for the business in a maximum amount equal to 50%
of certain amounts collected by the Licensee under the Agreement. Outstanding amounts will accrue interest monthly at prime (as quoted by the Companys lenders) and must be repaid no later than the first anniversary of the Agreement. The
Company also agreed to provide the Licensee with a line of credit for initial working capital needs. Funds drawn on the line of credit will accrue interest at an annual rate of 18% and must be repaid no later than 18 months from the date of the
Agreement. The aggregate financing obligation of the Company under the Agreement is capped at $300,000.

13. Subsequent Events

On July 23, 2007, The Princeton Review, Inc. (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 LP (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 shall be 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).

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. The
Purchase Agreement also grants observer rights to Prides with respect to meetings of the Board.

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 Mr. Michael J. Perik 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.

On July 23, 2007, Prides Capital Fund I, L.P. and the Company agreed to terminate an 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.

On July 24, 2007, the Company paid down the $15 million of debt outstanding and any accumulated interest with Golub Capital and terminated the
credit facility. The result of all these transactions increased the Companys cash position by approximately $30 million.



|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.



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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 60% of our overall revenue in the first half of
2007

Supplemental Educational 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 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 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 this transaction, the 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 our Admissions Services division is 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 9 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 and we 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 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. In connection with the sale of the Higher Education Technology
Services business, financial results associated with this business have been reclassified as discontinued operations. Additionally, 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. Lastly 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 June 30, 2007 and 2006

Revenue

For the three months ended June 30, 2007, total revenue increased by $3.2 million, or
9.5%, from $33.2 million in 2006 to $36.4 million in 2007.

Test Preparation Services revenue increased by $3.8 million, or 17.9%, from
$21.3 million in 2006 to $25.1 million in 2007. This increase is due primarily to an increase of $1.9 million in tutoring and licensing and royalty revenue increased by $1.8 million as a result of increased royalty payments from our publisher and
from our franchisees.



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SES services revenues increased by $1.2 million or 94%, from $1.3 million in 2006 to $2.5 million in
2007. This increase is primarily related to volume increases in student enrollments in our major markets of New York, Chicago and Florida.

K-12 Services revenue decreased by $1.8 million, or 17.2%, from $10.7 million in 2006 to $8.9 million in 2007. Revenue from intervention products and services decreased by $3.3 million due to the non-renewal in 2007 of the summer
intervention program for the School District of Philadelphia. Additionally, counseling revenues decreased by $633,000 resulting from the non-renewal of a large contract in Texas. These decreases were partially offset by Assessment services revenue
which increased by $2.5 million reflecting the billings for contracts added in the second half of 2006 and the first quarter 2007.

Cost
of Revenue

For the three months ended June 30, 2007, total cost of revenue increased by $1.1 million or 7.9%, from $13.4 million
in 2006 to $14.4 million in 2007.

Test Preparation Services cost of revenue increased by $1.0 million , or 14.5%, from $7.1 million in
2006 to $8.1 million in 2007. Teacher pay increased approximately $886,000 primarily due to volume increases for Tutoring teachers and increased course materials of approximately $193,000. Gross margins improved from 66.6% to 67.6% primarily as a
result of the increase in the higher margin tutoring, licensing and royalty revenue.

SES services costs of revenue decreased slightly by
$124,000 or 13.6%, from $911,000 in 2006 to $787,000 in 2007. This decrease is primarily due to reduced salary expense.

K-12 Services cost
of revenue increased by $146,000, or 2.7%, from $5.4 million in 2006 to $5.5 million in 2007. Increases in costs of $2.1 million associated with the assessment revenue were partially offset by decreases in the costs associated with the intervention
and counseling contracts that were not renewed in 2007. Gross margins decreased from 49.8% to 37.7% as a result of product mix and certain assessment contracts that incurred a higher level of costs.

Operating Expenses

For the three
months ended June 30, 2007, operating expenses increased by $1.5 million, or 7.5%, from $20.2 million in 2006 to $21.7 million in 2007:



| |  |  | Test Preparation Services operating expenses increased by $0.6 million, or 5.0%, from $11.5 million in 2006 to $12.1 million in 2007 primarily due to additional
software development and maintenance expenses as a result of new projects and legal fees due to our litigation with the former Tennessee franchise.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SES Services operating expenses increased by $857,000, or 303% from $283,000 in 2006 to $1.1 million in 2007 primarily due to increased full time salaries and
related costs incurred to staff the business in preparation for continued sustained growth and operations as an independent division.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | K-12 Services decreased by $855,000, or 18.3%, from $4.7 million in 2006 to $3.8 million in 2007. Salaries and related expense decreased $1.1 million primarily as a
result of headcount reductions, lower commissions and bonuses and increased operational efficiencies whereby a larger percentage of salaries are charged to contract costs which flow through cost of revenue. These savings were partially offset by
increased software development and maintenance expenses.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corporate increased by $949,000 or 25.5%, from $3.7 million in 2006 to $4.7 million in 2007 primarily due to increased salaries and related expenses of $938,000 and
professional fees of $770,000, offset by savings in miscellaneous other general and administrative expenses.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other
income (expense)

Other income (expense) includes an expense of $3.7 million resulting from the increase in the fair value of the
embedded derivative liability related to the Series B-1 Preferred Stock. (see note 4).



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Comparison of Six Months Ended June 30, 2007 and 2006

Revenue

For the six months ended
June 30, 2007, total revenue increased by $9.7 million, or 14.5%, from $66.8 million in 2006 to $76.6 million in 2007.

Test
Preparation Services revenue increased by $1.5 million, or 3.4%, from $44.4 million in 2006 to $45.9 million in 2007. This increase is primarily related to tutoring revenues of $1.9 million and an increase in licensing and royalty revenue of $1.9
million. These increases were partially offset by a decrease in retail classroom revenues of $2.4 million.

SES Services revenues increased
by $4.7 million, or 116%, from $4.0 million in 2006 to $8.7million in 2007. This increase is primarily related to volume increases in student enrollments in our major markets of New York, Chicago and Florida.

K-12 Services revenue increased by $3.5 million, or 19.1%, from $18.4 million in 2006 to $21.9 million in 2007 primarily related to the increase in
assessment revenue of $7.6 million from several new and renewal contracts. This increase was partially offset by lower intervention revenues ($2.6 million) and lower counseling revenues ($1.2 million) resulting primarily from contracts that were not
renewed.

Cost of Revenue

For the six months ended June 30, 2007, total cost of revenue increased by $5.8 million, or 21.7%, from $26.8 million in 2006 to $32.6 million in 2007.

Test Preparation Services cost of revenue increased by $2.1 million, or 14.8%, from $14.4 million in 2006 to $16.5 million in 2007. Teacher pay increased by $1.0 million primarily due to volume increases in tutoring.
Site rent increased by approximately $.5 million due to increase in classroom space rentals.

SES Services cost of revenues increased by
$1.8 million, or 98%, from $1.8 million in 2006 to $3.6 million in 2007. This increase is primarily attributable to the increase in teacher pay and site rental charges for SES classes by schools.

K-12 Services cost of revenue increased by $1.9 million, or approximately 17.8%, from $10.6 million in 2006 to $12.4 million in 2007. Expenses to service
assessment contracts increased by $4.4 million and were partially offset by decreases in intervention cost ($1.7 million) and counseling costs ($600,000). margin labor services.

Operating Expenses

For the six
months ended June 30, 2007, operating expenses increased by $1.9 million, or 4.6%, from $42.4 million in 2006 to $44.4 million in 2007:



| |  |  | Test Preparation Services operating expenses decreased by $.8 million, or 3.4% from $23.8 million in 2006 to $23.0 million in 2007. Professional services fees
increased by $509,000 primarily due to legal expenses related to franchise matters. These increases were offset by decreases associated with the sale and/or downsizing of the Admissions Services businesses during the first half of the 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SES Services Operating Expenses increased by $0.8 million or 44% from $1.8 million in 2006 to $2.6 million in 2007. The increase is primarily due to the increase in
salary expense and the site expansion for the New York, Chicago and Florida markets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | K-12 Services decreased by $606,000, or 6.9%, from $8.8 million in 2006 to $8.2 million in 2007. Salaries and related costs decreased by approximately $1.7 million
primarily as a result of headcount reductions, lower commissions/bonuses and increased operational efficiencies whereby a larger percentage of salaries are charged to contract costs which flow through cost of revenue. These savings were partially
offset by increased software development and maintenance expenses ($534,000) and increased amortization expense ($212,000).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corporate increased by $2.6 million or 32.4%, from $8.0 million in 2006 to $10.6 million in 2007. Professional service fees including legal, accounting and web
hosting expenses increased by approximately $1.3 million, salaries and related expenses
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | increased by $554,000 and depreciations and amortization expense increased by $258,000 primarily due to the Oracle software implements in the second quarter
of 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other income (expense)

Other income (expense) includes an expense of $3.7 million resulting from the increase in the fair value of the embedded derivative liability related to the Series B-1 Preferred Stock. (See note 4).

Income Taxes

The estimated effective
tax rate used in 2007 and 2006 would have been approximately 40%. During the current quarter, pursuant to FAS 109, the Company has recorded an income tax benefit related to continuing operations for the three and six months ended June 30, 2007
in the amount of $129,000 and $137,000, which is offset by a foreign tax provision of $94,000. For the three months ended March 31, 2007, we recorded an income tax benefit of $178,000. A corresponding provision for income taxes for the three
and six months ended June 30, 2007 of $394,000 and $572,000 has been recorded as part of the Companys Income from Discontinued Operations.

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents on hand, collections from
customers and our credit facility. At June 30, 2007, we had $11.2 million of cash and cash equivalents compared to $10.8 million at December 31, 2006. The $357,000 increase in cash from the December 31, 2006 balance is primarily
attributed to cash provided from the net proceeds of the sale of the Higher Education Technology Services business in February 2007 operations, which resulted in net proceeds of $5.0 million. This was offset by $3.3 million used for operating
activities, $1.1 million used for the purchase of furniture, fixtures, equipment and software development, and $599,000 related to capital lease payments and 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 (used in) 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 six months of 2007, cash used for operating activities from continuing operations was $2.7 million, compared to cash used in operating activities from
continuing operations of $3.0 million during the first three months of 2006.

During the first six months of 2007, investing activities
from continuing operations used $910,000 of cash as compared to $2.2 million used during the comparable period in 2006. The decrease is primarily attributable to lower spending for both internally developed software and capitalized K-12 content and
capitalized course costs.

Financing cash flows from continuing operations consist primarily of transactions related to our debt and equity
structure. During the first six months of 2007, financing activities from continuing operations used $633,000 of cash as compared to additions of approximately $4.4 million in the first six months of 2006. During the 2006 quarter, 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 $599,000 and $708,000 for the first six months of 2007 and 2006, respectively, principally related to capital lease payments and dividends paid on our Series B-1 Preferred Stock.

In July, 2007, we entered into a Series C Preferred Stock Purchase agreement providing for the issuance of $60.0 million of Series C Preferred Stock. We
agreed with the current holder to terminate the Fletcher Agreement pertaining to our Series B-1 Preferred Stock, and all related rights. We also paid down the $15.0 million of debt outstanding and terminated the credit facility. The
result of all these transactions increased our cash position by approximately $30.0 million.

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.



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We believe that our current cash balances, together with the proceeds from the sale of the Series C Preferred stock, 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.



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Seasonality in Results of Operations

We experience, and we expect to continue to experience, seasonal fluctuations in our revenue because the markets in which we operate are subject to seasonal fluctuations based on the scheduled dates for standardized
admissions tests and the typical school year. These fluctuations could result in volatility or adversely affect our stock price. We typically generate the largest portion of our test preparation revenue in the third quarter. However, as SES revenue
grows, we expect this revenue will be concentrated in the fourth and first quarters, or to more closely reflect the after school programs greatest activity during the school year. 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 requires the payment of quarterly dividends at the greater of 5% or 1.5% above 90-day LIBOR (5.36% at June 30, 2007).
During the six months ended June 30, 2007, we paid dividends on the Series B-1 Preferred Stock in an aggregate amount of $207,000, at an average rate of 6.90%. A 100 basis point increase in the dividend rate would have resulted in a $30,000
increase in dividends paid during this period.

Borrowings under our credit agreement bear interest at the following rates: Outstanding
amounts under the credit facility up to $10.0 million bear interest at rates based on either (A) 300 basis points over the greater of (x) the prime rate and (y) the Federal Funds Rate plus 50 basis points or (B) 400 basis points
over LIBOR, at our election. Outstanding amounts under the credit facility in excess of $10.0 million (or the borrowing base amount, if lower) bear interest at either (A) 400 basis points over the greater of (x) the prime rate and
(y) the Federal Funds Rate plus 50 basis points or (B) 500 basis points over the LIBOR rate, at our election. During the six months ended June 30, 2007, we paid interest on borrowings under our credit agreement in an aggregate amount
of $546,000 at a weighted average interest rate of 7.28%. A 100 basis point increase in the interest rate would have resulted in a $75,000 increase in interest paid during this period.

As more fully described in Note 4 to our condensed consolidated financial statements, we must account for the embedded derivatives and warrant related to
our Series B-1 Preferred Stock. Other than these embedded derivatives, we do not hold any derivative financial instruments. See Note 12 to the Condensed Consolidated Financial Statements  Subsequent Events which describe the termination of the
Series B-1 Preferred Stock and the repayment of all borrowings under the credit agreement in July, 2007.

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



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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 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 collectability 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 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.

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. 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. Such remediation activities include the following:



| |  |  | We have hired and continue to seek 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 have established more rigorous review procedures to ensure that account reconciliations and amounts recorded are substantiated by detailed and contemporaneous
documentary support and that reconciling items are investigated, resolved and recorded in a timely manner.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are continuing to formalize a contract review process to establish and document the revenue recognition events and methodology at the time the contract is signed
which will be reviewed and signed off by both the finance personnel and the project managers so that there is a clear understanding of what events will trigger revenue recognition and establish the amounts to be recognized for each event.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 will retain a
consulting firm to assist with the documentation of our internal control processes, including formal risk assessment of our financial reporting processes.

PART II. OTHER INFORMATION



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

On
September 10, 2003, CollegeNet, Inc. filed suit in Federal District Court in Oregon, alleging that the Company infringed a patent owned by CollegeNet, U.S. Patent No. 6,460,042 (the 042 Patent), related to the processing
of the on-line applications. CollegeNet never served the Company and no discovery was ever conducted. However, apparently based on adverse rulings in the related lawsuits concerning the same 042 Patent (the Related Litigation),
CollegeNet dismissed the 2003 case against the Company without prejudice on January 9, 2004.

On August 2, 2005, the Court of
Appeals for the Federal Circuit issued an opinion favorable to CollegeNet in its appeal from the adverse rulings in the Related Litigation.

The next day, on August 3, 2005, CollegeNet again filed suit against the Company alleging infringement of the same 042 Patent that was the subject of the earlier action. On November 21, 2005, CollegeNet filed an amended
complaint, which added a second patent, U.S. Patent No. 6,910,045 (the 045 Patent), to the lawsuit. The Company was served with the amended complaint on



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November 22, 2005, and filed its answer and counterclaims on January 13, 2006, which was later amended on February 24, 2006. On March 20,
2006 CollegeNet filed its Reply to the Companys counterclaims. CollegeNet seeks injunctive relief and unspecified monetary damages.

The Company filed a request with the United States Patent and Trademark Office (PTO) for ex partereexamination of CollegeNets 042 Patent on September 1, 2005. The Company filed another request with the
PTO for ex parte reexamination of CollegeNets 045 Patent on December 12, 2005. Although CollegeNet has not pursued any claims against the Company on a related U.S. Patent No. 6,345, 278 (the 278
Patent), the Company filed another request with the PTO for ex parte reexamination claims 1-18, 21-29, 31-39, 41 and 42 of the 278 Patent on November 8, 2006. The PTO granted the Companys requests and ordered reexamination of
all claims of the CollegeNet 042 patent on October 31, 2005, ordered reexamination of all claims of the 045 Patent on January 27, 2006, and ordered reexamination of claims 1-18, 21-29, 31-39, 41 and 42 of the 278 Patent
on February 2, 2007.

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 the CollegeNet 042 and 045 patents. On November 9, 2006 the PTO issued a Non-Final Office Action rejecting all 44 claims of the 042 patent.

The PTO has not yet taken any substantive action on the reexaminations of the 045 and 278 patents, other than instituting the proceedings.

On July 20, 2007 the PTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate in the
reexamination of the 042 patent. A reexamination certificate is expected to be issued for the 042 patent within the next several months. Based on the PTOs July 20th notice, the certificate is expected to confirm the validity
of claims 1-31 as originally issued, allow new claims 45-53 and allow the other claim 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. However, as of July 27, 2007,
a final judgment has not been entered in the CollegeNet v. XAP Corporation lawsuit.

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



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

(a) We held our Annual Meeting of Stockholders on June 14, 2007.

(b) Proxies for the meeting were
solicited pursuant to Regulation 14 under the Exchange Act; there was no solicitation in opposition to the Board Nominating Committees nominees listed in the Proxy Statement, and all such nominees were elected.

Directors elected to the 2010 Class were Richard Sarnoff and Clyde E. Williams, Jr.*



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Election of Directors:



|                       |  |            |  |          
|---------------------- |  | ---------- |  | ---------
|                       |  | For        |  | Withheld 
|Richard Sarnoff        |  | 22,664,631 |  | 3,771,105
|Clyde E. Williams, Jr. |  | 24,284,211 |  | 2,151,525

Other directors whose terms continue after the meeting were Richard Sarnoff, John S. Katzman,
Robert E. Evanson, Richard Katzman, David Lowenstein and Richard F. O Donnell.

*Mr. Howard Tullman, who served as a director of the
Company since 2000 and as Chairman of the Board since November of last year, resigned from the Board to pursue other opportunities, and therefore did not stand for re-election at this meeting. Following Mr. Tullmans resignation from the
Board, the Boards nominating committee nominated Mr. Clyde E. Williams, Jr. to fill the vacancy on the Board created by Mr. Tullmans departure. The Board then unanimously elected Mr. Williams to fill such vacancy on
June 8. Therefore, Mr. Williams was nominated by the Board to stand for election in place of Mr. Tullman.



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

Effective
August 9, 2007, Richard ODonnell resigned as a member of the Companys Board of Directors.

On August 8, 2007, Stephen
Melvin, the Companys Chief Financial Officer, notified the Company of his intent to resign as Chief Financial Officer prior to the end of 2007.



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



|              |  |                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                           
|10.1          |  | Michael Perik Employment Agreement                                                                                    
|              | 
|10.2          |  | Mark Chernis Employment Agreement, Amendment                                                                          
|              | 
|10.3          |  | Michael Perik Option Agreement                                                                                        
|              | 
|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 RICHARDSStephen RichardsChief Operating Officer and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)


March 17, 2008



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