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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

|x
ANNUAL REPORT PURSUANT TO   SECTION 13 OR 15(d) OF   THE
SECURITIES EXCHANGE ACT
OF 1934    
|----------------------------------------------------------------------------------------------
|                                                                                              
|FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004                                                   
|                                                                                              
|OR                                                                                            
|                                                                                              
|o
TRANSITION REPORT PURSUANT   TO SECTION 13 OR 15(d) OF   THE
SECURITIES EXCHANGE
ACT OF 1934
|                                                                                              
|FOR THE TRANSITION PERIOD FROM __________   TO
__________                                     
|                                                                                              
|COMMISSION FILE NUMBER 000-32469                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|THE   PRINCETON REVIEW, INC.                                                                  
|(Exact   name of registrant as specified in its charter)                                      
|                                                                                              
|                                                                                              

|Delaware                                                          |  | 22-3727603                                 
|----------------------------------------------------------------- |  | -------------------------------------------
|(State or   other jurisdiction of incorporation or
organization)  |  | (I.R.S.   Employer Identification No.)     
|                                                                  |  |                                            
|                                                                  |  |                                            
|2315 Broadway   New York, New York                                |  | 10024                                      
|(Address   of principal executive
offices)                        |  | (Zip   Code)                               
|                                                                  |  |                                            
|Registrants telephone number, including area code (212)
874-8282
|                                                                 
|                                                                 
|Securities registered pursuant to Section 12(b) of the
Act:      
|                                                                  |  |                                            
|Title of   Each Class                                             |  | Name of   Each Exchange on Which Registered
|                                                                  |  |                                            

None
Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.01 par value

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

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

Indicate by
check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the
best of registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form
10-K or any amendment to this Form 10-K.
o

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

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

The
aggregate market value of
registrants common stock held by non-affiliates, based upon the closing price of the common stock on June
30, 2004, as reported
by the Nasdaq National Market, was approximately $71 million. Shares of common stock held by each executive
officer and director
and by each person who owns 5% or more of the outstanding common stock, based on Schedule 13G filings, have been
excluded since such
persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive
determination for other
purposes.

The registrant
had 27,569,764
shares of $0.01 par value common stock outstanding at March 18, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Certain
information required in
Part III of this Form 10-K is incorporated by reference to the Proxy Statement for the registrants 2005
Meeting of Stockholders
to be held on June 9, 2005.

---



TABLE OF CONTENTS

|PART I    
|----------
|          
|Item 1.   
|          
|Item 2.   
|          
|Item 3.   
|          
|Item 4.   
|          
|PART II   
|          
|Item 5.   
|          
|Item 6.   
|          
|Item 7.   
|          
|Item 7A.  
|          
|Item 8.   
|          
|Item 9.   
|          
|Item 9A.  
|          
|Item 9B.  
|          
|PART III  
|          
|Item 10.  
|          
|Item 11.  
|          
|Item 12.  
|          
|Item 13.  
|          
|Item 14.  
|          
|PART IV   
|          
|Item 15.  
|          
|Signatures



PART I

All statements
in this Annual
Report on Form 10-K that are not historical facts are forward-looking statements within the meaning of 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, the factors described under the caption Risk Factors and elsewhere in this
Annual Report on Form 10-K. 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.

Item 1.  Business

Overview

The Princeton
Review provides
integrated classroom-based, print and online products and services that address the needs of students, parents,
educators and
educational institutions. We were founded in 1981 by our Chairman and Chief Executive Officer, John Katzman, as
an SAT preparation
course. Today, based on our experience in the test preparation industry, we believe we offer the leading SAT
preparation course and
are among the leading providers of test preparation courses for most of the other major post-secondary and
graduate admissions tests.
In 2004, we and our franchisees provided test preparation courses and tutoring services for the SAT, GMAT, MCAT,
LSAT, GRE and other
standardized admissions tests to more than 120,000 students in over 1,000 locations in the United States and
abroad.

In the last
several years, The
Princeton Review has transformed itself from primarily a test preparation company to an integrated provider of
standardized test
preparation, post-secondary admissions and K-12-focused products and services.  During this period, we
launched our K-12
Services division; complemented our traditional test preparation products with a range of online options;
invested in and acquired
new web-based admissions services capabilities and generally broadened and deepened our offerings in our core
markets.  While we
still derive more than half of our revenue from standardized test preparation, the percentage of our revenue from
our newer products
and services has risen from 19% in 2001 to 36% in 2004, helping us become a more diversified and balanced
company.

We operate our
businesses through
the following three divisions:

| |  | The Test   Preparation Services division,founded in 1981, provides
classroom-based and
Princeton Review Online   test preparation courses and tutoring and admissions counseling services and   receives
royalties from our
independent franchisees who provide   classroom-based test preparation courses under the Princeton Review
brand.       
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                    
| |  | The K-12   Services division,   founded in 1998, provides a range of
services to K-12
schools and school   districts to help primary and secondary school students and teachers   measurably improve
academic performance,
including online and print-based   assessment, professional development, and face-to-face
instruction.                  
| |   |                                                                                                                                                                                                                                                                                                                                                    
| |  | The   Admissions Services division, founded in 1986 as our
publishing division, provides
marketing   services and web-based admissions products to higher education institutions   and post-secondary
counseling services and
software to secondary schools and   school districts.  The division also   operates our Princetonreview.com
web
site.

We also
author more than 200
print and software titles on test preparation, academic admissions and related topics under the Princeton Review
brand. Our books are
sold primarily through Random House, Inc., from which we collect fees from advances, royalties, and editing and
marketing
arrangements.

We were
incorporated in Delaware in
March 2000 and are the successor to a number of affiliated entities operating under the Princeton Review name,
the first of which was
formed in 1981. Our Internet address is www.princetonreview.com. On our Investors web site, located at
www.princetonreview.com, we post the following filings as soon as reasonably practicable after they are
electronically filed
with or furnished to the Securities and Exchange Commission: Our annual reports on Form 10-K, our quarterly
reports on Form 10-Q, our
current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the
Securities Exchange Act of 1934. All such filings on our Investors web site are available free of
charge.

2



Our Products and Services

Test Preparation Services Division

In 2004, we and
our franchisees
provided test preparation courses and tutoring services to more than 120,000 students in over 1,000 course
locations all across the
United States, in Canada and in 19 additional countries. We provide test preparation courses to students taking
the following major
U.S. standardized tests:

|SAT                                                   | LSAT (Law School   Admissions Test)     
|----------------------------------------------------- | ----------------------------------------
|GMAT (Graduate Management   Admissions Test)          | MCAT (Medical College   Admissions Test)
|GRE (Graduate Record   Examination)                   | ACT (American College   Test)           
|TOEFL (Test of English as   a Foreign Language)       | PSAT                                    
|USMLE (United States   Medical Licensing Examination) | SAT II                                  

Our
Classroom-Based Course
Offerings

Our test
preparation courses focus
on customer service and quality instruction. Our experienced teachers and tutors generally work with groups of 12
or fewer students
in our SAT classes. We have completely updated all of our SAT products and materials to reflect the changes made
to the SAT as of
March 2005. Our GMAT and GRE classes generally have no more than eight students in each class to maximize
individual attention and
grouping by similar ability. In 2004, we also completely redesigned our LSAT course to target the more
competitive student, with more
than double the instruction time and more support materials.

We believe that
an important part
of our test preparation courses is the high quality study materials and the advanced diagnostic analysis that our
students receive.
We spend significant resources on research and development to enhance the supplemental materials used in our
courses. As a result,
each of our students receives in-depth analytical materials, sample questions, testing drills, model exams and
diagnostic analysis of
their progress as they take the course.

Our
Private Tutoring
Offerings

The Princeton
Review private
tutoring program is our most exclusive, customized offering. We offer one-to-one, high-end admissions counseling
and tutoring service
for all of the admissions tests. In addition, we provide individual assistance with academic subjects. 
Tutoring is chosen by
students and parents who want customized instruction from our very best instructors on a flexible
schedule.

Our Online
Course
Offerings

Our
award-winning online courses
are fully interactive and are particularly attractive to students who need the flexibility to prepare at any time
of the day or night
and on short notice.  This product line is also very profitable and is our fastest growing.

The online
courses have been
remapped for use by all of our classroom-based and tutoring students as well.  Students can take tests, make
up classes, or
simply do extra work online on their own schedule.  Our online tools have made all of our products deeper
and more flexible,
offering all Princeton Review students the ability to choose their best and most convenient way of learning as
they go through our
programs.

Our
School-Based
Offerings

In addition to
offering our
standardized test preparation courses to individual students, we also offer our SAT, SAT II and ACT test
preparation services to
schools and districts around the United States.  In 2004, The Princeton Review worked with hundreds of such
institutional
clients to provide test preparation services to their students. These clients range from remote private schools
to large urban school
districts. Our institutional test preparation courses are custom designed to meet the needs of these
institutional clients and their
students. Using the same materials and techniques, we train our own teachers and, occasionally, district teachers
to deliver test
preparation, remediation and enrichment to districts of all demographics. We also offer extensive testing and
professional
development services.

3



Additionally,
since 2003, our Test
Preparation Services division has teamed up with our K-12 Services division to become a major provider of
Supplemental Education
Services (SES) under the federal No Child Left Behind Act of 2001 (NCLB).  Using content and materials
developed by our K-12
Services division and Test Preparation Services division teaching techniques and personnel, we deliver
remediation and enrichment
services directly to thousands of students in school districts throughout the country.  Our customized SES
services offer
students intensive, live instruction in a small group setting in such critical areas as math and English language
arts, including
reading.

School-based
services is the Test
Preparation Services divisions largest area of expected growth in the coming years.

Our Test
Preparation
Publications and Software

Examples of the
books and
educational software products developed by the Test Preparation Services division include the
following:

|Cracking   the SAT                                                                   | Cracking   the AP Calculus         | Anatomy   Coloring Book    
|------------------------------------------------------------------------------------ | ---------------------------------- | ---------------------------
|Cracking   the GMAT                                                                  | Cracking   the AP Chemistry        | Human   Brain Coloring Book
|Cracking   the LSAT                                                                  | Cracking   the AP US History       | Physiology   Coloring Book 
|Cracking   the GRE                                                                   | Cracking   the AP European History | Cracking   the Praxis      
|WordSmart                                                                            | Cracking   the GED                 | Cracking   the ASVAB       
|MathSmart                                                                            | GMAT   Math Workbook               | Crash   Course for the SAT 
|GrammarSmart                                                                         | GMAT   Verbal Workbook             | Crash   Course for the GRE 
|The   Princeton Review:  Inside the SAT and ACT 2003 Edition
(CD ROM software
title)

K-12 Services Division

Services for
Schools

The
accountability movement,
which has gained momentum over the past 10 years and has been codified by new federal laws, including NCLB,
places testing at the
center of K-12 education.  Performance on these tests carries important consequences for students, teachers
and administrators
alike.  Students who perform poorly can face mandatory summer school, a repeated grade, or denial of a high
school diploma. For
teachers and school administrators, these tests exert strong pressure on teaching and learning, and class or
school performance
increasingly affects the direction of their careers.

The K-12
Services division partners
with schools to help them meet these challenges and measurably improve academic performance. Recognizing that
schools need a broad
range of products and services, we offer customized solutions that include formative and benchmarking
assessments, professional
development, after school programs and face-to-face instruction.  Research indicates that its the
synergy of effective
assessments, improvements in teacher quality, and skill-specific, standards-aligned instruction that can
significantly improve
student performance, and our goal is to provide schools with the right tools to achieve this result.  In
2004, we worked with
the U.S. Department of Education and a number of states and districts across the country, including Virginia,
Maryland and Hawaii,
the School District of Philadelphia, Los Angeles Unified School District, Chicago City Schools, Memphis
City Schools, and The New York City Department of Education.

We provide the
following three
major solutions to school districts throughout the country, which we are able to combine into customized programs
to meet the
specific needs of each school district.

Assessments to Inform
Instruction

We offer
districts interim,
low-stakes assessments aligned to their curriculum and state standards.  These instruments can be delivered
in traditional paper
and pencil format or online through our Homeroom platform. Homeroom is a powerful, web-based tool that enables
educators to quickly
assess students academic strengths and weaknesses and provides immediate feedback and tailored educational
resources for
improving performance.  Results are provided in a timely, usable and actionable format for teachers,
administrators, parents and
students.

4



These programs
have four important
features for school districts:

| |  | Quick   Turnaround.    Detailed reports are delivered online,
soon after test
administration.                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Useful   Reporting.    Our reports are designed to be maximally
useful for teachers
to guide   instruction and for students and parents to provide meaningful guidance.                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Connection   to learning resources.    Teachers, students and
parents have access
to specific resources based on   actual areas of need.  These resources include proprietary Princeton
Review lessons and
direct links to web-based resources.                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Ties to   Professional Development.  The Princeton Review works
with teachers and
administrators   to ensure that they understand the solution, and follows up with the   instructional leadership
of the schools to
review profiles of learning   outlined by the data.  In addition, The Princeton Review works with
districts to provide
parent nights to help inform the community.

Professional Development

We provide
ongoing, comprehensive
professional development to help teachers ensure the academic success of their students. Our professional
development programs are
ongoing in order to continually build upon knowledge and to ensure proper implementation of skills and resources
introduced
throughout our sessions. Programs are flexible and customized.

We offer three
main professional
development programs:

| |  | Ongoing   data-differentiated instruction and assessment support.We implement
ongoing professional   development programs that focus on using data in the classroom to drive   individualized
instruction, with the
ultimate goal being mastery in the   classroom and improvements on state standardized tests. The Princeton
Review   works with
instructional leaders to help them learn how to interpret and use   reports generated through The Princeton
Reviews
assessments, as well as from   their state standards test, to drive student instruction.                                                                                                                                        
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Individualized   professional development programs.Using
several data streams,
from teacher   self-evaluations to low stakes interim assessments, we create individualized   professional
development for a
districts staff. With this program, teachers   work in an ongoing manner with a Princeton Review consultant
who helps each
teacher focus instruction on the area of his or her students needs. The   consultants help each teacher
evaluate data and
reports gathered from   low-stakes assessments administered throughout the program and subsequently   recommend
individualized
professional development to expand teacher knowledge   based on student performance on various
skills.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Product   Training.Training   is a crucial component of any
successful,
comprehensive program. Every   program The Princeton Review offers contains some form of training or staff
development.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

After-School and Summer School Programs

We develop
comprehensive Math and
Reading/English Language Arts programs for after-school and summer school programs.  The programs come
complete with course
manuals for students and teachers, benchmark assessments and staff development.  The program can be built
around a
districts curriculum and/or testing program.  Our programs have all the tools a district needs to
provide supplemental
skill review to their students. We offer standardized programs, as well as the capacity to create a program
specific to a
districts unique needs.  We have the ability to train a districts teachers to deliver our after
school program or we
can provide Princeton Review teachers to teach the course.

5



Our
Publications

Our K-12
Services division also
authors more than 60 print titles under the Princeton Review brand, including the following:

|Roadmap   to the CAHSEE(California)   | New York   RoadmapSeries                
|------------------------------------- | ----------------------------------------
|Roadmap   to the FCAT(Florida)        | North   Carolina RoadmapSeries          
|Roadmap   to the HSPA(New   Jersey)   | Virginia   RoadmapSeries                
|Roadmap   to the OPT(Ohio)            | Cracking   the Virginia SOLSeries       
|Roadmap   to the MCAS(Massachusetts), | Cracking   the Texas End-of-CourseSeries
|Roadmap   to the Regents(New   York)  | Smart   JuniorSeries                    

Admissions Services Division

We sell a wide
range of products
and services that help higher education institutions attract new applicants and manage the student recruitment
process, and we work
with high schools to aid them in the college and career counseling they deliver.  In addition, we guide
students and parents
through the transition from high school to college, college to graduate school, and school to career through the
information
available on Princetonreview.com, our free web site, and the more than 70 print titles we author on these
topics.

The following
are some of the major
products, services and tools we offer to higher education institutions, high schools, school districts and
individual students and
parents.

For Post
Secondary
Institutions. We sell academic institutions a broad range of marketing and web-based products on a
subscription and transactional
basis.

| |  | Marketing   Products and Services.   Colleges and graduate schools
may include an
in-depth profile about their   school in our books and on our web site. More importantly, we promote these
institutions to students
who match their profile.  The institutions then pay us when these students request   further
information.                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                   
| |  | Prospect   Management Services.   We provide a series of online
services for colleges to
help manage the   admissions process and maximize their yield with prospective students.  These include
highly sophisticated
online   applications, communications tools, interview and recruiting event   schedulers, and data integration
capabilities.

For
Secondary Schools and
School Districts. We sell K-12 school districts support for their post-secondary counseling efforts by
offering customizable
packages of services that include college counseling advisors, our college guidance books and a web-based college
counseling product
called Education and Career Opportunities System, or ECOS.

| |  | Counseling   Management Tools.   Supported by a combination of
online and print tools,
we help districts set   interim and outcome goals and track the progress of their schools towards   those
goals.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                        
| |  | Counseling   Support. We provide   teams of specialists who provide
professional
development and counseling   services in schools, supporting the efforts of school-based counselors.                  

For
Princetonreview.com
visitors. We attract students to Princetonreview.com by offering extensive, free useful tools and
content.  We leverage our
high volume of student site usage through our marketing relationships with post-secondary institutions, as well
as by selling test
preparation services to these students.

| |  | School   Information. We   provide detailed information about
colleges and graduate
schools, including,   in many cases, students opinions about faculty, workload, social life,   sports and
more.  This
information is   largely taken form our bestselling guidebooks.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                           
| |  | Major,   Career and Other Searches. Through a series of wizards, we
help students narrow
down their   list of potential schools, majors, internships, scholarships, and other   related educational and
career
options.                                                   
| |   |                                                                                                                                                                                                                                                                           
| |  | Discussion   Boards and Communication Tools. We provide a forum for
students to discuss
college and graduate   school admissions experiences, ask questions of students and administrators   on campus,
and obtain advice
from Princeton Review moderators.               
| |   |                                                                                                                                                                                                                                                                           
| |  | Organization.We help students keep track of information about
their prospective
schools, and try to make the process simpler and less stressful.                                                                                                                          

6



Publications of
this division
include:

|Complete   Book of Colleges      | Complete   Book Law Schools             
|-------------------------------- | ----------------------------------------
|Internship   Bible               | Complete   Book Medical Schools         
|Visiting   College Campuses      | Paying   for College Without Going Broke
|Best   Value Colleges            | Paying   for Graduate School            
|Guide to   Study Abroad          | K&W   Guide                             
|Guide to   Summer Programs       | Kids   Guide to Majors/Career           
|Complete   Book Business Schools | Guide to   College Majors               
|Best 357   Colleges              |                                         

Our Franchised Operations

Our
classroom-based test
preparation courses and tutoring services are provided through company-operated locations and through our
independent franchisees.
Our franchisees provide these test preparation courses and tutoring services under the Princeton Review brand
within a specified
territory, in accordance with franchise agreements with us. The royalties paid to us by our franchisees are
comprised of a general
royalty of 8% of their cash receipts collected under the Princeton Review name, an additional royalty of 2% of
their cash receipts,
which is allocated to an advertising fund that we also contribute to, and a per student fee for use by their
students of our online
supplemental course tools. Our franchisees also purchase our course and marketing materials, which they use in
conducting and
promoting their classes. Royalties collected from our independent franchisees and revenue from their purchases
of materials together accounted for approximately 5% of our total 2004 revenue.

Our franchisees
do not provide our
Princeton Review Online courses. However, to the extent we provide our Princeton Review Online courses to
customers residing within
the exclusive jurisdictions of our franchisees, we pay those franchisees a royalty of 15% of all of our revenue
derived from selling
Princeton Review Online courses to students residing in their territories, net of certain administrative
expenses. We have not
entered into any such royalty arrangements with our franchisees for our other web-based products and
services.

As of December
31, 2004, we had
seven franchisees operating 17 offices under the Princeton Review name in the United States and 31 offices
operated by franchisees in
19 additional countries.

Our domestic
franchisees currently
provide test preparation courses and tutoring services in the following jurisdictions:

|State         |  | Number of   Counties | 
|------------- |  | -------------------- | 
|              |  |                      | 
|California    |  | 8                    | 
|Colorado      |  | 7                    | 
|Connecticut   |  | 5                    | 
|Florida       |  | 57                   | 
|Illinois      |  | 5                    | 
|Massachusetts |  | 4                    | 
|Michigan      |  | 3                    | 
|Nevada        |  | 1                    | 
|New York      |  | 5                    | 
|Ohio          |  | 2                    | 
|Pennsylvania  |  | 4                    | 
|Rhode Island  |  | 5                    | 
|Tennessee     |  | 95                   | 

Our
international franchises are
located in China, Egypt, India, Israel, Japan, Jordan, Lebanon, Malaysia, Mexico, Pakistan, the Philippines,
Saudi Arabia, Singapore,
South Korea, Syria, Taiwan, Thailand, Turkey and The United Arab Emirates. We intend to continue to expand our
international presence
through the sale, in the next several years, of additional franchises, primarily in Asian, Middle Eastern and
South American
markets.

We are not
currently offering
any new domestic franchises. Over the last several years, we completed a number of acquisitions of businesses
operated by our former
domestic franchisees, as more fully described below under Recent Acquisitions.  The majority of
our domestic
franchise agreements expire at the end of 2005.

7



Recent
Acquisitions

Franchise
Acquisitions

In the last
several years, we
completed acquisitions of the businesses of a number of our former domestic franchisees. In October, 2004, we
completed a small
acquisition of the independent franchise that provided test preparation courses in Puerto Rico for a purchase
price of approximately
$130,000. In July 2003, we completed a small acquisition of 77% of Princeton Review of North Carolina, Inc., the
independent
franchise that provided test preparation courses in North Carolina, for a purchase price of approximately
$890,000, of which
approximately $760,000 was financed with notes to the seller, including imputed interest. In November 2003 we
purchased the remaining
23% for approximately $248,000, of which approximately $208,000 was financed with notes to the seller, including
imputed interest. In
October 2002, we completed a small acquisition involving the assets of Princeton Review of St. Louis, one of
our franchisees that provided test preparation courses in Missouri, for a purchase price of approximately
$850,000, of which
approximately $470,000 was financed with a note to the sellers. In June 2001, we acquired the assets comprising
the business of
T.S.T.S., Inc., which offered test preparation courses in Texas, Arizona, Oklahoma, Louisiana and New Mexico
under franchise
agreements with us, for a purchase price of approximately $6.3 million. We financed approximately $4.8 million of
the purchase price
under our then existing line of credit and issued a subordinated promissory note to the seller for the remaining
approximately $1.5
million. In early March 2001, we acquired the assets comprising the businesses of Princeton Review of Boston,
Inc. and Princeton
Review of New Jersey, Inc., at a combined purchase price of $13.8 million. We financed approximately $10.2
million of the purchase
price under our then existing line of credit and issued two subordinated promissory notes for the remaining
approximately $3.6 million. In early March 2001, we also purchased the assets of another franchisee, Princeton
Review Peninsula,
Inc., for a purchase price of approximately $2.7 million, which was financed through borrowings under our then
existing line of
credit. Princeton Review Peninsula provided test preparation courses in several counties in California.

Embark

In October
2001, we acquired
substantially all of the operating assets of Embark.com, Inc., a developer of online products and services for
the college and
graduate school admissions market. The acquired business consisted primarily of Embarks customer contracts
with academic
institutions and its technological platform for submitting electronic applications and related services. The
purchase price paid by
us at closing consisted of 875,000 shares of our common stock valued at approximately $5.2 million, approximately
$3.4 million in
assumed indebtedness and approximately $2.1 million in other assumed liabilities of Embark, consisting primarily
of deferred revenue
relating to customer contracts assumed by us, net of acquired receivables of approximately $1.0 million. In
accordance with the
earn-out provisions entitling Embark to additional consideration based on the performance of the acquired
business, Embark earned a payment of 9,128 shares of our common stock and approximately $1.5 million in cash,
based on the revenue
performance of the acquired business through June 30, 2003. In addition to the purchase price, in connection with
the transaction, we
made a $1.8 million loan to Embark, which was secured by 300,000 of the shares of our common stock that Embark
received as part of
the purchase price. The approximate $1.5 million earn-out was applied against the loan balance, which was repaid
in full as of
December 31, 2003.

We intend to
continue to pursue
strategies to maximize stockholder value, which may continue to include acquisitions that will help us further
expand our product
offerings or grow geographically or other strategic alternatives, such as dispositions, reorganizations,
recapitalizations or other
similar transactions. We expect our acquisition focus to be on companies with complementary products or services,
including those
businesses operated by our remaining domestic franchisees that we can acquire on favorable terms.  From time
to time, we have
made investments in businesses with which we wanted to build strategic relationships, and we may do so in the
future.  We
anticipate that future acquisitions or strategic investments, if consummated, would involve some combination of
cash, debt and the
issuance of our stock.  Currently, we do not have any agreements or commitments to pursue any of the
types of transactions described above.

8



Sales and Marketing

The majority of
our students and
their parents choose our test preparation programs based on the recommendations of other students, parents,
teachers and counselors.
We also build awareness of our brand and promote our products through relationships with other companies that
publish and distribute
our products, including Random House, which publishes and distributes the books we author. We also maintain an
institutional sales
force and engage in some national and local advertising.

In the last
several years, we have
substantially increased our sales and marketing efforts in order to market and support our newer products and
services, such as our
web-based marketing, application and admissions management products, our K-12 products and our online and
institutional test
preparation offerings. Our sales and marketing activities by division are as follows:

Test
Preparation Services
Division. Nationally, we use mass print media, conferences, direct mail and electronic media to market our
products and services
to students, parents and educators. Locally, we and our franchisees primarily advertise in local and school
newspapers, distribute
posters and sponsor school activities. We also conduct extensive free information sessions and practice tests to
expose our products
to our markets. Virtually everyone in our regional offices is part of the sales force. They and our regional
phone centers counsel
students and parents regarding specific courses. Our Princeton Review one-to-one admissions counseling and
tutoring initiative is
marketed to high-end customers utilizing a distinctive message and dedicated marketing resources. Our Princeton
Review Online
products are marketed through electronic media and e-commerce partnerships, as well as through our
classroom course marketing efforts. We recently increased our sales force to conduct sales of our test
preparation and SES services
to schools and other educational institutions. We expect that marketing to educational institutions will continue
to constitute a
major focus of the marketing activities of the Test Preparation Services division.

K-12
Services Division.
We are marketing our K-12 services to schools and school districts through a number of channels, including
national conferences,
direct mail, electronic media and telemarketing. Our K-12 Services division has a sales and marketing force of
approximately 30
people. Homeroom is also integrated in the offerings of, and sold by, our business partners such as Plato
Learning, Inc. and
SchoolNet.

Admissions
Services
Division. Admissions Services has a dedicated sales and marketing force of 10 people that actively solicits
secondary school
districts and post-secondary institutions to purchase our products and services.

Product Design and Development

We believe that
successful product
design, development and enhancement has been, and will continue to be, essential to the success of our business.
We believe that the
strength of our reputation and brand name is directly attributable to the quality of our products and services,
and expect to
continue to devote significant resources to enhancing our current products and services and offering additional
high-quality products
and services that are responsive to our customers needs.

Test
Preparation Services
Division. We rely on our development staff, teachers and other education experts to create and refine the
materials used in our
Test Preparation Services division. Our goal is to design and improve our products in such a way as to offer our
students the best
and most productive overall experience, while addressing their preferences and fitting within their lifestyles.
We seek to accomplish
this by:

| |  | continually updating and   enhancing our test preparation materials and our
teaching
methods;                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                         
| |  | ensuring that our   designated personnel take virtually every major
standardized test for
which   we offer courses, so that our techniques and materials remain current;
| |   |                                                                                                                                                                         
| |  | performing quantitative   and qualitative research into the preferences and
needs of our
customers;                                                                     
| |   |                                                                                                                                                                         
| |  | regularly soliciting and   reviewing feedback from students taking our
courses;                                                                                         
| |   |                                                                                                                                                                         
| |  | enhancing the services and   functionality of our online test preparation
tools and content;
and                                                                        
| |   |                                                                                                                                                                         
| |  | frequently updating our   standardized test preparation
publications.                                                                                                   

9



Overall, we
seek to provide a
complementary mix of online and offline offerings that students can choose from to best fit their needs and
achieve their
goals.

K-12
Services Division. We
rely on a team of teachers, educational experts and developers to research, design, enhance and deliver our K-12
educational products
and services, which include, live instruction, online and paper-based assessments, professional development and
publications. Our
programs are designed to provide customized and highly focused resources to improve student performance. Our
focus in the K-12
Services division is to continue to expand and refine our offerings to afford schools and school districts the
highest degree of
flexibility possible in the mix of products they choose to purchase from us, while delivering measurable
results.

Admissions Services
Division. Since launching our Review.com (now Princetonreview.com) web site in 1994, we have continually
expanded the material
available and made improvements to its content and functionality. The online informational materials and tools
are developed and
enhanced by our authors and design engineers, through strategic partnerships with third parties and through
feedback from guidance
and admissions counselors. We regularly modify and enhance our web site to provide students, parents and guidance
counselors with
additional information and interactive tools designed to assist them with the school selection, admissions and
financial aid
processes. We also continually strive to provide our educational institution customers with more effective ways
to reach potential
applicants, and streamline and manage the various facets of the admissions process. To this end, we periodically
refine our web-based marketing, admissions and application management solutions to provide our higher education
institution customers
with the most technologically advanced and flexible products possible. Finally, our publications are frequently
updated by our staff
and freelance authors and editors to ensure that new editions are up to date and include the most current
information available on
college and graduate school admissions and related subjects.

Significant Customers

In the K-12
Services division, the
top two customers accounted for 39% and 20%, respectively, of revenue in that division in 2004.

Competition

The markets for
our educational
products and services are highly competitive. Following is our competitive landscape, by division:

Test
Preparation Services
Division. Our Test Preparation Services division faces competition in   standardized test preparation
primarily from one other
established national   company, Kaplan, Inc., a division of The Washington Post Company. We also   face
competition from many local
and regional companies that provide test   preparation, career counseling and application assistance to students.
In the   SES
market, national competitors include Edison Schools, Platform Learning,   Sylvan (a division of Educate, Inc.)
and Kaplan, with many
smaller providers   competing with us on a local level.

K-12
Services Division.
Our K-12 Services division faces competition primarily from the four national   textbook companies, Pearson Plc,
Harcourt, Inc. (an
affiliate of Reed   Elsevier Group Plc), Houghton Mifflen Company and McGraw-Hill Companies, some   of which have
acquired online and
supplemental providers.

Admissions
Services Division. Our Admissions Services division provides a   wide variety of products and services that face
competition from a variety
of   companies that, to different extents, provide products and services similar   to ours for the higher
education market. 
In particular, The College Board, a non-for-profit membership   association, provides a similar range of products
and services to
the   undergraduate market.

10



We also face
competition from
several non-profit and other organizations that offer both face-to-face and online products and services to
assist individuals and
educational organizations with counseling, marketing and applications.

We believe that
the principal
competitive factors in our markets include the following:

| |  | brand recognition;                                                                  
| | - | ------------------------------------------------------------------------------------
| |   |                                                                                     
| |  | ability to demonstrate   measurable results;                                        
| |   |                                                                                     
| |  | availability of integrated   online and offline solutions;                          
| |   |                                                                                     
| |  | overall quality of user   experience;                                               
| |   |                                                                                     
| |  | alignment of offerings   with specific needs of students, parents and
educators;
and
| |   |                                                                                     
| |  | value and availability of   products and services.                                  

We believe that
our primary
competitive advantages are our well-known and trusted Princeton Review brand, our extensive experience in test
preparation and
admissions and our innovative, high-quality educational products and services. We also believe that our ability
to attract students,
parents and educators to our Princetonreview.com web site offers higher education institutions access to a large
body of potential
applicants and offers sponsors and merchandisers an attractive source of potential consumers. However, some of
our competitors may
have more resources than we do, and they may be able to devote greater resources than we can to the development,
production and sale
of their services and respond more quickly than we can to new technologies or changes in the education
marketplace. As a result, we
may not be able to maintain our competitive advantages or otherwise compete effectively with current or
future competitors.

Intellectual Property and Property Rights

Our copyrights,
trademarks, service
marks, trade secrets, proprietary technology and other intellectual property rights distinguish our products and
services from those
of our competitors, and contribute to our competitive advantage in our target markets. To protect our brand,
products and services
and the systems that deliver those products and services to our customers we rely on a combination of copyright,
trademark and trade
secret laws as well as confidentiality agreements and licensing arrangements with our employees, customers,
independent contractors,
sponsors and others.

We
strategically pursue the
registration of our intellectual property rights. However, effective patent, trademark, service mark, copyright
and trade secret
protection may not always be available. Existing laws do not provide complete protection, and monitoring the
unauthorized use of our
intellectual property requires significant resources. We cannot be sure that our efforts to protect our
intellectual property rights
will be adequate or that third parties will not infringe or misappropriate these rights. In addition, there can
be no assurance that
competitors will not independently develop similar intellectual property. If others are able to copy and use our
products and
delivery systems, we may not be able to maintain our competitive position. If litigation is necessary to enforce
our intellectual
property rights or determine the scope of the proprietary rights of others, we may have to incur
substantial costs or divert other resources, which could harm our business.

We have used
The Princeton
Review as our principal service and trademark for test preparation services and related publications and
materials since
1982.  In the past, Princeton University did not object to our use, provided we used an express disclaimer
of affiliation with
the University in connection with most of our uses. In February of 2005, we entered into an agreement with
Princeton University under
which it has agreed not to oppose or contest our use or registration of these marks anywhere in the world and
also to provide us
consent and assistance where necessary to secure such registration, as long as we include the disclaimer of
affiliation with the
University in the size and manner specified in such agreement and annually inform our employees and franchisees
of the requirement
for use of such disclaimer.

In order to
develop, improve,
market and deliver new products and services, we may be required to obtain licenses from others. There can be no
assurance that we
will be able to obtain licenses on commercially reasonable terms or at all or that rights granted under any
licenses will be valid
and enforceable.

11



In addition,
competitors and others
may claim that we have infringed their intellectual property rights. Defending any such lawsuit, whether with or
without merit, could
be time-consuming, result in costly litigation or prevent us from offering our products and services, which could
harm our business.
If a lawsuit against us is successful, we may lose the rights to use our products or be required to modify them,
or we may have to
pay financial damages. We have been subject to infringement claims in the past and expect to be subject to legal
proceedings and
claims from time to time in the ordinary course of business, including claims of alleged infringement of the
trademarks and other
intellectual property rights of third parties.

Government Regulation

To offer
franchises in the U.S., we
must comply with regulations adopted by the Federal Trade Commission and with several state laws that regulate
the offer and sale of
franchises. We are not offering new franchises domestically, but both federal and state franchise sales laws may
apply to transfers
and renewals of existing franchises in some circumstances.  The FTCs Trade Regulation Rule on
Franchising, or the FTC
Rule, and various state laws require that we (1) furnish prospective franchisees with a franchise offering
circular containing
prescribed information; and (2) in some states, register the franchise offering before an offer is
made.

Our existing
franchise
relationships are subject to a number of state laws that regulate substantive aspects of the
franchisor-franchisee relationship,
including:

| |  | those   governing the termination or non-renewal of a franchise without
good cause;          
| | - | ---------------------------------------------------------------------------------------------
| |   |                                                                                              
| |  | requirements   that a franchisor deal with its franchisees in good
faith;                    
| |   |                                                                                              
| |  | prohibitions   against interference with the right of free association
among franchisees;
and
| |   |                                                                                              
| |  | those   regulating discrimination among franchisees in charges, royalties
or fees.           

Some foreign
countries also have
laws affecting the offer, sale or termination of franchises within their borders and to their citizens. 
Although unlikely, U.S.
federal and state franchise regulation may be deemed applicable to our efforts to establish franchises abroad.
Failure to comply with
these laws could limit or preclude our ability to expand internationally through franchising.

To date, these
laws have not
precluded us from seeking franchisees in any given area and have not had a material adverse effect on our
operations. However,
compliance with federal, state and international franchise laws can be costly and time consuming, and we cannot
be certain that we
will not encounter delays, expenses or other difficulties in this area.

Employees

As of December
31, 2004, we had 616
full-time employees, including 68 in content and editorial, 53 in administration, finance, legal and human
resources, 77 in
information systems, 36 in marketing, 49 in sales, 79 in customer support and 254 in our regional offices
performing multiple tasks,
including sales, administrative, and teaching functions. In addition, we had approximately 2,800 part-time
employees, comprised
mainly of teachers.

None of our
employees is covered by
a collective bargaining agreement. We consider our employee relations to be good.

Our Restructuring

Until March 31,
2000, we operated
as an S corporation with four majority owned limited liability company subsidiaries. On April 1, 2000, we
completed a corporate
restructuring in order to eliminate minority interests in our subsidiaries, provide all equity holders with a
common interest in our
company and otherwise facilitate our initial public offering. As part of our restructuring, all stockholders of
the S corporation and
all the minority equity interest holders in our subsidiaries, contributed their interests to a newly formed
holding company in
exchange for shares of common stock of the holding company. As a result of this restructuring, our status as an S
corporation
terminated.

We recently
completed a further
restructuring in order to recognize certain operational efficiencies from our corporate structure. Effective
January 1, 2005, we
merged four of our six subsidiaries with and into The Princeton Review, Inc.

12



Segment Information

For financial
information relating
to our operating divisions by business segment, see Note 13  to our consolidated financial statements
included elsewhere in this
Annual Report on Form 10-K.

Risk Factors

You should
carefully consider the
following risk factors together with all of the other information contained in this Annual Report on Form 10-K
before making an
investment decision with respect to our common stock. Any of the following risks, as well as other risks and
uncertainties described
in this Annual Report on Form 10-K, could harm our business, financial condition and results of operations and
could adversely affect
the value of our common stock.

Risks Related to Our Business

We have a recent history of
significant operating losses and may not be able to achieve sustained profitability if we are unable to
substantially increase
revenue from our newer products, while controlling costs, in which case the market price of our common stock
could be adversely
affected.

Over the last
few years, we
invested heavily in the expansion of existing business lines and the development of new businesses.  This
investment, together
with costs associated with Sarbanes-Oxley compliance and difficulties with our Admissions Services business, have
resulted in losses
in two of our last three fiscal years. After incurring net losses of approximately $1.1 million for the year
ended December 31, 2002
and $10.3 million for the year ended December 31, 2001, we returned to profitability in 2003. However, for the
year ended December
31, 2004, we again incurred a net loss, in the amount of approximately $30.0 million. As of December 31, 2004, we
had an accumulated
deficit of approximately $61.1 million.

In order to
grow as currently
contemplated and achieve sustained profitability, we will need to derive an increasing portion of our revenue
from our newer
businesses, consisting of our K-12 services, SES and Admissions Services offerings, while at the same time
effectively controlling
costs. If we are unable to do this, we will be unable to execute our current business plan and our operating
results may be adversely
affected. In order to increase revenue from these newer businesses we must, among other things,
successfully:

| |  | continue to increase   market acceptance by educators, students and parents
of the services
offered   by our K-12 Services division and our SES services;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                          
| |  | grow our revenue from   higher education institutions that purchase our
web-based marketing
services;   and                                              
| |   |                                                                                                                                                          
| |  | interest students using   our online tools in the schools that are
interested in enrolling
them.                                                         

If we are
unable to achieve these
objectives, we may fail to achieve or sustain profitability in subsequent periods, in which case the market price
of our common stock
may be adversely affected.

If colleges and universities
reduce their reliance on standardized admissions tests or there is a substantial reduction in the emphasis placed
by federal and
state governments on assessment and remediation in K-12 education, our business will be materially adversely
affected.

The success of
our test preparation
and K-12 services businesses depends on the continued use of standardized tests. If the use of standardized tests
declines or falls
out of favor with educational institutions or state and local governments, the markets for many of our products
and services will
deteriorate and our business will be materially adversely affected. Additionally, the SES market, which is
serviced by our Test
Preparation Services division and is a driver of growth in that division, is dependent on the availability of
federal funding under
NCLB.  Substantial reduction in funds available for SES programs under this Act could have an adverse effect
on our operating
results.

Our contracts with schools,
school districts, municipal agencies and other governmental bodies present several risks, including reducing our
ability to
effectively predict our operating performance, increasing variability in our cash balances and increasing credit
risk.

13



As our K-12
Services division
has grown over the last several years, we have begun to enter into more and more large, multiple element
contracts with schools,
school districts, municipal agencies, and other governmental bodies, requiring us to deliver a combination of
products and services,
including online and print-based assessment, professional development, and face-to-face instruction.  These
contracts present
several types of risks and uncertainties.

The approval
processes of some of
our customers in this area, which are required for formal contract execution, are lengthy and cumbersome and, in
many cases, are not
completed prior to the time we begin performance.  This means that we, at times, incur substantial costs
prior to the formal
execution of these agreements by the customer. While to date we have found that, following the award of the
contract to us, final
approval required for the customer to sign the agreement is usually a formality, our revenue recognition policies
preclude us from
recognizing revenue from these contracts until there is a final agreement binding on the customer.  Costs,
however, are recorded
as incurred, whether or not the contract is signed.  While we do not incur significant costs until we are
awarded a project and
we do everything possible to expedite the formal execution of these agreements by the
customer, the timing of this final step is outside our control.  This situation has made it more difficult
for us to forecast
revenue streams from these contracts from quarter to quarter.  This may make it more difficult for us to
deliver operating
results in line with our and analysts forecasts, and could therefore adversely affect our stock
price.

Because our
customers are
frequently unable to begin payment for services until formal approval of the agreement, this delay in formal
contract execution may
also cause our cash balances to fluctuate significantly from period to period and may expose us to credit
risk.  While we
believe that we may be able to recover against a customer for which we have performed services but which fails to
render payment
based on the absence of a signed contract, based on several legal theories designed to prevent unjust enrichment,
this basis of
recovery may not be available in all jurisdictions where we enter into these contracts, or may limit our recovery
with respect to
amounts or timing.  Accordingly, the absence of a signed agreement may, depending on the laws of the
applicable jurisdiction,
make it substantially more difficult or impossible for us to recover sums due us under these agreements. 
While we have not experienced a default by a customer under such circumstances to date, and believe that the
nature of the parties
with which we are contracting makes such a default less likely, it is a possibility that such circumstances may
arise in the future
with respect to one or more of these contracts.

We face intense competition that could adversely affect our revenue,
profitability and
market share.

The markets for
our products and
services are highly competitive, and we expect increased competition in the future that could adversely affect
our revenue,
profitability and market share. Our current competitors include but are not limited to:

| |  | providers of online and   offline test preparation and tutoring
services;                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                   
| |  | companies that provide SES   services;                                                                                                                                                            
| |   |                                                                                                                                                                                                   
| |  | companies that provide   print, software, web-based and other educational
assessment and
supplemental   products and services to districts and states in the highly competitive K-12   market;
and
| |   |                                                                                                                                                                                                   
| |  | companies that offer both   face-to-face and web-based products and
services to assist
individuals and   educational organizations with counseling, marketing and student   applications.         

Some of our
competitors may have
more resources than we do. These competitors may be able to devote greater resources than we can to the
development, promotion and
sale of their services and respond more quickly than we can to new technologies or changes in customer
preferences. We may not be
able to maintain our competitive position or otherwise compete effectively with current or future competitors,
especially those with
significantly greater resources.

Some of our
competitors that
provide K-12 educational products and services may have more experience, larger customer bases and greater brand
recognition in that
market. Further, established companies with high brand recognition and extensive experience providing various
educational products to
the K-12 market may develop products and services that are competitive with ours.

14



Negative developments in school
funding could reduce our institutional revenue.

We expect to
derive a growing
portion of our revenue from sales of our products and services to educational institutions, including our K-12
Services
divisions offerings, high school counseling products, SES programs and institutional test preparation
offerings. Our ability to
generate revenue from these sources may be adversely affected by decreased government funding of education.
Public school funding is
heavily dependent on support from federal, state and local governments and is sensitive to government budgets. In
addition, the
government appropriations process is often slow and unpredictable. Funding difficulties also could cause schools
to be more resistant
to price increases in our products, compared to other businesses that might be better able to pass on price
increases to their
customers.

There is a risk that our management or our independent auditor may
not be able to report
that our internal control over financial reporting is effective as of the end of the period covered by this
report, in accordance
with recent legislation requiring companies to evaluate their internal control over financial
reporting.

In July, 2004,
our independent registered public accounting firm, Ernst & Young LLP,
reported in writing to us and our audit committee that it had identified two
reportable conditions relating to our internal control over
financial reporting.  One of these reportable conditions concerned the need
for better controls to handle a greater volume of multiple element contracts in
our K-12 Services division and address related revenue recognition issues. 
The other involved the need to strengthen certain review procedures during the
monthly closing process within the accounting department. We are dedicating
substantial resources to improving our internal control over financial
reporting, both in response to the identified reportable conditions and as part
of an ongoing initiative to test and strengthen internal control overall in
accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of
2002 (Section 404).  In the course of this broad review of our
internal control structure, we have identified several additional areas where
our internal control over financial reporting needs to be improved.  These
additional areas include greater segregation of duties and the need to hire
additional qualified personnel in the accounting department, better
documentation of certain review processes, improvement in the financial reporting close process, the design and
implementation of a collections policy and the reconciliation
processes.

To address the
reportable conditions identified by our auditors and the other issues identified
as part of our review, we are in the process of making various improvements in
our internal control over financial reporting, including the ongoing
implementation of a new accounting and financial reporting software
system.  In addition, we retained consultants to assist us with the
implementation of this new system and with our overall review of our internal
controls in connection with the requirements of Section 404.  We have also
hired and will continue to recruit and hire additional qualified personnel for
the accounting department, as necessary to address identified
concerns.

We are
working diligently toward resolving all identified issues and evaluating and
documenting our internal control systems in order to allow management to report
on, and our independent registered public accounting firm to attest to, our internal control over
financial reporting as of December 31, 2004, as required by Section 404. 
We have not yet been able to complete our assessment of which, if any, of the
identified control deficiencies constitute material weaknesses, as
defined in The Public Company Accounting Oversight Boards Auditing
Standard No. 2 (Standard No. 2), and have therefore not determined
whether, as of December 31, 2004, our internal control over financial reporting
was effective. However, given the number of control deficiencies we have
identified, and the fact that we believe that one or more of these control
deficiencies constitute a significant deficiency under Standard No.
2, there is a strong likelihood that we will conclude, when we are able to
complete our assessment, that one or more of these control deficiencies,
individually or in the aggregate, constitute a material weakness.
This would then require us to conclude in our report under Section 404 that our
internal control over financial reporting was not effective as of December 31,
2004. Additionally, our independent registered public accounting firm has informed us that it may not be
able to complete its work on a timely basis in order to report on our internal
controls prior to the required deadline.  Even if our independent registered public accounting firm
is able to issue its report in time, we cannot be certain that it will be able
to attest that our internal control over financial reporting is effective. 
We are also not able to predict what effect, if any, this may have on the price
of our common stock.

Our business is subject to seasonal fluctuations, which may cause our
operating results to
fluctuate from quarter to quarter. This may result in volatility or adversely affect our stock
price.

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 revenues increase, we expect to recognize these revenues primarily
in the first and
fourth quarters.  The electronic application revenue recorded in our Admissions Services division is highest
in the first and
fourth quarters, corresponding with the busiest times of year for submission of applications to academic
institutions. Our K-12
Services division may also experience seasonal fluctuations in revenue, with the first and fourth quarters
(corresponding to the school year) expected to have the highest revenue.

15



Our quarterly operating results are not indicative of future performance
and are difficult
to forecast.

Our quarterly
operating results may
not meet expectations of public market analysts or investors, which could cause our stock price to decline. In
addition to the
seasonal fluctuations described above, our operating results may vary from quarter to quarter in response to a
variety of other
factors beyond our control, including:

| |  | our customers spending   patterns, which, in some cases, are
difficult to
predict;                  
| | - | -----------------------------------------------------------------------------------------------------
| |   |                                                                                                      
| |  | the timing of school   districts funding sources and budget
cycles;                                 
| |   |                                                                                                      
| |  | the timing of signing,   expirations and renewals of educational institution
contracts;              
| |   |                                                                                                      
| |  | variations in product mix,   particularly in the case of our K-12 Services
division;                 
| |   |                                                                                                      
| |  | the timing of corporate   sponsorships and advertising; and                                          
| |   |                                                                                                      
| |  | non-recurring charges   incurred in connection with acquisitions or other
extraordinary
transactions.

Due to these
factors, we believe
that quarter-to-quarter comparisons of our operating results may not be indicative of our future performance and
you should not rely
on them to predict the future performance of our stock price. In addition, our past results may not be indicative
of future
performance because several of our businesses were introduced or acquired relatively recently.

Loss of significant customers could significantly adversely affect our
revenue or cause
disruptions in our operations.

As the business
of our K-12
Services division has evolved, the contracts entered into with school districts have generally increased in
size.  As a result,
two customers accounted for 39% and 20%, respectively, of that divisions revenue in 2004.  The loss of
one or more such
customers could significantly adversely affect our revenue. Additionally, we rely on Random House as the
publisher and distributor of
all of the books we write. Royalties and other fees from books authored by us and published and distributed by
Random House
represented approximately 4% of our revenue in each of 2004 and 2003. Accordingly, termination of our
relationship with Random House
could adversely affect our revenue and cause disruption in our operations.

If we are not able to continually enhance our web-based products and
services and adapt them
to changes in technology, our future revenue growth could be adversely affected.

If our
improvement and adaptation
of our web-based products and services is delayed, results in systems interruptions or is not aligned with market
expectations or
preferences, our revenue growth could be adversely affected. The online environment is rapidly evolving, and the
technology used in
web-based products changes quickly. We must therefore be able to quickly modify our solutions to adapt to
emerging online standards
and practices, technological advances, and changing user and sponsor preferences. Ongoing enhancement of our web
site, web-based
products and related technology will entail significant expense and technical risk. We may use new technologies
ineffectively or fail
to adapt our web site, web-based products and related technology on a timely and cost-effective basis.

If our domestic franchisees contest our interpretation of our
agreements with them, our
ability to offer our products in the domestic franchisees territories could be adversely affected, which
could adversely affect
our revenue.

If our domestic
franchisees contest
our interpretation of our rights and obligations under our existing agreements with them, then our ability to
deliver our products
and services within their franchise territories could be hindered, and our revenue could be adversely affected.
Through a series of
franchise agreements and other agreements, our independent franchisees have various rights to provide test
preparation products and
services under the Princeton Review brand within specified territories, and to use our trademarks and other
intellectual property in
connection with providing these services. Similarly, we have various rights to market and sell our products and
services in the
franchisees territories. Our agreements have been reviewed and renegotiated to accommodate our business
goals and the goals of
our franchisees as they have both developed over the years.

If we are unable to renew our
agreements with our domestic franchisees, the franchisees existing Princeton Review offices will close and
we may have to open
new offices in the affected territories, which could adversely affect our revenue.

The majority of
our domestic
franchise agreements expire on December 31, 2005.  If we are unable to enter into new agreements with the
franchisees, the
franchise relationships will end and the franchisees will no longer offer products and services under the
Princeton Review brand in
their former territories.  The closing of their Princeton Review offices would diminish our market presence
and our ability to
deliver face-to-face test preparation in those territories, at least until we are able to open new offices and
resume the activities
previously carried out by the franchisees.

16



If we do not adequately protect the intellectual property rights to
our products and
services, we may lose these rights and our business may suffer materially.

Failure to
protect our intellectual
property could materially adversely affect our business. We depend on our ability to protect our brand, our
products and services and
the systems that deliver those products and services to our customers. We rely on a combination of copyright,
trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements, to protect these products. These
intellectual property
rights distinguish our products and services from those of our competitors. If others are able to copy, use and
market these products
and delivery systems, then we may not be able to maintain our competitive position. Despite our best efforts, we
cannot assure you
that our intellectual property rights will not be infringed, violated or legally imitated. Existing laws do not
provide complete
protection and policing the unauthorized use of our products and services requires
significant resources.

If our products and services infringe the intellectual property rights
of others, this may
result in costly litigation or the loss of our own intellectual property rights, which could materially adversely
affect our
business.

Competitors and
others have claimed
in the past and may claim in the future that we have infringed their intellectual property rights. The defense of
any lawsuit,
whether with or without merit, could be time-consuming and costly. If a lawsuit against us is successful, we may
lose, or be limited
in, the rights to offer our products and services. Any proceedings or claims of this type could materially
adversely affect our
business.

We may be held liable for the content of materials that we author,
content available on our
web site or products sold through our web site.

We may be
subject to claims for
defamation, negligence, copyright or trademark infringement or other legal theories based on the content of
materials that we author,
and content that is published on or downloaded from our web sites, accessible from our web sites through links to
other web sites or
posted by our users in chat rooms or bulletin boards. These types of claims have been brought, sometimes
successfully, against online
services as well as print publications in the past. Although we carry general liability insurance, our insurance
may not cover
potential claims of this type, such as trademark infringement or defamation, or may not be adequate to cover all
costs incurred in
defense of potential claims or to indemnify us for all liability that may be imposed. In addition, these claims,
with or without
merit, would result in diversion of our management personnel and financial resources. Further, if
print publications that we author contain material that customers find objectionable, these publications may have
to be recalled,
which could result in lost revenue and adverse publicity.

The loss of our senior management could have a material adverse
effect on our
business.

We depend on
the continued service
of our senior management. The loss of any of our Chief Executive Officer, John Katzman, our President and Chief
Operating Officer,
Mark Chernis, or our Chief Financial Officer, Stephen Melvin, could materially adversely affect our
business.

Our business may be harmed by actions taken by our franchisees that are
outside our
control.

Approximately
5% of our 2004 revenue was derived from royalties paid to us by our franchisees and from sales of our course and
marketing
materials to these franchisees. The quality of franchised test preparation operations may be diminished if our
franchisees do not
successfully provide test preparation services in a manner consistent with our standards and requirements, or do
not hire and train
qualified managers or instructors. As a result, our image and reputation may suffer and our revenue could
decline.

17



Franchise
regulations could limit our ability to terminate or replace unproductive
franchises, which could adversely affect our results of operations, and could
limit our ability to expand internationally through franchising.

Applicable laws
may delay or
prevent us from terminating an unproductive franchise or withholding consent to renewal or transfer of a
franchise, which could have
an adverse effect on franchise royalties. We are subject to both federal and state laws regulating the offer and
sale of franchises.
These laws also frequently apply substantive standards to the relationship between franchisor and franchisee and
limit the ability of
a franchisor to terminate or refuse to renew a franchise. Some foreign countries also have laws affecting the
offer and sale of
franchises within their borders and to their citizens and U.S. federal and state franchise regulation may be
applicable to our
efforts to establish franchises abroad. Failure to comply with these laws could limit or preclude our ability to
expand
internationally through franchising.

Compliance
with federal, state
and international franchise laws can be costly and time consuming, and we cannot be certain that we will not
encounter delays,
expenses or other difficulties in this area. Further, the nature and effect of any future legislation or
regulation of our franchise
operations cannot be predicted.

If we need but are unable to obtain additional capital to expand our
operations and invest
in new products and services, our business may be adversely affected.

In the future
we may require
substantial additional capital to finance ongoing operations or the growth of our business. To the extent that
our existing sources
of liquidity and cash flow from operations are insufficient to fund our activities, we may need to raise
additional funds. We cannot
be certain that we will be able to obtain additional financing on favorable terms. If we fail to raise additional
funds, we may need
to sell debt or additional equity securities or to reduce our growth to a level that can be supported by our cash
flow. Without
additional capital, we may not be able to:

| |  | further develop or enhance   our services and products;                  
| | - | -------------------------------------------------------------------------
| |   |                                                                          
| |  | acquire necessary   technologies, products or businesses;                
| |   |                                                                          
| |  | expand operations in the   United States or internationally;             
| |   |                                                                          
| |  | hire, train and retain   employees;                                      
| |   |                                                                          
| |  | market our services and   products; or                                   
| |   |                                                                          
| |  | respond to competitive   pressures or unanticipated capital
requirements.

Interest expense and other charges related to our recent acquisitions
could negatively
affect our results of operations.

In connection
with our acquisitions
of the businesses of Embark.com, Inc. and several of our franchisees over the last four years, we incurred
indebtedness in an
aggregate amount of approximately $34.3 million, of which approximately $4.4 million remained outstanding as of
December 31, 2004,
bearing interest at a weighted average interest rate of approximately 7.7% per year. Interest expense associated
with this
indebtedness will reduce our earnings.

Additionally,
in connection with
these acquisitions, we recorded a total of approximately $33.4 million of goodwill. Statement of Financial
Accounting Standards No.
142 (SFAS 142), Goodwill and Other Intangible Assets, requires goodwill and other intangible assets that
have an indefinite
useful life to be reviewed at least annually for impairment. To the extent these assets are deemed to be
impaired, they must be
written down. At December 31, 2004, we wrote down $8.2 million in goodwill associated with our acquisition of
Embark, due to the
Admission Services divisions poor performance. Any future write down of goodwill would similarly adversely
affect our operating
results. As of December 31, 2004, after giving effect to the write down of the Embark goodwill, we had
unamortized goodwill of $23.6
million related to these acquisitions.

We may engage in future acquisitions that could dilute the equity
interest of our
stockholders, increase our debt or cause us to assume contingent liabilities, all of which may have a detrimental
effect on the price
of our common stock. If any acquisitions are not successfully integrated with our business, our ongoing
operations could be
negatively affected.

We may
acquire the businesses of
our remaining domestic franchisees or other businesses, products or technologies in the future. To facilitate
future acquisitions, we
may take actions that could have a detrimental effect on our financial condition, results of operations or the
price of our common
stock, including:

18



| |  | issuing equity securities   or convertible debt securities, which would
dilute current
stockholders   percentage ownership;
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                             
| |  | incurring substantial   debt; or                                                                                            
| |   |                                                                                                                             
| |  | assuming contingent liabilities.                                                                                            

Acquisitions
also entail
numerous business risks, including:

| |  | difficulties in   assimilating acquired operations, technologies or
products;                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                         
| |  | unanticipated costs that   could materially adversely affect our results of
operations;                                                                 
| |   |                                                                                                                                                         
| |  | negative effects on our   reported results of operations from acquisition
related charges and
amortization of acquired technology and other intangibles;
| |   |                                                                                                                                                         
| |  | diversion of managements   attention from other business
concerns;                                                                                     
| |   |                                                                                                                                                         
| |  | adverse effects on   existing business relationships with suppliers and
customers;                                                                      
| |   |                                                                                                                                                         
| |  | risks of entering markets   in which we have no or limited prior
experience; and                                                                        
| |   |                                                                                                                                                         
| |  | the potential inability to   retain and motivate key employees of acquired
businesses.                                                                  

If we fail to manage our growth effectively, our business may be
harmed.

In recent
periods we have significantly increased our work force, introduced a number of
new products, made substantial enhancements to our existing products and
consummated several acquisitions. At December 31, 2004, we had 616 full time
employees, as compared with 335 full time employees at December 31, 2000. This
recent growth has placed, and our anticipated growth in future operations will
continue to place, significant demands on our management, and strain our
operational, financial and technological resources. We expect that further
expansion of our operations will be required to successfully implement our
business strategy, including the continued enhancement of our product and
service offerings. In order to manage our growth effectively, we must continue
to improve our operational, management and financial systems, procedures, and
controls on a timely basis. If we fail to manage our growth effectively, our
business could be materially and adversely affected.

We may undertake divestitures that may limit our ability to manage and
maintain our business
and may adversely affect our business.

In the future,
we may undertake
sales or other strategic dispositions of certain businesses or operations to attempt to maximize stockholder
value.  These
transactions involve a number of risks, including:

| |  | Diversion   of management attention and transaction costs associated in
negotiating and
closing the transaction;                                    
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                     
| |  | Inability   to retain customers, management, key personnel and other
employees due to   the
altered nature of our businesses after such transaction;
| |   |                                                                                                                                                     
| |  | Inability   to realize the benefits of divestitures and collect monies owed
to us;
and                                                              
| |   |                                                                                                                                                     
| |  | Failure   to realize the highest value of the divested business because we
are selling   it
before its full potential has been achieved.            

We could be liable for events that occur at facilities that we use to
provide our
services, and a liability claim against us could adversely affect our reputation and our financial
results.

We could become
liable for the
actions of instructors and other personnel at the facilities we use to provide our classroom-based services. In
the event of on-site
accidents, injuries or other harm to students, we could face claims alleging that we were

19



negligent, provided inadequate supervision or were otherwise liable for the
injuries. Although
we maintain liability insurance, this insurance coverage may not be adequate to protect us fully from these
claims. In addition, we
may not be able to obtain liability insurance in the future at reasonable prices or at all. A successful
liability claim could
adversely affect our reputation and our financial results. Even if unsuccessful, such a claim could cause
unfavorable publicity,
entail substantial expense and divert the time and attention of key management personnel.

If we experience system failures, our reputation may be harmed and users
may seek alternate
service providers causing us to lose revenue.

If our primary
and backup computer
systems were to fail or be disrupted, our services could be interrupted and we may lose revenue and future
business. We depend on the
efficient and uninterrupted operation of our computer and communications hardware and software systems. These
systems and operations
are vulnerable to damage or interruption from floods, fires and power loss and similar events, as well as
computer viruses,
break-ins, sabotage, intentional acts of terrorism, vandalism and other misconduct and disruptions or delays
occurring throughout the
Internet network infrastructure. Although all of our material systems are redundant, short-term service
interruptions may take place
if our primary systems were to fail or be disrupted and we are forced to transition to backup systems.
Substantially all of the
computer hardware necessary for our online operations is currently located at our headquarters in
New York, New York. Accordingly, our online operations are dependent on our ability to maintain our systems in
effective working
order and to protect them from disruptive events. We do not have a formal disaster recovery plan, and our
insurance policies may not
adequately compensate us for any losses that may occur due to failures of or interruptions in our
systems.

In addition,
the system failures
of third party Internet service providers could produce interruptions in our service for those users who access
our services through
these third party providers. Service interruptions could reduce our revenue and our future revenue will be harmed
if our users
believe that our system is unreliable.

If our systems are unable to accommodate a high volume of traffic on our
web site, the
growth of our revenue could be reduced or limited.

If use of our
web site
infrastructure increases beyond our capacity, customers may experience delays and interruptions in service. As a
result, they may
seek the products and services of our competitors and the growth of our revenue could be reduced or limited.
Because we seek to
generate a high volume of traffic and accommodate a large number of customers on our web site, the satisfactory
performance,
reliability and availability of our web site, processing systems and network infrastructure are critical to our
reputation and our
ability to serve our customers. If use of our web site continues to increase, we will need to expand and upgrade
our technology,
transaction processing systems and network infrastructure. While slower response times have not had a material
effect on our results
of operations to date, our web sites have in the past and may in the future experience slower response times due
to
increased traffic.

Future regulations or the interpretation of existing laws pertaining to
the Internet could
decrease the demand for our products or increase the cost of doing business.

Any new law or
regulation
pertaining to the Internet, or the application or interpretation of existing laws, could increase our cost of
doing business,
decrease the demand for our products and services, or otherwise harm our business. We must comply with a variety
of federal and state
laws affecting the content of materials distributed over the Internet, as well as regulations and other laws
restricting the
collection, use and disclosure of personal information that we may obtain in the course of providing our online
services. In
particular, we must comply with the Childrens Online Privacy Protection Act, which, as implemented,
mandates that we obtain
verifiable, informed parental consent before we collect, use or disclose personal information from children under
the age of 13.
Future laws or regulations may relate to information retrieved from or transmitted over the Internet, consumer
protection,
online content, user privacy, taxation and the quality of products and services. Compliance with future laws and
regulations, or
existing laws as they may be interpreted in the future, could be expensive, time consuming, impractical or
impossible.

We may be liable for invasion of privacy or misappropriation by
others of our users
information, which could adversely affect our reputation and financial results.

Some of our
services require the
disclosure of sensitive information by the user. We rely on a number of security systems for our services to
protect this information
from unauthorized use or access. We cannot predict whether new technological developments could circumvent these
security measures.
If the security measures that we use to protect personal information or credit card information are ineffective,
we may be subject to
liability, including claims for invasion of privacy, impersonation, unauthorized

20



purchases with credit card information or other similar claims. In
addition, the Federal Trade
Commission and several states have investigated the use of personal information by certain Internet companies. We
could incur
significant expenses if new regulations regarding the use of personal information are introduced or if our
privacy practices are
investigated.

Risks Related to the Securities Markets and Ownership of Our Common
Stock

Our stock price has been and may continue to be volatile, which could
adversely affect our
stockholders.

Since our
initial public offering
in 2001, the market price of our common stock has been volatile, and it may continue to be volatile as a result
of one or more of the
following factors, most of which are beyond our control:

| |  | variations in our   quarterly operating results;                                                                                                 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                  
| |  | changes in securities   analysts estimates of our financial
performance;                                                                        
| |   |                                                                                                                                                  
| |  | loss of a major customer   or failure to complete significant
transactions;                                                                      
| |   |                                                                                                                                                  
| |  | announcements by us or our   competitors of significant contracts,
acquisitions, strategic
partnerships,   joint ventures or capital commitments;
| |   |                                                                                                                                                  
| |  | changes in market   valuations of similar companies;                                                                                             
| |   |                                                                                                                                                  
| |  | the discussion of our   company or stock price in online investor
communities such as chat
rooms;                                                
| |   |                                                                                                                                                  
| |  | additions or departures of   key personnel; and                                                                                                  
| |   |                                                                                                                                                  
| |  | fluctuations in stock   market price and volume.                                                                                                 

In addition,
the market prices
of the securities of Internet-related companies have been volatile, and have experienced fluctuations that often
have been unrelated
to or disproportionate to the operating performance of these companies. These broad market fluctuations could
adversely affect the
market price of our stock. In the past, securities class action lawsuits alleging fraud have often been filed
against a company
following periods of volatility in the market price of its securities. In the future, we may be the target of
similar lawsuits. If a
lawsuit were to be filed against us, it could result in substantial costs and the diversion of our
managements attention and
resources, which could seriously harm our financial results or result in a decline in the market price of our
common stock. Declines
in the market price of our common stock could also harm employee morale and retention, our
ability to attract qualified employees and our access to capital.

We have anti-takeover protections, which may discourage or prevent a
takeover of us, even if
an acquisition would be beneficial to our stockholders.

Certain
provisions of our
certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for
another company to
acquire us, even if a takeover would benefit our stockholders. The provisions in our corporate
documents:

| |  | authorize the issuance of   blank check preferred stock that
could be issued by our
board of directors   to increase the number of outstanding shares, making a takeover more   difficult and
expensive;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                           
| |  | establish a staggered   board of directors, so that it would take three
successive annual
meetings to   replace all directors;                                                                            
| |   |                                                                                                                                                                                                           
| |  | prohibit cumulative voting   in the election of directors, which would
otherwise allow less
than a   majority of stockholders to elect director candidates;                                               
| |   |                                                                                                                                                                                                           
| |  | prohibit stockholders from   calling special meetings of
stockholders;                                                                                                                                    
| |   |                                                                                                                                                                                                           
| |  | prohibit stockholder   action by written consent, thereby requiring all
stockholder actions to
be   taken at a meeting of our stockholders; and                                                           
| |   |                                                                                                                                                                                                           
| |  | establish advance notice requirements for
     nominations for election to the board of directors or for proposing matters
     that can be acted upon by stockholders at stockholder meetings.           

21



In addition, Section 203 of the Delaware General Corporation Law and the
terms of our stock
option plans may discourage, delay or prevent a change in our control, which may depress the market price of our
common
stock.

Concentration of ownership among our existing executive officers and
directors may make it
more difficult for other stockholders to influence significant corporate decisions and may hinder a change of
control.

As of March 18,
2005, our present directors and executive officers and their affiliates
beneficially owned approximately 37% of our outstanding common stock. In
particular, John S. Katzman, our Chief Executive Officer, beneficially owned
approximately 33% of our outstanding common stock.  This concentration of
ownership may make it more difficult for other stockholders to influence matters
requiring stockholder approval and may have the effect of delaying, preventing
or deterring a change in control of our company, thereby possibly depriving our
stockholders of an opportunity to receive a premium for their common stock as
part of any sale or acquisition.

The issuance of our shares of common stock upon conversion or
redemption of outstanding
preferred stock may cause significant dilution to our stockholders and may have an adverse impact on the market
price of our common
stock.

On June 4,
2004, we completed a
private placement to Fletcher International, Ltd. of 10,000 shares of our Series B-1 Cumulative Convertible
Preferred Stock (the
Series B-1 Preferred Stock) for $10 million in the aggregate.  Dividends on the Series B-1
Preferred Stock are
payable quarterly, at our option in cash or registered shares of our common stock, at a minimum rate of 5% per
annum.  The
Series B-1 Preferred Stock is convertible into 1,007,303 shares of our common stock at a conversion price of
$9.9275 per share,
subject to adjustment upon certain events.  Fletcher may also redeem its shares of the Series B-1 Preferred
Stock, in lieu of
converting such shares, at any time on or after November 28, 2005, for shares of common stock, unless we satisfy
the conditions for
cash redemption, for an amount of shares of our common stock based upon a redemption rate equal to 102.5% of
the then prevailing price of our common stock plus the value of any accrued and unpaid dividends.  Fletcher
also has the right,
for a period of twenty-four months, beginning on July 1, 2005, to purchase up to $20 million in newly created
series of preferred
stock having, except as set forth in our agreement with Fletcher, similar terms, conditions, rights, preferences
and privileges as
the Series B-1 Preferred Stock (the Additional Preferred Stock).  The Additional Preferred Stock
will be convertible
into shares of our common stock at a conversion price equal to 108.3% of the then prevailing price of our common
stock, subject to a
minimum of $9.9275 per share

The issuance of
our shares of
common stock to Fletcher upon conversion or redemption of the Series B-1 Preferred Stock and the Additional
Preferred Stock and their
resale by Fletcher will increase our publicly traded shares.  These resales could also depress the market
price of our common
stock.  We will not control whether or when Fletcher elects to convert its securities for common
stock.  The perceived risk
of dilution may cause our stockholders to sell their shares, which would contribute to a downward movement in the
stock price of our
common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price
could encourage
investors to engage in short sales of our common stock.  By increasing the number of shares offered for
sale, material amounts
of short selling could further contribute to progressive price declines in our common
stock.

In connection with the private placement of Series B-1 Preferred
Stock, we may be
responsible for having the resale of shares issued or issuable to Fletcher registered with the SEC and may be
subject to penalties if
the shares are not registered with the SEC.

Pursuant to our
agreement with
Fletcher, we are obligated to file a registration statement with the SEC at any time that the number of shares of
common stock issued
or issuable under the agreement exceeds 80% of the number of shares then registered.  If we fail to file any
such required
registration statement and have it declared effective by the SEC, we must (i) issue to Fletcher a number of
additional shares to
reflect the number of shares it would have acquired if its purchase price was based on the actual conversion
price reduced by five
percent for each month in which we fail to satisfy our obligations and (ii) adjust the conversion price for the
additional investment
rights to such lower price.  In addition, beginning on July 1, 2005, such failure will result in an
extension of the investment
term for each day we fail to satisfy our registration obligations.

22



Executive Officers

The following
table sets forth
information with respect to our executive officers as of March 18, 2005.

|Name                     |  | Age |  | Position                                                                
|------------------------ |  | --- |  | ------------------------------------------------------------------------
|                         |  |     |  |                                                                         
|John S.   Katzman        |  | 45  |  | Chairman and   Chief Executive Officer                                  
|Mark Chernis             |  | 38  |  | President,   Chief Operating Officer and Secretary                      
|Stephen   Melvin         |  | 53  |  | Chief   Financial Officer and Treasurer                                 
|Timothy S.   Conroy      |  | 46  |  | Executive   Vice President, General Manager K-12 Services
Division      
|Margot
Lebenberg         |  | 37  |  | Executive Vice   President, General Counsel                             
|Stephen   Quattrociocchi |  | 42  |  | Executive   Vice President, Test Preparation Services Division          
|Young J.   Shin          |  | 38  |  | Executive   Vice President, General Manager Admissions Services
Division

John S.
Katzman,Chairman
and Chief Executive Officer, founded our company in 1981. Mr. Katzman has served as our Chief Executive
Officer and director
since our formation. Mr. Katzman served as our President from 1981 until August 2000. Mr. Katzman is
the brother of Richard
Katzman, one of the other members of the board of directors. Mr. Katzman received a BA from Princeton
University.

Mark
Chernis, President,
Chief Operating Officer and Secretary, joined us in 1984. Mr. Chernis has served as Chief Operating Officer
and Secretary since
1995 and became President in August 2000. From 1989 to 1995, Mr. Chernis served as our Vice President,
Operations. From 1984 to
1989, Mr. Chernis served as a systems analyst. Mr. Chernis received a BA from Vassar College.

Stephen
Melvin,Chief
Financial Officer and Treasurer, joined us in 1998. From 1996 to 1998, he served as Vice President of Solow
Realty Company where he
was responsible for overseeing the property management business. From 1987 to 1996, Mr. Melvin was Chief
Financial Officer of
Western Heritable Investment Corporation, a real estate investment and management company. From 1983 to 1987,
Mr. Melvin served
as Controller of Private Satellite Network, Inc. From 1978 to 1983, Mr. Melvin was Assistant Corporate
Controller of Paramount
Pictures Corp. From 1974 to 1978, Mr. Melvin was a Certified Public Accountant at Deloitte & Touche LLP.
Mr. Melvin
received a BA from the University of Virginia and an MS from New York University.

Timothy S.
Conroy, Executive Vice President, General Manager K-12 Services Division,
joined us in June 2004.  From 2000 to 2003, Mr. Conroy served as the EVP
and General Manager of Compass Learning, an education technology company. 
From 1989 to 2000, Mr. Conroy served in various senior management positions with
Simon and Schuster, an education publisher which was sold by Viacom to
Pearsons Plc in 1998.

Margot
Lebenberg, Executive
Vice President, General Counsel, joined us in June 2004.  From 2003 to 2004, Ms. Lebenberg served as the
Executive Vice
President and General Counsel for SoundView Technology Group, Inc., a research driven securities firm, through
its sale to Charles
Schwab.  From 2001 to 2003, she served as Vice President and Assistant General Counsel of Cantor Fitzgerald,
a leading financial
services provider, and its subsidiary eSpeed, Inc., a leader in developing and deploying electronic
trading.  From 1996 to 2000,
she served as Senior Vice President, General Counsel and Secretary of SOURCECORP, Incorporated (formerly known as
F.Y.I.
Incorporated), a business process outsourcing and consulting firm, in Dallas, Texas.  Ms. Lebenberg began
her career at Morgan,
Lewis & Bockius LLP in New York and founded and served as President of Living Mountain Capital LLC, a
business advisory consulting firm specializing in corporate development, strategic alliances and
restructurings.  Ms. Lebenberg
received her JD from Fordham University School of Law and her BA from SUNY Binghamton.

Stephen
Quattrociocchi,Executive Vice President, Test Preparation Services Division, joined us in 1988. Since 1997, he has served as
Executive Vice
President of our Test Preparation Services division. From 1991 to 1997, Mr. Quattrociocchi served as Vice
President of Course
Operations. Mr. Quattrociocchi received a BS from the Massachusetts Institute of Technology and an MBA from
the Wharton
School.

Young
     J. Shin, Executive VicePresident, General Manager Admissions Services
     Division, joined us in February 2003. From October 2002 to February 2003,
     Mr. Shin served as the Chief Executive Officer of eduAdvisors, LLC, an
     education marketing company. In 1995, Mr. Shin co-founded Embark.com,
     Inc., a provider of online college and graduate school information and
     application services, the assets of which we acquired in October 2001.
     Mr. Shin served as Embarks Chairman of the Board from 1995 until
     February 2003, as Embarks Chief Technology Officer from 2000 to 2001
     and its President and Chief Executive Officer from 1995 to 2000. From 1991 to 1994, Mr. Shin was a
Technical Specialist and
     Consulting Practice Manager at Seer Technologies, Inc. a computer aided
     software company. Mr. Shin received a BS from Massachusetts Institute
     of Technology and a BS from Massachusetts Institute of Technologys
     Sloan School of Management.

23



Item 2.  Properties

Our
headquarters are located in New
York, New York, where we lease approximately 30,000 square feet of office space under a lease that expires on
August 31, 2010. As of
December 31, 2004, we also leased an aggregate of approximately 224,000 square feet of office space for
additional operations in New
York, New York and our 58 regional offices or classroom locations located in Alabama, Arizona, California,
Colorado, Georgia,
Illinois, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, New Jersey, New York, North Carolina,
Ohio, Oklahoma,
Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington, Washington D.C. and Canada.

Item 3.  Legal
Proceedings

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

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

No matters were
submitted to a vote
of security holders during the fourth quarter of the fiscal year covered by this Annual Report on Form
10-K.

PART II

Item 5.  Market for Registrants Common Stock and Related
Stockholder
Matters

Price Range
of Common
Stock

Our common
stock trades on the
Nasdaq National Market under the symbol REVU. The following table sets forth, for the periods
indicated, the high and low
sales prices per share of our common stock as reported on the Nasdaq National Market.

|Fiscal Year
2003: |  | High |       | Low |  
|----------------- |  | ---- | ----- | --- | -
|                  |  |      |       |     |  
|First Quarter     |  | $    | 5.61  |     | $
|Second Quarter    |  |      | 6.70  |     |  
|Third Quarter     |  |      | 7.90  |     |  
|Fourth Quarter    |  |      | 10.65 |     |  

|Fiscal   Year 2004: |  |   | High  |  |   | Low  | 
|------------------- |  | - | ----- |  | - | ---- | 
|                    |  |   |       |  |   |      | 
|First Quarter       |  | $ | 10.56 |  | $ | 7.57 | 
|Second Quarter      |  |   | 9.21  |  |   | 6.81 | 
|Third Quarter       |  |   | 7.96  |  |   | 6.52 | 
|Fourth Quarter      |  |   | 8.26  |  |   | 5.41 | 

As of March 18,
2005, the last reported sale price of our common stock on the Nasdaq National
Market was $5.65 per share. As of March 18, 2005, there were 80 stockholders of
record of our common stock. This does not include the number of persons whose
stock is in nominee or street name accounts through
brokers.

24



Dividend
Policy

We have never
declared or paid any
cash dividends on our common stock or other securities and we do not intend to pay any cash dividends with
respect to our common
stock in the foreseeable future. We currently intend to retain any earnings for use in the operation of our
business and to fund
future growth. Any future determination to pay cash dividends will be at the discretion of our board of directors
and will depend
upon our financial condition, operating results, capital requirements and such other factors as the board of
directors deems
relevant.

Securities
Authorized for
Issuance Under Equity Compensation Plans

As of
December 31, 2004, the
following securities were authorized for issuance under our 2000 Stock Incentive Plan:

|Plan category        |  | Number of    securities to be   issued upon   exercise of
outstanding   options, warrants   and rights |           | Weighted-average      exercise price of   outstanding
options,   warrants and
rights |  | Number of   securities   remaining available   for future
issuance   under
equity   compensation plans | 
|-------------------- |  | ------------------------------------------------------------------------------------------------------ | --------- | ------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------ | 
|                     |  |                                                                                                        |           |                                                                                      |  |                                                                                                        | 
|Stock Incentive Plan |  |                                                                                                        | 3,358,503 |                                                                                      |  | $ 7.13                                                                                                 | 

Item 6.  Selected Consolidated
Financial Data

The
consolidated statement of
operations data for each of the years ended December 31, 2004, 2003 and 2002, and the consolidated balance sheet
data as of December
31, 2004 and 2003 has been derived from our audited consolidated financial statements appearing elsewhere in this
Annual Report on
Form 10-K. The consolidated statement of operations data for the years ended December 31, 2001 and 2000 and the
consolidated balance
sheet data as of December 31, 2002, 2001 and 2000 has been derived from our audited consolidated financial
statements which are not
included in this Annual Report on Form 10-K. The information shown below is qualified by reference to and should
be read together
with our consolidated financial statements and their notes and Managements Discussion and Analysis of
Financial Condition
and Results of Operations included elsewhere in this Annual Report on Form 10-K. We have
calculated the weighted average shares used in computing net income (loss) per share as described in Note 1 to
our consolidated
financial statements.

25



|                                                                      |  | Years   Ended December 31,              |        
|--------------------------------------------------------------------- |  | --------------------------------------- | -------
|                                                                      |  |                                         |        
|                                                                      |  | 2004                                    |        
|                                                                      |  |                                         |        
|                                                                      |  | (in   thousands, except per share data) |        
|Statement   of Operations Data:                                       |  |                                         |        
|Revenue                                                               |  |                                         |        
|Test   Preparation
Services                                           |  | $                                       | 74,744 
|K-12   Services                                                       |  |                                         | 27,957 
|Admissions
Services                                                   |  |                                         | 11,084 
|                                                                      |  |                                         |        
|Total   Revenue                                                       |  |                                         | 113,785
|                                                                      |  |                                         |        
|Cost of
revenue                                                       |  |                                         |        
|Test   Preparation Services                                           |  |                                         | 23,584 
|K-12   Services                                                       |  |                                         | 13,684 
|Admissions   Services                                                 |  |                                         | 3,385  
|                                                                      |  |                                         |        
|Total   cost of revenue                                               |  |                                         | 40,653 
|Gross profit                                                          |  |                                         | 73,132 
|                                                                      |  |                                         |        
|Operating
expenses                                                    |  |                                         |        
|Selling,   general and administrative                                 |  |                                         | 78,381 
|Impairment   of
goodwill                                              |  |                                         | 8,199  
|Loss   on early extinguishment of debt                                |  |                                         |       
|Impairment   of
investment                                            |  |                                         |       
|                                                                      |  |                                         |        
|Total   operating
expenses                                            |  |                                         | 86,580 
|                                                                      |  |                                         |        
|Income (loss) from
operations                                         |  |                                         | (13,448
|Gain on distribution/sale   of securities and other assets            |  |                                         |       
|Net Income
(loss)                                                     |  |                                         | (30,413
|                                                                      |  |                                         |        
|Accreted dividends on
Series A redeemable
preferred stock             |  |                                         |       
|Accreted dividends on   Class B non-voting common stock               |  |                                         |       
|Dividends and accretion on
Series B-1   preferred
stock               |  |                                         | (428   
|                                                                      |  |                                         |        
|Net income (loss)
attributed to common
stockholders                   |  | $                                       | (30,841
|                                                                      |  |                                         |        
|Basic income (loss) per
share                                         |  | $                                       | (1.12  
|                                                                      |  |                                         |        
|Diluted income (loss) per
share                                       |  | $                                       | (1.12  
|                                                                      |  |                                         |        
|Weighted average shares
used in computing net
income (loss) per share |  |                                         |        
|Basic                                                                 |  |                                         | 27,468 
|                                                                      |  |                                         |        
|Diluted                                                               |  |                                         | 27,468 
|                                                                      |  |                                         |        

|                                                  |  | As of   December 31, |        
|------------------------------------------------- |  | -------------------- | -------
|                                                  |  |                      |        
|                                                  |  | 2004                 |        
|                                                  |  |                      |        
|                                                  |  | (in   thousands)     |        
|Balance   Sheet Data:                             |  |                      |        
|Cash and cash equivalents                         |  | $                    | 19,197 
|Total assets                                      |  |                      | 107,641
|Long-term debt, net of   current portion          |  |                      | 4,213  
|Series B-1 preferred
stock                        |  |                      | 9,736  
|Series A redeemable   convertible preferred stock |  |                      |       
|Class B redeemable
non-voting common
stock        |  |                      |       
|Stockholders equity   (deficit)                  |  |                      | 55,197 

|                                                                                                                  
|------------------------------------------------------------------------------------------------------------------
|Period-to-period   comparability of the above Selected Consolidated
Financial Data is
affected   by the following:

|1. In 2004,   we incurred an $8.2 million impairment charge for the
write-down of goodwill
related to Embark, and recorded a reserve against our deferred tax asset, in   the form of a valuation allowance,
in the amount of
$22.1 million.                                                                                     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. In 2004,   we sold our Series B-1 Preferred Stock for gross proceeds of
$10.0
million.                                                                                                                                                                                                                                        
|3. In 2003,   we acquired the Princeton Review of North
Carolina.                                                                                                                                                                                                                                                                
|4. In 2002,   we acquired The Princeton Review of St.
Louis.                                                                                                                                                                                                                                                                     
|5. In 2001,   we acquired Princeton Review of Boston, Princeton Review of
New Jersey,
Princeton Review Peninsula, T.S.T.S., and Embark.                                                                                                                                                                                          
|6. In 2001,   we completed our initial public offering, resulting in net
proceeds of $51.8
million.                                                                                                                                                                                                                              
|7. In 2000,   we incurred $10.6 million of expense associated with the
termination of our   PSU
and SAR plans and the related distribution of stock to our employees, and   $3.1 million of expense related to
the early
extinguishment of debt,   resulting in the write off of the unamortized cost of the associated
warrants.
|8. In 2000,   we recorded a gain of $7.6 million relating to the
distribution of stock
of   Student Advantage, Inc. to our stockholders and employees in connection with   our corporate restructuring
and sale of preferred
stock in March 2000.                                                                                
|9. In 2000,   we sold our Series A Preferred Stock for gross proceeds of
$27.0
million.                                                                                                                                                                                                                                          

26



Item 7.  Managements Discussion and Analysis of
Financial Condition and
Results of Operations

The following
discussion and
analysis of our financial condition and results of operations should be read in conjunction with our consolidated
financial
statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion and
analysis contains
forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from
those anticipated in
these forward-looking statements as a result of many factors, including, but not limited to, those described
under Risk
Factors and elsewhere in this Annual Report on Form 10-K.

Overview

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

Test
Preparation
Services

Our Test
Preparation Services
division provides classroom-based and Princeton Review Online test preparation courses, tutoring and admissions
counseling services,
and SES programs, and receives royalties from our independent franchisees who provide classroom-based courses
under the Princeton
Review brand.  This division has historically accounted for the majority of our overall revenue and
accounted for approximately
66% of our overall revenue in 2004.

After a
strong start, the second
half of 2004 proved challenging for this division, which grew a disappointing 4% in 2004. During 2004, the
fastest growing areas for
this division were its tutoring and online courses, in part because students were enrolling to prepare for the
new version of the SAT
test, which went into effect in early 2005, and SES courses, sales of which have increased in response to the
increased emphasis on
state assessments.  However, the growth in online and tutoring revenue was offset by lower enrollments in
our LSAT and GMAT
courses.

Our LSAT course
was revamped in
2004 to target the more competitive student, with more than double the instruction time and more support
materials.  Despite
very positive feedback from students, as well as increased score improvements, enrollment for this course was
weak during the third
quarter of 2004.  This was due to the shortened sales season necessitated by the earlier start of a longer
course.  This
effect should have been better accounted for in planning and marketing efforts.  Effects of this continued
to be felt in courses
for the October and December LSAT.  However, February enrollment improved and June enrollment is showing
significant
improvement.  GMAT enrollment was down in 2004 due to a general drop-off in business school
applications.  We expect
weakness in GMAT enrollments to continue until there is a recovery in business school applications.

Additionally,
during the third and
fourth quarters of 2004, SAT enrollments were flat due to reduced test-take volume in the December and January
SAT administrations
after increased enrollment earlier in the third quarter.  Students clearly were waiting to take the new SAT
across the board and
Spring 2005 enrollment is benefiting.

In addition,
margins in this
division declined from 71% in 2003 to 68.4% in 2004 primarily as a result of the weakness in enrollment. 
Class size and yield
management are adversely impacted when enrollment falls short of plan.

K-12
Services

Our K-12
Services division provides
a number of services to K-12 schools and school districts, including assessment, professional development and
face-to-face
instruction.  As a result of the increased emphasis on accountability and the measurement of student
performance in public
schools in this country and the centralization of school districts purchasing of assessment, professional
development and
supplemental educational products and services, this division has seen the interest by the public school market
for its products grow
and the average dollar volume of its contracts double over the last year.  Revenues in this division grew by
29.9% in 2004,
compared to 2003.  This divisions revenue represented 24.5% of our overall revenue in 2004.

27



Alongside the
impressive revenue
growth in our K-12 Services division, we have encountered several challenges.  As this division has grown
over the last several
years, we have begun to enter into more and more large, multiple element contracts with schools, school
districts, municipal
agencies, and other governmental bodies, requiring us to deliver a combination of products and services,
including online and
print-based assessment, professional development, and face-to-face instruction.  The approval processes of
some of our customers
in this area, which are required for formal contract execution, are lengthy and cumbersome and, in many cases,
are not completed
prior to the time we begin performance.  This means that we, at times, incur substantial costs prior to the
formal execution of
these agreements by the customer. While to date we have found that, following the award of the contract
to us, final approval required for the customer to sign the agreement is usually a formality, our revenue
recognition policies
preclude us from recognizing revenue from these contracts until there is a final agreement binding on the
customer.  Costs,
however, are recorded as incurred, whether or not the contract is signed.  In the third quarter of 2004,
this situation
prevented us from recognizing approximately $3.8 million in revenue from two significant contract renewals,
which, despite our best
efforts, were not formally executed until the fourth quarter. These contracts therefore present several types of
risks and
uncertainties, including reducing our ability to effectively predict our operating performance, increasing
variability in our cash
balances and increasing credit risk.  These risks and uncertainties are discussed in detail under the
heading Risk
Factors in this Form 10-K.

While we see
continued strong
revenue growth in this division, operating results are difficult to predict accurately, due to the foregoing
factors and the fact
that each contract entered into by this division has its own, unique product mix.  Because our various
products in this division
have different gross margins (professional development and live course instruction products typically have lower
gross margins than
fees for assessment products and printed materials), contracts with varying product mix could significantly alter
this
divisions operating results from period to period.  Primarily due to changes in product mix, gross
margins in this
division declined from 61% in 2003 to 51% in 2004.

Admissions
Services

Our Admissions
Services division
currently derives most of its revenue from the sale of web-based admissions and application management products
and marketing
services to educational institutions.  In 2004, this division represented 10% of our overall revenue.

In 2004, the
divisions
performance was again below managements expectations, primarily due to a lack of increase in demand for
subscription-based
admissions and application management services.  For the second consecutive year, revenue in this division
did not grow over the
prior year.

We are
currently in the process of
refocusing this divisions overall direction, with the goal of changing the way we charge post-secondary
academic institutions
for our marketing services.  We are moving from a model of pricing for various bundles of marketing
services, to a
model where payment is based upon actual leads we generate.  We believe this model will allow us to better
capitalize on the
popularity of our web site with college and graduate school-bound students.  To support this change in our
marketing services
model, we are re-launching our web site with a view to optimizing our ability to match the right prospects with
the post-secondary
institutions looking to attract them.  We believe that we will need to further increase revenues before this
division will show
sustainable operating profits, and it is managements hope that this new direction will
provide the needed momentum to do so.

As a result
of this
divisions disappointing results in 2004, and the uncertainty of significant increases in future cash flows
from the new
marketing services described above, as of December 31, 2004, we wrote down approximately $8.2 million of goodwill
that we recorded in
connection with our acquisition of Embark.

28



Revenue

Test
Preparation Services.
The Test Preparation Services division derives revenue primarily from:

| |  | classroom-based   and online test preparation courses and tutoring
services, which consists
of   tuition and fees paid to our company-operated sites. We recognize revenue   from tuition paid for our
courses over the life of
the course, which is   usually from five to 10 weeks depending on the course type. Tutoring revenue is   based on
an hourly fee and
is recognized as the services are delivered.   Course and tutoring revenue represented approximately 57% of our
total   revenue in
2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | SES   programs, which consist of after school courses taught primarily in
the K-12
grades.  We are typically paid for   these courses on a per-student basis, and recognize the revenue over
the life   of the
courses.  SES revenue   represented approximately 2% of our total revenue in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | royalty fees   paid to us by our independent franchisees. These royalties
are 8% of all cash
receipts collected by our franchisees for all test preparation and tutoring   services performed by them under
the Princeton Review
name. Virtually all of   our domestic franchise contracts expire in 2005 and 2006.  All provide for renewal
of the franchise
rights at the franchisees option upon satisfaction of certain conditions,   including the franchisees
agreement to
execute our current form of franchise   agreement, which contains the same royalty rate as our existing
agreements.  Royalties
received from franchisees also   include a per student fee paid by our franchisees for use by their students   of
our online
supplemental course tools. Starting in July 2001, we began   consolidating in our financial results the
advertising fund contributed
to by   us and our franchisees, and, therefore, royalties now also include a fee of   2% of the
franchisees cash receipts for contribution to the advertising   fund. For a description of the advertising
fund, see Note 8 to
our   consolidated financial statements. We recognize revenue from franchise   royalties on a monthly basis. This
revenue represented
approximately 4% of   our total revenue in 2004.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | sales of   course and marketing materials and other products to our
independent   franchisees.
This revenue is recognized upon the transfer of title to our   customers, which occurs on the shipment dates of
these materials.
This   revenue represented approximately 1% of our total revenue in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | authoring   books published by Random House and providing content for
software. This   revenue
consists of performance-based fees, including royalties and marketing   fees from sales of books and software. We
recognize these
fees based on sales   of the books and software when reported to us by the publishers. Additionally,   we earn
delivery-based fees
from Random House in the form of advances and   copy editing fees for books written by us. We recognize these
fees as the   products
are delivered. This revenue represented approximately 2% of our   total revenue in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

K-12
Services. The K-12 Services division derives revenue from the services we provide
to primary and secondary schools and school districts and from our work with McGraw-Hill.

Revenue from
the services we
provide to schools and school districts is derived from:

| |  | fees for   training and professional development for schoolteachers and
administrators,   which
we recognize in the period that the services are provided;                   
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                              
| |  | fees for   classroom instruction, principally during after school K-12
programs, which   we
recognize over the period the courses are delivered;                             
| |   |                                                                                                                                                                              
| |  | fees for   paper-based and online benchmark testing, which we recognize
over the period   the
services are delivered;                                                        
| |   |                                                                                                                                                                              
| |  | sales of   printed materials, which we recognize when the materials are
delivered;
and                                                                                       
| |   |                                                                                                                                                                              
| |  | annual   subscription fees for the Homeroom subscription service,
recognized by us   ratably
over the life of the subscription period, which is typically one or   two years.

The revenue we
earned from the
above services we provided to schools and school districts represented approximately 22% of our total revenue in
2004.

29



Revenue from
authoring books
published by Random House

This revenue
consists of
performance-based fees, including royalties and marketing fees from sales of books.  We recognize these fees
based on sales of
the books when reported to us by the publisher. Additionally, we earn delivery-based fees from Random House in
the form of advances
and copy editing fees for books written by us. We recognize these fees as the products are delivered. This
revenue represented less
than 1% of our total revenue in 2004.

Revenue from
McGraw-Hill

Under an
agreement with
McGraw-Hill that expired in September, 2003, our K-12 Services division developed content and provided editorial
services to
McGraw-Hill educational publishing units. We authored workbooks and textbook questions for McGraw-Hill designed
to correspond to the
material covered by various state-mandated assessments. We also provided editorial review of McGraw-Hill
educational materials to
ensure that sample test questions and other testing information were accurate and aligned with state or national
standards. 
Revenue from our agreement with McGraw-Hill was derived from the following sources, of which only the royalties
continue beyond the
termination of this agreement:

| |  | royalties   for Princeton Review branded content that we provided for their
textbooks,   which
we recognize based on sales reported by McGraw-Hill;        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                            
| |  | an annual   fee for the use of the Princeton Review trademark on materials
published by
McGraw-Hill, which we recognized pro rata over the entire year; and
| |   |                                                                                                                                                            
| |  | development   fees for the production of workbook manuscripts, which we
recognized as the
products were delivered.                                         

Revenue from
our contract with
McGraw-Hill represented approximately 1% of our total revenue in 2004.

Admissions Services. The Admissions Services division derives
revenue from:

| |  | web-based   subscription, application and marketing fees. These fees
consist of annual
subscription fees and application processing fees paid to us by academic   institutions for our online
application and management
products, annual   subscription fees paid to us by secondary schools for our ECOS product, and   annual marketing
fees paid to us by
academic institutions to promote their   programs on our web site and in our publications. We recognize the
subscription and
marketing fees over the contract period, which is typically   one or two years. We recognize the application
processing fees in the
month   that the relevant applications are submitted. This revenue represented   approximately 8% of our total
revenue in
2004.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | marketing   fees paid to us by academic institutions based upon the number
of student
inquiries we generate.  This revenue   is recognized as leads are generated based on the price per lead in
the   applicable
contracts, and represented 1% of our total revenue in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | authoring   books published by Random House.  This revenue consists
of   performance-based
fees, including royalties and marketing fees from sales of   books.  We recognize these fees based on sales
of the books when
reported to us by the publisher. Additionally, we earn delivery-based fees   from Random House in the form of
advances and copy
editing fees for books   written by us. We recognize these fees as the products are delivered. This   revenue
represented
approximately 1% of our total revenue in 2004.                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | sales of   advertising and sponsorships to businesses and schools wishing
to promote   their
products, services and programs on our web site. Advertising and   sponsorship revenue is recognized each month
based on contractual
terms. This   revenue represented approximately 1% of our total revenue in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                            

Cost of Revenue

Test
Preparation Services.
Cost of revenue consists of course expenses of our company-owned operations, cost of course materials sold and
the costs to author,
develop, edit and produce content for books and software. Course expenses consist of costs

30



incurred to deliver test preparation courses, SES programs, tutoring and
admissions counseling
services, including rent of classroom space, teacher salaries, credit card fees, and costs of course materials
purchased from third
party vendors. Costs of materials sold are comprised of the costs to manufacture and distribute the course and
marketing materials
and other products. The largest components of cost of revenue in our Test Preparation Services division are rent
of classroom space
and teacher salaries, which together accounted for approximately 68% of the cost of revenue of this division in
2004. Also included
in cost of revenue is a royalty we pay to our franchisees in exchange for allowing us to offer our Princeton
Review Online courses
within their territories. This royalty is calculated based on a fee per student which varies depending on the
course. These
fees are for Princeton Review Online courses provided to students residing within our
franchisees territories, net of certain administrative expenses.

K-12
Services. Cost of
revenue consists of costs to provide training, professional development and after school programs, author and
produce workbooks,
develop content for textbooks and our Homeroom subscription service and author, develop and edit our books. To
the extent these costs
relate to revenue which is not recognized until products are delivered, the corresponding costs are also deferred
until delivery of
the products.  Additionally, cost of revenue includes amortization expense related to our capitalized K-12
content, which are the direct costs we incur to write questions
and lessons that are used across our various product categories in this division.  These costs are
capitalized and
amortized over a seven-year period, on a straight-line basis (see Note 1 to our Consolidated Financial
Statements).

Admissions Services. Cost
of revenue includes the costs to author, develop and edit our books and the admissions services section of our
web site. To the
extent these costs relate to revenue which is not recognized until products are delivered, the corresponding
costs are also deferred
until delivery of the products. Cost of revenue also includes the costs to build and maintain our web-based
products and the
commissions related to the sale of those products, which are recognized over the contract period, and credit card
fees incurred in
connection with processing student applications, which are recognized in the month the applications are
processed.

Selling, General and Administrative Expenses

Selling,
general and administrative
expenses include payroll and payroll related expenses, advertising expenses and office facility expenses,
including rent, utilities,
telephone and miscellaneous expenditures, which collectively represented approximately 61% of our total selling,
general and
administrative expenses in 2004. Selling, general and administrative expenses also include costs associated with
national advertising
campaigns that benefit our company-owned locations as well as our independent franchisees.  Finally, the
remaining major
components of selling, general and administrative expenses include professional fees, travel and entertainment
and depreciation and
amortization.

Income Taxes

As a result
of the establishment of a valuation allowance for net deferred tax assets we recorded an income tax expense of
$16.7 million for
2004.  Income tax expense was $3.2 million for 2003 and  income tax benefit
was $736,000 for 2002. Our effective income tax rate was 122% for 2004, 42% for
2003 and 40% for 2002.

We currently
have significant deferred tax
assets related to net operating loss carryforwards, tax credit carryforwards and
deductible temporary differences that will reduce taxable income in future
years. Our loss in 2004 and the emphasis placed on cumulative losses under generally accepted accounting
principles represents sufficient
evidence under SFAS No. 109, Accounting for Income Taxes, for
us to determine that it was appropriate to establish a full valuation allowance
against net deferred tax assets. Accordingly, we have a full valuation allowance in 2004. Although management
expects these assets will ultimately be fully utilized, future performance cannot be assured. The Company will
continue to evaluate the need for the valuation allowance in future periods.

Results of Operations

Comparison of Years Ended December 31, 2004 and 2003

Overall,
results for 2004 were
below expectations in all three divisions.  After returning to profitability in 2003, we incurred a net loss
of $30.4 million in
2004.  In the Test Preparation Services division, weakness in enrollments in LSAT and GMAT courses offset
growth in online
courses, SES programs and tutoring, resulting in annual revenue growth of only 4%.  Despite revenue growth
for the year of 30%,
the K-12 Services division experienced a longer sales cycle in closing on contracts.  The Admissions
Services division, despite
rolling out a new counseling product, failed to grow revenue for the second year in a row, primarily due to weak
demand for
subscription-based services from its post-secondary institution customers.  Gross margins for the company as
a whole slipped
from 69.4% in 2003 to 64.3% in 2004, due primarily to higher costs combined with lower enrollment in test
preparation services and a less profitable product mix in K-12 services.

31



On the expense
side, professional fees, including those relating to Sarbanes Oxley compliance,
were significantly higher than expected, and a bad debt expense relating to the
write-off of aged accounts receivable in the Admissions Services and K-12
Services divisions further hurt our bottom line.  Additionally, we recorded
a valuation allowance relating to our net deferred tax assets as of December 31,
2004, of approximately $22.1 million, resulting in a tax charge of $16.7 million
in 2004, and incurred an $8.2 million impairment charge relating to the write-down
of goodwill.

Revenue

Our total
revenue increased from
$104.5 million in 2003 to $113.8 million in 2004, representing a 9% increase.

Test
Preparation Services revenue
increased from $71.7 million in 2003 to $74.7 million in 2004, representing a 4% increase, comprised primarily of
an increase of
approximately $2.9 million in revenue from our company-owned operations. The increased revenue from company-owned
operations resulted
from an increase of approximately $488,000 in revenue attributable to the operations acquired from our former
franchisee, Princeton
Review of North Carolina, Inc., and an increase of approximately $2.5 million in course and tutoring revenue at
our other
locations.  This $2.5 million increase is attributable to an increase in our tutoring, online course and SES
revenue totaling
$4.2 million, which was partially offset by a decrease in retail classroom revenue of approximately $2.3 million,
primarily due to a
drop in LSAT and GMAT course fees.

K-12
Services revenue increased
from $21.5 million in 2003 to $28.0 million in 2004, representing a 30% increase.  This increase resulted
primarily from an
increase of approximately $6.8 million in revenue from schools for assessment tests, printed materials,
professional development and
Homeroom subscriptions, due to additional contracts signed in 2004, as well as increased revenue from contracts
signed in 2003 which
were in effect for the full year in 2004.  The increase in revenue from schools was partially offset by a
decrease in fees from
McGraw-Hill.

Admissions
Services revenue
decreased from $11.2 million in 2003 to $11.1 million in 2004, representing a 1% decrease. The approximate
$750,000 in sales of college counseling services to
high schools, a new product offering in 2004 by this division, was offset by a decrease in revenues from
post-secondary institutions.

Cost of Revenue

Our total cost
of revenue increased
from $32.0 million in 2003 to $40.7 million in 2004, representing a 27% increase.

Test
Preparation Services cost of
revenue increased from $20.8 million in 2003 to $23.6 million in 2004, representing a 13% increase, primarily as
a result of
increasing the number of tutoring sessions and SES programs delivered. Cost of revenue as a percentage of revenue
increased due to
reduction in the average class size due to reduced enrollment, primarily in our LSAT courses, as well as an
increase in the relative
cost of teachers and course materials.

K-12 Services
cost of revenue
increased from $8.3 million in 2003 to $13.7 million in 2004, representing a 65% increase.  This increase is
primarily
attributable to an increase in costs incurred to service increasing numbers and increasingly complex contracts
with school-based
customers.  The percentage increase in cost of revenue was significantly higher than the increase in revenue
in this division
primarily because of the increased revenues from the lower margin professional development services.

Admissions
Services cost of
revenue increased from $2.8 million in 2003 to $3.4 million in 2004, representing a 21% increase, primarily due
to increased customer
support costs, including the new high school counseling
product.

Operating Expenses

Selling,
general and administrative
expenses increased from $65.6 million in 2003 to $86.6 million in 2004, representing a 32% increase.  This
increase resulted
from the following:

| |  | a write-down of goodwill related to the acquisition of Embark of
approximately
$8.2 million;                                                                                                                                                  
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase   of approximately $4.7 million in salaries and payroll taxes,
resulting
primarily from increased headcount;                                                                                                                      
| |  | an increase   of approximately $2.6 million attributable primarily to
personnel related
costs, including office rent and expenses, travel and entertainment, employee   benefits and recruiting
fees;                                         
| |  | an increase   of approximately $2.4 million in professional fees, comprised
primarily of
legal, accounting and consultant fees, relating to Sarbanes-Oxley compliance,   an internal corporate
reorganization and other
miscellaneous matters;
| |  | an increase   of approximately $2.2 million in web site technology and
development
expenses;                                                                                                                                                  

32



| |  | an increase   of approximately $1.1 million in bad debt allowance expense
primarily due to   an
increase in aged accounts receivable in the Admissions Services and K-12   Services divisions; and       
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase   of approximately $725,000 in depreciation and amortization
expenses, due
primarily to increased amortization expense relating to the K-12 Services   divisions web site development
costs.

We
anticipate that professional fees related to Sarbanes-Oxley compliance will continue to be significant in 2005,
with at least $1 million in such fees anticipated in the first quarter of 2005 as we complete our Section 404
evaluation.

Comparison of Years Ended December 31, 2003 and 2002

Overview

During 2003 the
company achieved
profitability primarily due to the continued profitability of the Test Preparation Services division and the
decreased operating
losses in  K-12 Services and Admissions Services, and our ability to keep SG&A relatively flat.  Our
Test Preparation
Services revenue increased by 6%, which was below expectations due to disappointing LSAT and GMAT
enrollments.  Our K-12
Services division revenue grew by 114%, as this divisions products gained a foothold in the
marketplace.  Our Admissions
Services division revenue in 2003 remained the same as 2002.  This division has experienced  difficulties
upselling services
to its existing customer base and attracting new customers for its products.

Revenue

Our total
revenue increased from
$89.2 million in 2002 to $104.5 million in 2003, representing a 17% increase.

Test
Preparation Services revenue
increased from $67.9 million in 2002 to $71.7 million in 2003, representing a 6% increase, comprised primarily of
an increase of
approximately $4.7 million in revenue from our company-owned operations.  The increased revenue from
company-owned operations
resulted from an increase of approximately $1.3 million in revenue attributable to the operations acquired from
our former
franchisees, Princeton Review of St. Louis, in October 2002, and Princeton Review of North Carolina, in July
2003, and an increase of
approximately $3.4 million at our other locations. Of the $3.4 million increase at our other locations
approximately $5.0 million is
attributable to enrollment increases, which was partially offset by decreases in average prices for
courses.  The increase was
also partially offset by the absence in 2003 of approximately $700,000 in revenue related to the
development of a U.S. Army web site recorded in 2002.

K-12
Services revenue increased
from $10.1 million in 2002 to $21.5 million in 2003 representing a 114% increase. This increase resulted
primarily from an increase
of approximately $13.4 million in revenue from schools, including several large school districts, for
professional development,
printed materials, benchmark testing, after school supplemental programs and Homeroom subscriptions, primarily
attributable to new
contracts signed in 2003.  These increases were partially offset by a decrease of approximately $2.0 million
in workbook
development fees and royalties from McGraw-Hill.

Admissions
Services revenue
remained at the same level of $11.2 million in 2002 and 2003.  Revenue from advertising fees from
non-school customers
decreased by approximately $929,000, which was offset by increases in fees from post secondary
institutions.

Cost of Revenue

Our total cost
of revenue increased
from $24.9 million in 2002 to $32.0 million in 2003, representing a 28% increase.

Test
Preparation Services cost of
revenue increased from $18.5 million in 2002 to $20.8 million in 2003, representing a 12% increase. This increase
resulted primarily
from the following: An increase of approximately $424,000 in costs associated with the operation of the
businesses acquired from
Princeton Review of St. Louis and Princeton Review of North Carolina; an approximately $1.3 million increase in
teacher pay due to
salary increases and an increased number of classes; and an increase of approximately $550,000 in facility rental
expense resulting
from additional classes.  Cost of revenue as a percentage of revenue increased due to smaller average class
size, which lowers our gross margins.

K-12 Services
cost of revenue
increased from $3.5 million in 2002 to $8.3 million in 2003, representing a 136% increase. This increase is
primarily attributable to
an increase in costs of approximately $4.8 million incurred to service the school contracts for professional
development, printed
materials, benchmark testing, after school supplemental programs and Homeroom subscriptions.

33



Admissions
Services cost of revenue
decreased from $2.9 million in 2002 to $2.8 million in 2003, representing a 2% decrease.  The decrease is
primarily attributable
to a decrease of approximately $629,000 in web site development expenses, which was partially offset by increases
in commissions
expense and costs to produce books published by Random House.

Operating Expenses

Selling,
general and administrative
expenses increased from $65.4 million in 2002 to $65.6 million in 2003, representing a 0.2% increase.  This
increase resulted
from the following:

| |  | an increase   of approximately $1.8 million in salaries and payroll
taxes;                                                                                                                               
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase   of approximately $1.3 million attributable primarily to
personnel related
costs, including office rent and expenses, travel and entertainment, employee   benefits and recruiting fees;
and
| |  | an increase   of approximately $281,000 in professional services
fees.                                                                                                                                   

These increases were mostly offset by:

| |  | a decrease   of approximately $1.6 million in web site technology and
development
expenses;
| | - | -------------------------------------------------------------------------------------------
| |  | a decrease   of approximately $1.4 million in advertising and marketing
expenses;
and      
| |  | a decrease   of approximately $275,000 in bad debt expense.                                

Other Income

Our other
income increased from
$325,000 in 2002 to $1.2 million in 2003, representing a 274% increase.  During December 2003, we sold our
preferred stock in,
and certain contractual rights with, Tutor.com for $1 million.

Liquidity and Capital Resources

Our current
primary sources of
liquidity are cash and cash equivalents on hand and cash flow from operations.  At December 31, 2004, we had
approximately $19.2
million of cash and cash equivalents.  Our Test Preparation Services division has historically generated,
and continues to
generate, the largest portion of our cash from its retail classroom and tutoring courses.  These customers
usually pay us in
advance or contemporaneously with the services we provide, thereby supporting our short-term liquidity
needs.  Increasingly,
however, across all of our divisions, we are generating a greater percentage of our cash from contracts with
institutions such as
K-12 schools and school districts and post secondary institutions, which pay us in arrears.  Typical payment
terms for these
institutional customers range from 60 to 90 days.  Additionally, the long contract approval cycles
of some of our contracts with large institutions or school districts can contribute to the level of variability
in the timing of our
cash receipts, as these contracts sometimes require performance to begin significantly in advance of collection
of payments.

During 2004,
we also experienced
a significant increase in the aging of receivables from many of these customers, partially as a result of
decreased focus on
collections due to enormous strains on accounting resources required by the internal controls assessment mandated
by Section 404 of
Sarbanes-Oxley.  While we have hired additional employees to collect these outstanding amounts, we had to
increase our allowance
for bad debts from $0.3 million in 2003 to $1.3 million in 2004. Our days sales outstanding increased
to 73 days at the
end of 2004, from 52 days at the end of 2003.

Cash provided
by operating activities is net (loss) income adjusted for certain non-cash items
and changes in assets and liabilities. For 2004, cash provided by operating
activities was $4.0 million, compared to $9.2 million in 2003 and $0.3 million
in 2002. In 2004, the majority of the decrease in cash provided by operating
activities was due to lower net income, net of non-cash items, which was
partially offset by lower working capital requirements.  During 2004 the
increase in operating assets and liabilities resulting from the increased deferred income was
partially offset by increases in accounts receivable.  Deferred income
increased due to increased tutoring fees collected but not earned as well as
increased future revenue from contracts with institutional clients. 
Accounts receivable increased due to increased future enrollments in Test
Preparation as well as increased contracts with institutional customers in K-12
Services and Admissions Services.

Investing cash
flows consist
primarily of capital expenditures and the payment for investments acquired. We used $8.3 million in net cash for
investing activities
during 2004, compared to $5.8 million during 2003 and $8.7 million during 2002. The higher cash used in investing
activities in 2004
compared to 2003 resulted from an approximate $1 million investment in Oasis Childrens Services LLC and an
increase in capital
expenditures.  Capital expenditures and additions to capitalized development

34



projects and other assets totaled $7.7 million, $6.0 million and $7.7
million in 2004, 2003 and
2002, respectively.  The increase in capital expenditures in 2004 over 2003 is due primarily to software
purchased, increased
development projects and new office construction. Capital spending for 2005 is expected to be between $10 and $11
million for
additional software development and implementation costs, additional content development and equipment
purchases.

Financing cash
flows consist
primarily of transactions related to the sales of preferred stock and payments of debt related to
acquisitions.  We generated
$9.7 million in net cash from financing activities in 2004 compared to  uses of $1.3 million and $1.6 million in
2003 and 2002,
respectively. During 2004 we raised approximately $9.7 million from the sale of preferred stock, we paid down
approximately $1.8 of
debt principal related to prior acquisitions and we borrowed $2 million under a bank credit facility.

On June 4,
2004, we sold to
Fletcher 10,000 shares of Series B-1 Preferred Stock for $10 million in the aggregate.  The Series B-1
Preferred Stock will pay
quarterly dividends at a minimum rate of 5% per annum, payable, at our option, in cash or registered shares of
our common
stock.  The Series B-1 Preferred Stock is convertible into 1,007,303 shares of our common stock at a
conversion price of $9.9275
per share, subject to adjustment upon certain events.  Fletcher may also redeem its shares of the Series B-1
Preferred Stock, in
lieu of converting such shares, at any time on or after November 28, 2005, for shares of common stock, unless we
satisfy the
conditions for cash redemption, for an amount of shares of our common stock based upon a redemption rate equal to
102.5% of the then
prevailing price of our common stock plus the value of any accrued and unpaid dividends.  Fletcher also
has the right, for a period of twenty-four months, beginning on July 1, 2005, to purchase up to $20 million of
Additional Preferred
Stock.  The Additional Preferred Stock is convertible into shares of our common stock at a conversion price
equal to 108.3% of
the then prevailing price of our common stock, subject to a minimum of $9.9275 per share.

On May 21,
2004, we entered into
a credit agreement with Commerce Bank, N.A. for a three-year revolving credit facility with a maximum available
borrowing of $5.0
million.  The line of credit was secured by our accounts receivable and bore a variable interest rate based
on either the prime
rate or 150 to 175 basis points over the London Interbank Offered Rate (LIBOR), in accordance with
the terms of the
agreement. As of December 31, 2004, the effective interest rate was 3.9%.  This credit facility was subject
to our maintaining
certain financial covenants and other covenants set forth in the credit agreement and required us to pay a
quarterly unused facility
fee of 0.375%.  We borrowed $2 million under this facility in May 2004 and used most of the proceeds to
repay higher interest,
fixed rate debt. As of December 31, 2004, $2.0 million was outstanding.  As of December
31, 2004, we were not in compliance with the financial covenants contained in the credit agreement requiring the
maintenance of a
certain fixed charge, EBITDA and interest coverage ratio.  As of December 31, 2004 the balance outstanding
under the line of
credit was reclassified to current liabilities as a result of such non-compliance.  In February 2005, we
repaid the entire
balance outstanding and terminated the credit facility.

We anticipate
that our cash
balances, together with cash generated from operations, will be sufficient to meet our normal operating
requirements for at least the
next 12 months.  Our future capital requirements will depend on a number of factors, including market
acceptance of our products
and services and the resources we devote to developing, marketing, selling and supporting these products and
services. We expect to
continue to devote substantial capital resources to product development and support and advertising, marketing
and promotional
activities. We also expect to continue to evaluate possible acquisition and strategic relationship opportunities,
including possible
acquisitions of businesses operated by our domestic franchisees, as well as other strategic alternatives, such as
dispositions,
reorganizations, recapitalizations or other similar transactions, and may therefore devote capital
resources to consummating such transactions.

Contractual Obligations and Commercial Commitments

As of December
31, 2004, our
principal contractual obligations and commercial commitments consisted of obligations outstanding under our
long-term office and
classroom leases, obligations under promissory notes entered into in connection with acquisitions, employment
agreements and several
capital leases of computer equipment. As of December 31, 2004, we operated from leased premises in New York,
Alabama, Arizona,
California, Colorado, Georgia, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, New
Jersey, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington, Washington
D.C., and
Canada.

35



The following
table summarizes our
contractual obligations and other commercial commitments set forth therein as of December 31, 2004.

|                               |  | Payments due by period |      
|------------------------------ |  | ---------------------- | -----
|                               |  |                        |      
|                               |  | ($ in millions)        |      
|Contractual Obligations        |  |                        | Total
|                               |  |                        |      
|Long-Term   Debt Obligations   |  | $                      | 6.4  
|Capital   Lease
Obligations    |  |                        | 1.8  
|Operating   Lease Obligations  |  |                        | 26.7 
|Credit   Facility (see note
6) |  |                        | 2.0  
|Purchase   Obligations (1)     |  |                        | 11.9 
|Total                          |  |                        | 48.8 

|   
|---
|(1)

Adoption of New Accounting Pronouncements

In December 2004, the FASB
replaced SFAS No. 123 with SFAS No. 123R, Share-Based Payments, which
requires all share based payments to employees, including employee stock
options, to be recognized in the income statement based on their fair values effective July 1, 2005.
Based on the options outstanding as of December 31, 2004 we expect SFAS No. 123R
to have a material impact on our Consolidated Statement of Operations.

Critical Accounting Policies

The estimates,
methods and
judgments we use in applying our accounting policies significantly impact the results we report in our financial
statements. Some of
our accounting policies require us to make subjective and difficult judgments, often as a result of the need to
make estimates of
matters that are inherently uncertain. Our most critical accounting estimates include the assessment of the

36



collectability of our accounts receivable balances, which impacts bad debt
write-offs; recoverability of goodwill, which impacts write-offs of goodwill;
assessment of recoverability of long-lived assets, which primarily impacts
operating margin when we impair assets or accelerate their depreciation;
recognition and measurement of current and deferred income tax assets and
liabilities, which impacts our tax provision and, to a lesser extent, revenue
recognition, which impacts how and when we recognize revenue from our goods and
services. Below, we discuss these policies further, as well as the estimates and
judgments involved.

We also have
other policies that we
consider to be key accounting policies. However, these policies do not meet the definition of critical accounting
estimates because they do not generally require
us to make estimates or judgments that are difficult or subjective.

Accounts
Receivable. We
maintain allowances for doubtful accounts for losses resulting from the inability of our customers to make
required payments. If the
financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional
allowances may be required. We review our aged receivables monthly. This review includes discussions with our
customers and their
account representatives, the customers payment history and other factors. Based on these reviews we may
increase or decrease
our allowance for bad debt if we determine there is a change in the collectability of our accounts
receivable.

Goodwill and
Territorial Marketing Rights. We perform an
annual goodwill impairment review during the fourth quarter, or more frequently
if indicators of potential impairment exist. In each of 2002 and 2003 no
impairment was indicated. In 2004, we wrote down $8.2 million in goodwill in our
Admissions Services division because we deemed this goodwill to be impaired due
to the continued poor performance of this division.  Our impairment review
process is based on a discounted future cash flow approach that uses our
estimates of revenue for the reporting units, driven by assumed market growth
rates as well as appropriate discount rates. These estimates are consistent with
the plans and estimates that we use to manage the underlying businesses.

Long-Lived
Assets. We assess
the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of
the assets or the
asset grouping may not be recoverable. Factors we consider in deciding when to perform an impairment review
include significant
under-performance of a business or product line in relation to expectations, significant negative industry or
economic trends and
significant changes or planned changes in our use of the assets. Recoverability of assets that will continue to
be used in our
operations is measured by comparing the carrying amount of the asset grouping to the related total future net
cash flows. If an asset
groupings carrying value is not recoverable through those cash flows, the asset grouping is considered to
be impaired. The
impairment is measured by the difference between the assets carrying amount and their fair value,
based on the best information available, including market prices or discounted cash flow analysis.

Income
Taxes. In determining
income for financial statement purposes, we must make certain estimates and judgments. These estimates and
judgments occur in the
calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred
tax assets, which
arise from temporary differences between the tax and financial statement recognition of revenue and
expense.

We must
assess the likelihood that we will be able to recover our deferred tax assets.
If recovery is not likely, we must increase our provision for taxes by recording
a reserve, in the form of a valuation allowance, for the deferred tax assets
that we estimate will not ultimately be recoverable.  At December 31, 2004,
we had a net deferred tax asset of approximately $22.1 million, primarily
relating to our net operating loss carryforwards of $50.1 million, which expire
in varying amounts between 2020 and 2024.

Realization
of our deferred tax asset is dependent on generating sufficient taxable income in the United States prior to
expiration of these loss carryforwards. As of December 31, 2004, we recorded a valuation allowance for the entire
net deferred tax asset because our loss in 2004 and the emphasis placed on cumulative losses under generally
accepted accounting principles represents sufficient evidence under SFAS No. 109 Accounting for Income
Taxes for us to determine that it was appropriate to establish a full valuation allowance. If, in the
future, an appropriate level and consistency of profitability is attained, we would reduce the valuation
allowance, which would have a significant impact on our consolidated financial statements.

Revenue
Recognition. In general our revenue recognition policies do not require us to make estimates or judgments
that are difficult or subjective, with the possible exception being the recognition of revenue for separate units
of accounting in accordance with EITF No. 00-21, Revenue Arrangements with Multiple
Deliverables. In accounting for multiple-element arrangements, one of the key judgments to be made is
the accounting value that is attributable to the different contractual elements. The appropriate allocation of
value not only impacts which segment is credited with the revenue, it also impacts the amount and timing of
revenue recorded in the consolidated statement of operations during a given period due to the differing methods
of recognizing revenue for each product or service by each of the segments. Revenue is allocated to each element
based on the accounting
determination of the relative fair value of that element to the aggregate fair value of all elements. The fair
values must be reliable, verifiable and objectively determinable. When available, such determination is based
principally on the pricing of similar arrangements with unrelated parties that are not part of a multiple-element
arrangement.

Impact of Inflation

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

37



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 revenues increase, we expect to recognize these revenues primarily in
the first and
fourth quarters.  The electronic application revenue recorded in our Admissions Services division is highest
in the first and
fourth quarters, corresponding with the busiest times of year for submission of applications to academic
institutions. Our K-12
Services division may also experience seasonal fluctuations in revenue, with the first and fourth quarters
(corresponding to the school year) expected to have the highest revenue.

Item 7A.  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.  All of our currently outstanding long-term debt bears interest at fixed rates. Our
recently issued Series B-1 Preferred
Stock requires the payment of quarterly dividends at the greater of 5% or 1.5% above 90-day LIBOR.  During
2004, we paid
dividends on the Series B-1 Preferred Stock in an aggregate amount of $374,000, at an average rate of 6.5%. 
A 100 basis point
increase in the dividend rate would have resulted in a $56,000 increase in dividends paid during this
period. We repaid and terminated our line of credit in February 2005. We do not
currently hold or issue derivative financial instruments.

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

Item 8.  Financial Statements and Supplementary
Data

Index to Consolidated Financial Statements and Financial Statement
Schedule

|                                                          | Page
|--------------------------------------------------------- | ----
|                                                          |     
|Consolidated Financial   Statements:                      |     
|Report   of Independent Registered Public Accounting Firm | 39  
|Consolidated   Balance Sheets                             | 40  
|Consolidated   Statements of Operations                   | 41  
|Consolidated   Statements of Stockholders Equity         | 42  
|Consolidated   Statements of Cash Flows                   | 43  
|Notes   to Consolidated Financial Statements              | 44  
|Financial Statement   Schedule:                           |     
|Schedule   IIValuation And Qualifying Accounts           | 67  

38



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of The Princeton Review,
Inc. and
Subsidiaries

We have audited
the accompanying
consolidated balance sheets of The Princeton Review, Inc. and Subsidiaries (the Company) as of
December 31, 2004 and
2003, and the related consolidated statements of operations, stockholders equity and cash flows for each of
the three years in
the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index
at Item 8.
These financial statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted
our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion,
the consolidated
financial statements referred to above present fairly, in all material respects, the consolidated financial
position of The Princeton
Review, Inc. and Subsidiaries as of December 31, 2004 and 2003 and the consolidated results of their operations
and their cash flows
for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted
accounting principles.
Also, in our opinion the related financial statement schedule, when considered in relation to the basic financial
statements taken as
a whole, presents fairly, in all material respects, the information set forth herein.

|                   | /s/ ERNST & YOUNG   LLP
|------------------ | -----------------------
|                   |                        
|New York, New York |                        
|March 22, 2005     |                        

39



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Consolidated Balance
Sheets

|                                                                                                                                                                                           |  | December
31,                      |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------- | -------
|                                                                                                                                                                                           |  |                                   |        
|                                                                                                                                                                                           |  | 2004                              |        
|                                                                                                                                                                                           |  |                                   |        
|                                                                                                                                                                                           |  | (in thousands,
except share data) |        
|ASSETS                                                                                                                                                                                     |  |                                   |        
|Current   assets:                                                                                                                                                                          |  |                                   |        
|Cash   and cash
equivalents                                                                                                                                                                |  | $                                 | 19,197 
|Accounts   receivable, net of allowance of $1,290 in 2004 and $302 in
2003                                                                                                                 |  |                                   | 20,652 
|Accounts   receivable-related parties                                                                                                                                                      |  |                                   | 1,682  
|Other   receivables ($1,049
in 2004 and $1,017
in 2003 from related parties)                                                                                                               |  |                                   | 1,107  
|Prepaid   expenses                                                                                                                                                                         |  |                                   | 2,019  
|Other   assets                                                                                                                                                                             |  |                                   | 2,601  
|                                                                                                                                                                                           |  |                                   |        
|Total   current assets                                                                                                                                                                     |  |                                   | 47,258 
|Furniture, fixtures,   equipment and software development, net                                                                                                                             |  |                                   | 13,380 
|Deferred income taxes                                                                                                                                                                      |  |                                   |       
|Investment in affiliates                                                                                                                                                                   |  |                                   | 1,847  
|Goodwill                                                                                                                                                                                   |  |                                   | 31,511 
|Other intangibles,
net                                                                                                                                                                     |  |                                   | 10,032 
|Other assets                                                                                                                                                                               |  |                                   | 3,613  
|                                                                                                                                                                                           |  |                                   |        
|Total   assets                                                                                                                                                                             |  | $                                 | 107,641
|                                                                                                                                                                                           |  |                                   |        
|LIABILITIES   AND STOCKHOLDERS EQUITY                                                                                                                                                     |  |                                   |        
|Current
liabilities:                                                                                                                                                                       |  |                                   |        
|Accounts   payable                                                                                                                                                                         |  | $                                 | 8,359  
|Accrued   expenses                                                                                                                                                                         |  |                                   | 7,342  
|Current   maturities of
long-term
debt                                                                                                                                                     |  |                                   | 3,769  
|Deferred   income                                                                                                                                                                          |  |                                   | 17,637 
|Book   advances                                                                                                                                                                            |  |                                   |       
|                                                                                                                                                                                           |  |                                   |        
|Total   current
liabilities                                                                                                                                                                |  |                                   | 37,107 
|Deferred rent                                                                                                                                                                              |  |                                   | 1,388  
|Long-term debt                                                                                                                                                                             |  |                                   | 4,213  
|Series B-1 Preferred stock,   $.01 par value; 10,000 and none authorized,
issued and
outstanding at   December 31, 2004 and December 31, 2003, respectively (liquidation value of
$10,000) |  |                                   | 9,736  
|Stockholders equity                                                                                                                                                                       |  |                                   |        
|Preferred   stock, $.01 par
value; 4,990,000
shares authorized; none issued and   outstanding at December 31, 2004 and 2003                                                                |  |                                   |       
|Common   stock, $.01 par value; 100,000,000 shares authorized; 27,569,764
and   27,385,273
issued and outstanding at December 31, 2004 and December 31, 2003,   respectively               |  |                                   | 276    
|Additional   paid-in capital                                                                                                                                                               |  |                                   | 116,260
|Accumulated   deficit                                                                                                                                                                      |  |                                   | (61,102
|Accumulated   other comprehensive loss                                                                                                                                                     |  |                                   | (237   
|                                                                                                                                                                                           |  |                                   |        
|Total   stockholders
equity                                                                                                                                                               |  |                                   | 55,197 
|                                                                                                                                                                                           |  |                                   |        
|Total   liabilities and stockholders equity                                                                                                                                               |  | $                                 | 107,641
|                                                                                                                                                                                           |  |                                   |        

See accompanying notes.

40



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Consolidated Statements
of Operations

|                                                                        |  | Years   Ended December 31,            |        
|----------------------------------------------------------------------- |  | ------------------------------------- | -------
|                                                                        |  |                                       |        
|                                                                        |  | 2004                                  |        
|                                                                        |  |                                       |        
|                                                                        |  | (in thousands,
except per share data) |        
|Revenue                                                                 |  |                                       |        
|Test Preparation Services                                               |  | $                                     | 74,744 
|K-12 Services                                                           |  |                                       | 27,957 
|Admissions Services                                                     |  |                                       | 11,084 
|                                                                        |  |                                       |        
|Total revenue                                                           |  |                                       | 113,785
|                                                                        |  |                                       |        
|Cost of revenue                                                         |  |                                       |        
|Test Preparation
Services                                               |  |                                       | 23,584 
|K-12 Services                                                           |  |                                       | 13,684 
|Admissions
Services                                                     |  |                                       | 3,385  
|                                                                        |  |                                       |        
|Total cost of
revenue                                                   |  |                                       | 40,653 
|                                                                        |  |                                       |        
|Gross profit                                                            |  |                                       | 73,132 
|Operating expenses                                                      |  |                                       |        
|Selling, general and
administrative                                     |  |                                       | 78,381 
|Impairment of goodwill                                                  |  |                                       | 8,199  
|Impairment of
investment                                                |  |                                       |       
|                                                                        |  |                                       |        
|Total operating
expenses                                                |  |                                       | 86,580 
|                                                                        |  |                                       |        
|Income   (loss) from
operations                                         |  |                                       | (13,448
|Interest   expense                                                      |  |                                       | (693   
|Other   income                                                          |  |                                       | 435    
|                                                                        |  |                                       |        
|Income   (loss) before
(provision) benefit for
income taxes             |  |                                       | (13,706
|(Provision)   benefit for income taxes                                  |  |                                       | (16,707
|                                                                        |  |                                       |        
|Net   income (loss)                                                     |  |                                       | (30,413
|Dividends and accretion on
Series-B-1 Preferred Stock                   |  |                                       | (428   
|                                                                        |  |                                       |        
|Net   income (loss)
attributed to common
stockholders                   |  | $                                     | (30,841
|                                                                        |  |                                       |        
|Basic   income (loss) per
share                                         |  | $                                     | (1.12  
|                                                                        |  |                                       |        
|Diluted   income (loss) per
share                                       |  | $                                     | (1.12  
|                                                                        |  |                                       |        
|Weighted   average shares
used in computing net
income (loss) per share |  |                                       |        
|Basic                                                                   |  |                                       | 27,468 
|                                                                        |  |                                       |        
|Diluted                                                                 |  |                                       | 27,468 
|                                                                        |  |                                       |        

See accompanying notes.

41



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Consolidated Statements
of
Stockholders Equity (in thousands)

|                                                                                |  | Common   Stock |        | Additional   Paid-in
Capital |   | Accumulated   Deficit |  | Accumulated   Other   Comprehensive
Income (loss) |         | Total   Stockholders   Equity |  
|------------------------------------------------------------------------------- |  | -------------- | ------ | ---------------------------- | - | --------------------- |  | ------------------------------------------------- | ------- | ------------------------------ | -
|                                                                                |  |                |        |                              |   |                       | 
|                                                                                |  | Shares         |        | Amount                       |   |                       |  |                                                   |        
|                                                                                |  |                |        |                              |   |                       |  |                                                   |         |                                |  
|Balance at   December 31,
2001                                                  |  |                | 27,175 |                              | $ | 272                   |  | $                                                 | 113,091 |                                | $
|Exercise of   stock
options                                                     |  |                | 40     |                              |   |                      |  |                                                   | 266     |                                |  
|Stock based
compensation                                                        |  |                |       |                              |   |                      |  |                                                   | 256     |                                |  
|Shares   issued in
connection with acquisition                                  |  |                | 46     |                              |   | 1                     |  |                                                   | 359     |                                |  
|Comprehensive
loss                                                              |  |                |        |                              |   |                       |  |                                                   |         |                                |  
|Net loss                                                                        |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|Foreign Currency
gain/loss                                                      |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|Unrealized loss on
securities, net of applicable  income    tax expense of $420 |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|                                                                                |  |                |        |                              |   |                       |  |                                                   |         |                                |  
|Comprehensive
loss                                                              |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|                                                                                |  |                |        |                              |   |                       |  |                                                   |         |                                |  
|Balance at   December 31,
2002                                                  |  |                | 27,261 |                              |   | 273                   |  |                                                   | 113,972 |                                |  
|Exercise of   stock options,
including income tax benefit of $125               |  |                | 124    |                              |   | 1                     |  |                                                   | 706     |                                |  
|Stock based
compensation                                                        |  |                |       |                              |   |                      |  |                                                   | 151     |                                |  
|Comprehensive
income                                                            |  |                |        |                              |   |                       |  |                                                   |         |                                |  
|Net Income                                                                      |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|Foreign currency
gain/loss                                                      |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|Unrealized loss on
securities, net of applicable income  tax expense of $10     |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|                                                                                |  |                |        |                              |   |                       |  |                                                   |         |                                |  
|Comprehensive
income                                                            |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|                                                                                |  |                |        |                              |   |                       |  |                                                   |         |                                |  
|Balance at   December 31,
2003                                                  |  |                | 27,385 |                              |   | 274                   |  |                                                   | 114,829 |                                |  
|Exercise of   stock options                                                     |  |                | 121    |                              |   | 1                     |  |                                                   | 834     |                                |  
|Shares   issued in
connection with an equity investment                         |  |                | 64     |                              |   | 1                     |  |                                                   | 499     |                                |  
|Stock based
compensation                                                        |  |                |       |                              |   |                      |  |                                                   | 98      |                                |  
|Dividends and accretion on
SeriesB-1 Preferred Stock                            |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|Comprehensive
loss                                                              |  |                |        |                              |   |                       |  |                                                   |         |                                |  
|Net loss                                                                        |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|Foreign currency
gain/loss                                                      |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|                                                                                |  |                |        |                              |   |                       |  |                                                   |         |                                |  
|Comprehensive
loss                                                              |  |                |       |                              |   |                      |  |                                                   |        |                                |  
|                                                                                |  |                |        |                              |   |                       |  |                                                   |         |                                |  
|Balance at   December 31,
2004                                                  |  |                | 27,570 |                              | $ | 276                   |  | $                                                 | 116,260 |                                | $
|                                                                                |  |                |        |                              |   |                       |  |                                                   |         |                                |  

See accompanying notes.

42



THE PRINCETON REVIEW, INC. AND SUBSIDIARIESConsolidated Statements
of Cash Flows

|                                                                                                     |  | Years   Ended December 31, |        
|---------------------------------------------------------------------------------------------------- |  | -------------------------- | -------
|                                                                                                     |  |                            |        
|                                                                                                     |  | 2004                       |        
|                                                                                                     |  |                            |        
|                                                                                                     |  | (in thousands)             |        
|Cash flows from operating activities:                                                                |  |                            |        
|Net income
(loss)                                                                                    |  | $                          | (30,413
|Adjustments to reconcile net income (loss) to net   cash provided by (used
in) operating
activities: |  |                            |        
|Depreciation                                                                                         |  |                            | 1,609  
|Amortization                                                                                         |  |                            | 5,393  
|Impairment of
goodwill                                                                               |  |                            | 8,199  
|Impairment of investment                                                                             |  |                            |       
|Bad debt
expense                                                                                     |  |                            | 1,521  
|Valuation allowance for deferred tax assets                                                          |  |                            | 22,132 
|Deferred income taxes                                                                                |  |                            | (5,425 
|Stock based compensation                                                                             |  |                            | 98     
|Other, net                                                                                           |  |                            | 219    
|Net change in operating
assets and
liabilities:                                                      |  |                            |        
|Accounts receivable                                                                                  |  |                            | (3,510 
|Prepaid
expenses                                                                                     |  |                            | 9      
|Other assets                                                                                         |  |                            | (246   
|Accounts payable and accrued
expenses                                                                |  |                            | (359   
|Deferred income                                                                                      |  |                            | 4,758  
|                                                                                                     |  |                            |        
|Net   cash provided by
operating
activities                                                          |  |                            | 3,985  
|                                                                                                     |  |                            |        
|Cash   flows from investing
activities:                                                              |  |                            |        
|Purchase   of furniture,
fixtures, equipment and
software development                                |  |                            | (5,208 
|Investment   in affiliates                                                                           |  |                            | (850   
|Purchase   of franchises and
other businesses,
net of cash acquired                                  |  |                            | (130   
|Stockholder   loan                                                                                   |  |                            |       
|Notes
receivable                                                                                     |  |                            | 400    
|Additions  to capitalized K-12 content, capitalized course costs and other
assets                    |  |                            | (2,518 
|                                                                                                     |  |                            |        
|Net   cash used in investing
activities                                                              |  |                            | (8,306 
|                                                                                                     |  |                            |        
|Cash   flows from financing
activities:                                                              |  |                            |        
|Repayment   term loan,
net                                                                           |  |                            |       
|Proceeds   from credit facility                                                                      |  |                            | 2,000  
|Capital   lease payments                                                                             |  |                            | (555   
|Dividends and accretion on Series B-1 Preferred Stock                                                |  |                            | (374   
|Proceeds   from the sale of
Series B-1 Preferred
Stock, net of issuance costs                        |  |                            | 9,682  
|Notes   payable related to acquisitions                                                              |  |                            | (1,779 
|Proceeds   from exercise of
options                                                                  |  |                            | 752    
|Payment   of credit facility deferred financing costs                                                |  |                            | (145   
|                                                                                                     |  |                            |        
|Net   cash provided by (used
in) financing
activities                                                |  |                            | 9,581  
|                                                                                                     |  |                            |        
|Net   increase (decrease) in
cash and cash
equivalents                                               |  |                            | 5,260  
|Cash   and cash equivalents,
beginning of
period                                                     |  |                            | 13,937 
|                                                                                                     |  |                            |        
|Cash   and cash equivalents,
end of
period                                                           |  | $                          | 19,197 
|                                                                                                     |  |                            |        
|Supplemental   disclosures
of cash flow
information                                                  |  |                            |        
|Cash   paid during the year for:                                                                     |  |                            |        
|Interest                                                                                             |  | $                          | 564    
|                                                                                                     |  |                            |        
|Equipment acquired through capital leases                                                            |  | $                          | 1,276  
|                                                                                                     |  |                            |        

See accompanying notes.

43



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial
Statements

1. Nature of Business and Significant Accounting Policies

Business

The Princeton
Review, Inc. and its
wholly owned subsidiaries, as well as the Companys national advertising fund (together, the
Company), are engaged
in the business of providing courses that prepare students for college, graduate school and other admissions
tests. The Company,
through Princeton Review Operations, LLC, provides these courses in various locations throughout the United
States and Canada and
over the Internet. As of December 31, 2004, the Company had seven franchisees operating approximately 17 offices
under the Princeton
Review name in the United States and approximately 31 offices abroad operated by franchisees in 19 additional
countries. The Company
also sells support materials and equipment to its franchisees, authors content for various books and software
products published by
third parties, sells marketing and web-based products to higher education institutions,
operates a Web site providing education-related content and provides a number of services to K-12 schools and
school districts to
help them measurably improve academic performance.

Principles of Consolidation

The
accompanying consolidated
financial statements include the accounts of The Princeton Review, Inc. and its wholly owned subsidiaries. All
significant
intercompany transactions and balances are eliminated in consolidation.

Cash and Cash Equivalents

As of December
31, 2004 and 2003,
cash and cash equivalents consist of investments in securities issued or guaranteed by the U.S. government, its
agencies or
instrumentalities, which have  maturities of 90 days or less at the date of purchase. As of December 31, 2004
approximately
90% of the Companys cash and cash equivalents were on hand at two financial institutions. As of December
31, 2003 approximately
85% of the Companys cash and cash equivalents were on hand at one financial institution.

Accounts Receivable and Allowance for Doubtful Accounts

The Company
provides credit, in the normal course of business, to its customers. The Company maintains an allowance for
doubtful customer accounts for estimated losses that may result from the inability of the Company's customers to
make required payments. That estimate is based on a variety of factors, including historical collection
experience, current economic and market conditions, and a review of the current status of each customer's trade
accounts receivable. The Company charges actual losses when incurred to this allowance.

Inventories

Inventories
consist of program
support equipment, course materials and supplies. All inventories are valued at the lower of cost (first-in,
first-out basis) or
market.

Furniture, Fixtures and Equipment

Furniture,
fixtures and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets principally ranging from three to seven
years. Leasehold improvements are amortized using the straight-line method over
the lesser of the lease term or its estimated economic useful life.

Software and Web Site Development

The Company
accounts for internal
use software development in accordance with the provisions of the American Institute of Certified Public
Accountants Statement of
Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Useand
Emerging Issues Task Force (EITF) 00-2, Accounting for Web site Development Costs.

44



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

For the years
ended December 31,
2004, 2003 and 2002, the Company expensed approximately $3.8 million, $2.3 million and $3.6 million,
respectively, of product
development costs that were incurred in the preliminary project stage under SOP 98-1. For the years ended
December 31, 2004 and 2003,
the Company capitalized approximately $3.2 million and $2.8 million, respectively, in product and web site
development costs under
SOP 98-1 and EITF 00-2. For the years ended December 31, 2004, 2003 and 2002, the Company recorded related
amortization expense of
approximately $2.8 million, $2.4 million and $2.6 million, respectively. As of December 31, 2004 and 2003, the
net book value of
these capitalized product and web site development costs were $5.3 million and $4.9 million, respectively. These
capitalized costs
are amortized using the straight-line method over the estimated useful life of the assets ranging from
12 to 60 months.

Goodwill, Capitalized Course Costs, Capitalized K-12 Content and Other
Intangible Assets.

Goodwill
represents the excess
purchase price of acquired businesses over the estimated fair value of net assets acquired.

Territorial
marketing rights
represent rights contributed by our independent franchisees to our former subsidiary, Princeton Review
Publishing, L.L.C., in 1995 in
exchange for membership units of Princeton Review Publishing, L.L.C. to allow the marketing of the Companys
products on a
contractually agreed-upon basis within the franchisee territories. Without these rights, the Company would be
prohibited from selling
its products in these territories due to the exclusivity granted to the franchisees within their territories.
Should a franchisee
decide not to renew its franchise agreement, which is unlikely unless there is a sale of the franchise back to
the Company, these
rights would remain with the Company. Since no legal, regulatory, contractual, competitive, or other factors
limit the useful life of
territorial marketing rights, the Company has deemed these intangible assets to have indefinite
lives. Goodwill and territorial marketing rights were amortized on a straight-line basis until December 31, 2001,
after which such
amortization ceased upon the adoption of Statement of Financial Accounting Standards (SFAS) 142.
Accordingly, the
Companys goodwill and territorial marketing rights that are deemed to have indefinite lives are no longer
amortized but are
subject to annual impairment tests. Accumulated amortization at the time of adoption of SFAS 142 was $2.3
million.

Capitalized
course costs include
certian expenditures incurred by our Test Preparation Services division to develop test preparation courses and
consist primarily of amounts
paid to consultants and salaries of employees hired to develop course materials and curriculum. Course costs are
capitalized only when
a course is first developed or there is a major revision to a course or significant re-write of the course
materials or curriculum,
for example, when the related test changes. The amortization period for these costs is five years, based upon the
average life cycle of the related standardized tests. Amortization of these capitalized
course costs commences with the realization of course revenues. The cost of minor enhancements or annual updates
to the curriculum
and materials is expensed as incurred.

Capitalized
K-12 content includes certain
expenditures incurred by our K-12 Services division to produce questions and
lessons primarily for math, reading and language arts subjects typically taught
in grades one through 11 and consist primarily of amounts paid to consultants
and salaries of employees hired to produce these questions or lessons. These
questions or lessons are used in numerous products sold by the K-12 Services
division, including the Homeroom subscription service, printed materials and
live instruction products. Only expenditures for questions or lessons that allow
the Company to enter into new markets, such as new geographic areas or grades,
or that significantly enhance the marketability of the Companys products,
such as a new subject area, are capitalized. The amortization period for these
costs is seven years, based on numerous factors, including the average lives of
similar products and the cycle of major changes in educational philosophies and
methodologies as reflected by the adoption cycles of state tests and textbooks. Amortization of these capitalized
K-12 content
costs commences when the questions or lessons are available for use. The cost of
planning, marketing and maintenance related to this content is expensed as
incurred, as is the cost of design and feasibility work.

Publishing
rights primarily consist
of amounts paid in 1995 to certain co-authors to buy out their rights to future royalties on certain books,
including Cracking
the SAT/PSAT, Cracking the LSAT, Cracking the GRE, Cracking the GMAT, The Best 357 CollegesandWord
Smart. These books
are primarily current reference materials that are updated every one or two years. In 2004, the Company collected
approximately $1.2
million in royalties from the publisher of these books. Publishing rights are being amortized on a straight-line
basis over 25 years.

Franchise
costs represent the
cost of franchise rights purchased by the Company from third parties and are amortized using the straight-line
method over the
remaining useful life of the applicable franchise agreement.

Customer lists
were purchased by the Company from Embark.com, Inc. (Embark) in 2001
and consist primarily of academic institution customers of the Companys
Admissions Service division. At the time of the acquisition, an independent
party completed a valuation of the customer list using a discounted cash flow
analysis and assumed an eight percent annual loss of customer revenues. Customer
lists are amortized on a straight-line basis over 10 years.

Other intangible
assets are amortized on a straight-line basis over their useful lives: Three to
20 years for trademarks/tradenames and three to 20 years for non-compete
agreements.

45



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

See Note 5 for
further information
with respect to the Companys goodwill and other intangible assets.

Impairment

Goodwill and
Territorial Marketing Rights

As noted above,
the Company adopted SFAS 142, Goodwill and Other Intangible Assets,
under which goodwill and territorial marketing rights are no longer amortized
but instead goodwill and territorial marketing rights are assessed for
impairment annually. In making this assessment, management relies on a number of
factors including operating results, business plans, economic projections,
anticipated future cash flows, and transactions and market place data. Goodwill
is assigned to specific reporting units and is reviewed for possible impairment
at least annually or more frequently upon the occurrence of an event or when
circumstances indicate that a reporting units carrying amount is greater
than its fair value. During the fourth quarter of 2004, the Company completed
its annual assessment for impairment and determined that the carrying amount of
goodwill for one of its reporting units exceeded its fair value. As a result of
the second step analysis, a goodwill impairment of approximately $8.2 million
was recognized.

Long-Lived
Assets

The Company
reviews its long-lived
assets, which excludes goodwill and territorial marketing rights, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an
asset may not be recoverable. If such review indicates that an asset may not be recoverable, an impairment loss
is recognized for the
excess of the carrying amount over the fair value of an asset to be held and used or over the fair value less
cost to sell an asset
to be disposed. During 2004,  no impairment charge was required.

Investments in Affiliates

The Company
values its investments
in affiliate companies in which it has a less than 50% ownership interest and can exercise significant influence
using the equity
method of accounting. Investments in affiliate companies in which the
Company has a less than 20% ownership interest and does not have the ability to exercise significant influence
are accounted for
using the cost method of accounting.

Deferred Income

Deferred income
represents tuition
and customer deposits (which are refundable prior to the commencement of the program), college marketing fees and
subscription
services, professional development fees and fees for printed materials. Tuition is applied to income ratably over
the periods in
which it is earned, generally the term of the program. College marketing fees and subscription fees are applied
to income ratably
over the life of the agreements, which typically range from one to two years. Fees for professional development
and printed materials
are recognized as the services and products are delivered.

Revenue Recognition

The Company
recognizes revenue from
the sale of products and services as follows:

Course and
Tutoring
Income

Tuition and
tutoring fees are paid
to the Company and recognized over the life of the course.

Book,
Software and Publication
Income and Expenses

46



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

The Company
recognizes revenue from
both performance-based fees such as marketing fees and royalties and delivery-based fees such as advances, copy
editing fees,
workbook development and test booklet fees and books sold directly to schools. Performance-based fees, which
represent royalties on
books and software sold, are recognized when sales reports are received from the publishers. Delivery-based fees
are recognized upon
the completion and acceptance of the product by the publishers and/or customers. Until such time, all costs and
revenues related to
such delivery-based fees are deferred. Book advances are recorded as liabilities and deferred book expenses are
included in other
current assets.

Royalty
Service
Fees

As
consideration of the rights and
entitlements granted under franchise agreements, which entitle the franchisees to provide test preparation
services utilizing the
Princeton Review method in their licensed territories, the franchisees are required to pay to the Company a
monthly royalty service
fee equal to 8% of the franchises gross receipts collected during the preceding month. In addition, these
fees include a per
student fee charged to the Companys franchisees for use by their students of the Companys
supplemental online course
tools. The Companys franchisees contributions to the advertising fund are also recognized by the
Company as royalty
revenue (see Note 8). Under the terms of the franchise agreements, the Company has the right to perform audits of
royalty service
fees reported by the franchisees. Any differences resulting from an audit, including related interest
and penalties, if any, are recorded upon the completion of the audit when such amounts are
determinable.

Course
Materials and Other
Products

The Company
recognizes revenue from
the sale of course materials and other products to the independently owned franchises upon shipment.

Lead
Generation
Fees

The Company
recognizes revenue from
lead generation fees as the service is delivered to these institutions.

College
Marketing and
Subscription Fees

The Company
recognizes revenue from
subscription fees for web-based services over the life of the contract, which is typically one to two
years.

Transaction
Processing
Fees

The Company
recognizes revenue from
transaction processing fees, such as web-based school application fees, as the transactions are
completed.

Multiple-deliverable
contracts

Certain of the
Companys
customer contracts represent multiple-element arrangements, which may include several of the Companys
products and services.
Multiple-element arrangements are assessed to determine whether they can be separated into more than one unit of
accounting. A
multiple-element arrangement is separated into more than one unit of accounting if all of the criteria in EITF
00-21 are met. If
there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the
arrangement consideration
is allocated to the separate units of accounting based on each units relative fair value and the revenue
policies described
above are then applied to each unit of accounting.

Other
Revenue

Other revenue
consists of
miscellaneous fees for other services provided to third parties primarily for assessment tests, authoring
questions, advertising,
training and professional development fees, which are recognized as the products or services are delivered. Also
included in other
revenue are college marketing fees, such as newsletter or banner ads, which are recognized ratably over the
period in which the
marketing services are provided, which is typically one year.

47



Revenue
Components

The following
table summarizes the
Companys revenue and cost of revenue for the years ended December 31, 2004, 2003 and 2002:

|                      |  | Years Ended December   31, |        
|--------------------- |  | -------------------------- | -------
|                      |  |                            |        
|                      |  | 2004                       |        
|                      |  |                            |        
|                      |  | (in   thousands)           |        
|Revenue               |  |                            |        
|Services              |  | $                          | 92,718 
|Products              |  |                            | 14,066 
|Other                 |  |                            | 7,001  
|                      |  |                            |        
|Total Revenue         |  | $                          | 113,785
|                      |  |                            |        
|Cost of Revenue       |  |                            |        
|Services              |  | $                          | 33,099 
|Products              |  |                            | 6,891  
|Other                 |  |                            | 663    
|                      |  |                            |        
|Total Cost of
Revenue |  | $                          | 40,653 
|                      |  |                            |        

Foreign Currency Translation

Balance sheet
accounts of the
Companys Canadian subsidiary are translated using year-end exchange rates. Statement of operations accounts
are translated at
monthly average exchange rates. The resulting translation adjustment is recorded as a separate component of
stockholders
equity. Foreign exchange gains and losses for all the years presented were not significant. The accumulated
balance as a component of
comprehensive income was approximately $221,000 and $359,000 at December 31, 2004 and 2003,
respectively.

Advertising and Promotion

The majority of
costs associated
with advertising and promotion are expensed in the year incurred. Costs related to producing mailers and other
pamphlets are expensed
when mailed. Due to the seasonal nature of the business, most advertising costs related to mailers and pamphlets
are expensed by the
end of the year. Total advertising and promotion expense was approximately $6.4 million, $7.6 million, and $9.1
million for the years
ended December 31, 2004, 2003 and 2002, respectively.

Use of Estimates

The preparation
of the financial
statements in conformity with accounting principles generally accepted 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 and amortization
lives assigned to
intangible assets. Actual results could differ from those estimates.

Fair Value of Financial Instruments

For financial
instruments including
cash and cash equivalents, accounts receivable, other receivables and accounts payable, the carrying amount
approximated

48



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

fair value because of their short maturity. The carrying value of the
Companys debt approximated fair value as the interest rates for the debt
approximated market rates of interest available to the Company for similar
instruments.

Concentration of Credit Risk

Financial
instruments that
potentially subject the Company to concentration of credit risk include cash and cash equivalents and accounts
receivable arising
from its normal business activities. The Company places its cash and cash equivalents with high credit quality
financial
institutions.

Concentrations
of credit risks with
respect to accounts receivable are limited due to the large number of entities comprising the payor base, and
their dispersion across
different states. The Company does not require collateral. At December 31, 2004, two customers accounted for
approximately 18% and
10%, respectively, of gross accounts receivable. At December 31, 2003, one customer accounted for approximately
27% of gross accounts
receivable.

Income Taxes

The Company
accounts for income
taxes based upon the provisions of SFAS No. 109, Accounting for Income Taxes. Under SFAS 109, the
liability method is used for
accounting for income taxes, and deferred tax assets and liabilities are determined based on differences between
financial reporting
and tax basis of assets and liabilities. A valuation allowance is recorded when it is more likely than not that
some or all of the
deferred tax assets will not be realized.

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) applicable 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. The calculation of diluted net income (loss) per share excludes potential common shares if the effect
is
antidilutive.

During certain
of the periods
presented, stock options and securities convertible into or exercisable for common stock were outstanding that
would be dilutive but
were excluded because to include them would have been antidilutive (see Note 15).

Stock options

The Company
accounts for the
issuance of stock options using the intrinsic value method in accordance with Accounting Principles Board
(APB) No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Generally for the Companys
stock option plans, no
compensation cost is recognized in the Consolidated Statements of Operations because the exercise price of the
Companys stock
options equals the market price of the underlying stock on the date of grant. Had the Company accounted for its
employee stock
options under the fair-value method of that statement, the Companys net income per share would have been
decreased and net loss
per share would have been increased to the pro forma amounts indicated:

|                                                                                                                                        |  | Years   Ended December 31, |                                        
|--------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------------------------------------
|                                                                                                                                        |  |                            |                                        
|                                                                                                                                        |  | 2004                       |                                        
|                                                                                                                                        |  |                            |                                        
|                                                                                                                                        |  |                            | (in   thousands, except per share
data)
|Net income (loss)   attributed to common stockholders, as
reported                                                                      |  | $                          | (30,841                                
|Total   stock-based employee compensation expense determined under
fair-value based   method
for all awards, net of related tax effects |  | $                          | (1,178                                 
|Pro forma net income
(loss)   available for
common stockholders                                                                         |  | $                          | (32,019                                
|Basic and diluted income   (loss) per share, as reported                                                                                |  | $                          | (1.12                                  
|Basic and diluted income
(loss) per share, pro
forma                                                                                    |  | $                          | (1.17                                  

49



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

After the
Companys initial public offering, these options were valued using a Black-Scholes option
pricing model. The following weighted-average assumptions were used under this method:

|                        |  | Years   Ended   December 31, |     
|----------------------- |  | ---------------------------- | ----
|                        |  |                              |     
|Assumptions             |  | 2004                         |     
|                        |  |                              |     
|Expected life (years)   |  |                              | 5   
|Risk-free interest rate |  |                              | 4.25
|Dividend yield          |  |                              | 0   
|Volatility factor       |  |                              | 66  

This
option-valuation method requires input of highly subjective assumptions. Because
the Companys employee stock options have characteristics significantly
different from those of traded options, and because change in the subjective
input assumptions can materially affect the fair value estimate, in
managements opinion, the existing methods do not necessarily provide a
reliable single measure of the fair value of its employee stock options. The
effects of applying SFAS 123 in this pro forma disclosure are not indicative of
future amounts and additional awards in future years are anticipated. For
purposes of pro forma disclosure, the estimated fair value of the equity awards
is amortized to expense over the options vesting period. The weighted
average fair value of options granted during the years ended December 31, 2004,
2003 and 2002 was $4.42, $2.75 and $4.74, respectively. As of December 31, 2004,
there were approximately 2,134,000 options exercisable with a weighted average
remaining contractual life of approximately 7.3 years.

Adoption of New Accounting Pronouncements

In December
2004, the FASB replaced SFAS No. 123 with SFAS No. 123R, Share-Based
Payments, which requires all share based payments to employees, including
employee stock options, to be recognized in the income statement based on their
fair values effective July 1, 2005. Based on the options outstanding as of December 31, 2004 the
Company expects SFAS No. 123R to have a material impact on our Consolidated Statements of Operations.

Reclassification

Certain
balances have been
reclassified to conform to the current year presentation.

2. Other Assets

Other assets
(current) consist of
the following at:

|                                   |  | December   31,   |      
|---------------------------------- |  | ---------------- | -----
|                                   |  |                  |      
|                                   |  | 2004             |      
|                                   |  |                  |      
|                                   |  | (in   thousands) |      
|Deferred book costs                |  | $                | 782  
|Inventories                        |  |                  | 1,054
|Deferred income tax                |  |                  |     
|Loans to officers, current portion |  |                  | 190  
|Loan Receivable                    |  |                  | 250  
|Other                              |  |                  | 325  
|                                   |  |                  |      
|                                   |  | $                | 2,601
|                                   |  |                  |      

50



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

Other assets (noncurrent) consist of the following at:

|                                               |  | December   31,   |      
|---------------------------------------------- |  | ---------------- | -----
|                                               |  |                  |      
|                                               |  | 2004             |      
|                                               |  |                  |      
|                                               |  | (in   thousands) |      
|Security deposits                              |  | $                | 701  
|Content and software   development in progress |  |                  | 1,493
|Loans to officers,
including accrued
interest  |  |                  | 1,062
|Loan receivable                                |  |                  | 350  
|Other                                          |  |                  | 7    
|                                               |  |                  |      
|                                               |  | $                | 3,613
|                                               |  |                  |      

51



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

3. Furniture, Fixtures, Equipment and Software Development

Furniture,
fixtures, equipment and
software development consist of the following at:

|                                                                                                                                                          |  | December   31,   |       
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------
|                                                                                                                                                          |  |                  |       
|                                                                                                                                                          |  | 2004             |       
|                                                                                                                                                          |  |                  |       
|                                                                                                                                                          |  | (in   thousands) |       
|Computer Equipment                                                                                                                                        |  | $                | 5,829 
|Furniture, fixtures and   equipment                                                                                                                       |  |                  | 1,662 
|Computer and phone
equipment under capital
lease                                                                                                          |  |                  | 2,902 
|Automobiles                                                                                                                                               |  |                  | 22    
|Software and website   development - third party                                                                                                          |  |                  | 2,540 
|Software and website
development - internally
developed                                                                                                   |  |                  | 8,128 
|Leasehold improvements                                                                                                                                    |  |                  | 5,482 
|                                                                                                                                                          |  |                  |       
|                                                                                                                                                          |  |                  | 26,565
|Less accumulated   depreciation and amortization, including $1,182 in 2004
and $722 in 2003
of   accumulated depreciation for assets under capital leases |  |                  | 13,185
|                                                                                                                                                          |  |                  |       
|                                                                                                                                                          |  | $                | 13,380
|                                                                                                                                                          |  |                  |       

4. Investment in Affiliates

On June 25,
2004, the Company
invested $625,000 and issued 63,562 shares of the Companys common stock, with an approximate value of
$500,000 at the time of
issuance, and incurred approximately $162,000 of acquisition costs for an approximate 25% equity interest in
Oasis Childrens
Services, LLC (Oasis), a privately held company. Oasis works with schools, school systems and
communities to operate
summer and after-school programs. In conjunction with the investment, Oasis and the Company have agreed to, from
time to time,
jointly develop, market and sell summer programs for the K-12 market that combine recreational and enrichment
programs and activities
provided by Oasis with educational programs and activities provided by the Company. The Company accounts for its
investment in Oasis
using the equity method.

The Company
has an ownership
interest of approximately 20% in Student Monitor, LLC, a privately held company. At December 31, 2004 and 2003,
the Companys
investment in this company was approximately $0 and $31,000, respectively.

At December 31,
2004 and 2003, the
Companys net investment in Tutor.com was $0, as a result of recording its share of Tutor.com losses.
Pursuant to an agreement
entered into on December 31, 2003, the Company terminated its strategic relationship with Tutor.com. and sold
preferred stock it held
in Tutor.com for $300,000 in cash. As consideration for the termination of certain strategic agreements and the
restructuring of
certain rights, the Company received an additional $200,000 in cash and $500,000 in notes. The Company retains a
common stock
position in Tutor.com, representing approximately 2.5% of its outstanding equity, which is valued at $0 as of
December 31,
2004.

Through 2002
and 2001, the Company invested $700,000 in SchoolNet, Inc., a privately held
education technology solutions company. The Company currently owns approximately
5% of SchoolNet. The Company maintains a strategic marketing relationship with
SchoolNet, through which SchoolNet markets and distributes a version of the
Companys Homeroom product called Homeroom Inside. As of
December 31, 2004 and 2003, the value of the Companys investment in
SchoolNet was approximately $356,000, net of an impairment writedown of
approximately $344,000 in 2002. The Company has also contracted with SchoolNet
to provide Enterprise Resource Planning software that monitors the use of the
Homeroom.com Web site.

52



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

5. Goodwill and Other Intangible Assets

The following
table summarizes the
components of goodwill  which is no longer subject to amortization:

|                              |  | December 31,   |       
|----------------------------- |  | -------------- | ------
|                              |  |                |       
|                              |  | 2004           |       
|                              |  |                |       
|                              |  | (in thousands) |       
|                              |  | Goodwill       |       
|                              |  |                |       
|Gross
carrying amount         |  | $              | 33,070
|Less
accumulated amortization |  |                | 1,559 
|                              |  |                |       
|                              |  | $              | 31,511
|                              |  |                |       

The
following table summarizes the
change in the carrying amount of segment goodwill for the periods indicated:

|                                |  | Test   Preparation
Services |        | K-12   Services |  | Admissions   Services |  | Other |        | Total |  
|------------------------------- |  | --------------------------- | ------ | --------------- |  | --------------------- |  | ----- | ------ | ----- | -
|                                |  |                             |        |                 |  |                       |  |       |        |       |  
|                                |  | (in   thousands)            |       
|Balance as of December 31, 2002 |  | $                           | 21,861 |                 |  |                      |  | $     | 8,406  |       | $
|Net change from
acquisitions    |  |                             | 1,123  |                 |  |                      |  |       | 293    |       |  
|Other                           |  |                             | 7      |                 |  |                      |  |       |       |       |  
|                                |  |                             |        |                 |  |                       |  |       |        |       |  
|Balance as of December 31,
2003 |  |                             | 22,991 |                 |  |                      |  |       | 8,699  |       |  
|Net change from
acquisitions    |  |                             | 130    |                 |  |                      |  |       |       |       |  
|Impairments                     |  |                             |       |                 |  |                      |  |       | (8,199 | )     |  
|Other                           |  |                             |       |                 |  |                      |  |       |       |       |  
|                                |  |                             |        |                 |  |                       |  |       |        |       |  
|Balance as of December 31,
2004 |  | $                           | 23,121 |                 |  |                      |  | $     | 500    |       | $
|                                |  |                             |        |                 |  |                       |  |       |        |       |  

As a result
of the
Companys annual evaluation of the impairment of intangible assets, the Company recorded an $8.2 million
charge for the
impairment of goodwill related to the 2001 acquisition of Embark. This impairment resulted from the Admission
Services
divisions disappointing operating results in 2004, and while this division continues to operate and expects
to generate future
cash flows from the sale of its new marketing services, these future cash flows are still uncertain.

53



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

The following is a summary of other intangible assets:

|                             |  | December   31,            |       
|---------------------------- |  | ------------------------- | ------
|                             |  |                           |       
|                             |  | 2004                      |       
|                             |  |                           |       
|                             |  | (in   thousands)          |       
|**Subject to
Amortization**  |  | Gross   Carrying   Amount |       
|                             |  |                           |       
|Franchise costs              |  | $                         | 283   
|Publishing
rights            |  |                           | 1,761 
|Capitalized K-12 content     |  |                           | 7,732 
|Trademark/tradename          |  |                           | 338   
|Non-compete agreements       |  |                           | 1,244 
|Customer lists               |  |                           | 2,700 
|Capitalized course costs     |  |                           | 1,151 
|                             |  |                           |       
|                             |  | $                         | 15,209
|                             |  |                           |       
|Not Subject to Amortization  |  |                           |       
|                             |  |                           |       
|Territorial marketing rights |  |                           |       
|                             |  |                           |       
|                             |  |                           |       
|                             |  |                           |       

|                                  |  |  |  |  | (in thousands) |      
|--------------------------------- |  |  |  |  | -------------- | -----
|                                  |  |  |  |  |                |      
|Aggregate amortization   expense: |  |  |  |  |                |      
|Actual:                           |  |  |  |  |                |      
|2002                              |  |  |  |  | $              | 1,461
|2003                              |  |  |  |  | $              | 1,625
|2004                              |  |  |  |  | $              | 2,152
|Estimate for fiscal year:         |  |  |  |  |                |      
|2005                              |  |  |  |  | $              | 1,904
|2006                              |  |  |  |  | $              | 1,759
|2007                              |  |  |  |  | $              | 1,632
|2008                              |  |  |  |  | $              | 1,028
|2009                              |  |  |  |  | $              | 586  

6. Line of Credit and Long-Term Debt

Line of Credit

On May 21,
2004, the Company
entered into a credit agreement with Commerce Bank, N.A. for a three-year revolving credit facility with a
maximum aggregate
principal amount of $5.0 million. The line of credit was secured by the Companys accounts receivable and
bore a variable
interest rate based on either the prime rate or 150 to 175 basis points over the London Interbank Offered Rate
(LIBOR),
in accordance with the terms of the agreement. As of December 31, 2004, the effective interest rate was 3.9% and
$2.0 million was
outstanding.

As of December
31, 2004, the
Company was not in compliance with the financial covenants contained in the credit agreement requiring the
maintenance of a certain
fixed charge, EBITDA and interest coverage ratios. The balance outstanding under the line of credit has been
reclassified to current
liabilities as a result of such non-compliance. In February 2005, the company repaid the entire balance
outstanding and terminated
the credit facility.

Notes Payable

On March 2,
2001, the Company
  completed its acquisition of Princeton Review of New Jersey, Inc. and Princeton Review of Boston, Inc. The
Company
  financed part of this acquisition with notes to the sellers totaling $3,625,000, which was outstanding as of
December 31, 2004. This
  balance is comprised of two notes. The first promissory note of $3,125,000 is payable as to principal in 20
equal quarterly
  installments beginning with the 17th calendar quarter following the closing date of the acquisition and bears
interest at the rate of
  8.25% per year, payable quarterly. The second promissory note for $500,000 bears interest at the rate of 8.25%
per year, payable on a
  quarterly basis, and is payable as to the entire principal amount four years from its date of
issuance.

54



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes
to Consolidated
Financial Statements  (Continued)

In July 2004,
the Company repaid
the outstanding balance of the note due to T.S.T.S., Inc. in the amount of $1,475,000. The Company financed the
repayment of this note with the line of credit discussed above.

On October 1,
2001, the Company completed its purchase of substantially all of the operating
assets of Embark. As part of the assumed liabilities, the Company
renegotiated and assumed $3.4 million in indebtedness that Embark owed to
Comdisco, Inc. (Comdisco). Amounts outstanding under the loan
agreement bore interest at an annual rate of 6.25%. The loan was secured by
substantially all of the Companys current and future business assets,
including membership interests in its subsidiaries, and was guaranteed by the
Companys subsidiaries. The loan was paid in full as of December 31,
2003.

In October
2004, the Company repaid the remaining outstanding balance on the note due to
the Princeton Review of St. Louis, Inc., in the amount of $250,000, which included
interest imputed at the rate of 4.8% per annum.

On July 11,
2003, the Company
acquired 77% of Princeton Review of North Carolina, Inc with the balance acquired from the minority shareholders
on November 13,
2003. The Company financed part of this acquisition with two notes to the sellers in the amount of $760,000 and
$208,000, including
imputed interest at 5% per year, which were outstanding as of December 31, 2004 and 2003. The $760,000 note is
payable in annual
installments of $80,000, including interest, during 2004 and 2005, increasing to $120,000 in years 2006 through
2010 when the loan is
due. The $208,000 note is payable in annual installments of $29,714, including interest, in years 2004 through
2010 when the loan is
due.

The annual maturities of notes
payable and the line of credit as of December 31, 2004 are approximately as follows:

|As of December 31, |  | Amount   Maturing |      
|------------------ |  | ----------------- | -----
|                   |  |                   |      
|                   |  | (in thousands)    |      
|2005               |  | $                 | 3,100
|2006               |  |                   | 735  
|2007               |  |                   | 740  
|2008               |  |                   | 747  
|2009               |  |                   | 597  
|Thereafter         |  |                   | 446  
|                   |  |                   |      
|                   |  | $                 | 6,365
|                   |  |                   |      

55



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

Capital Lease Obligations

At December 31,
2004, the Company
has leased approximately $2.9 million of computer and phone equipment under capital leases, all of which are
included in fixed assets

The following
is a schedule of the
future minimum capital lease obligation payments together with the present value of the minimum lease payments at
December 31,
2004:

|Year ending December
31,                                                    |  | (in   thousands) |      
|--------------------------------------------------------------------------- |  | ---------------- | -----
|                                                                            |  |                  |      
|2005                                                                        |  | $                | 779  
|2006                                                                        |  |                  | 737  
|2007                                                                        |  |                  | 274  
|2008                                                                        |  |                  |     
|2009                                                                        |  |                  |     
|                                                                            |  |                  |      
|Total                                                                       |  |                  | 1,790
|Less amounts representing   interest (effective rate ranges from 6% to
11%) |  |                  | 174  
|                                                                            |  |                  |      
|Present value of the   minimum lease payments                               |  |                  | 1,616
|Less current portion of
capital lease
obligations                           |  |                  | 669  
|                                                                            |  |                  |      
|Long-term portion of   capital lease obligations                            |  | $                | 947  
|                                                                            |  |                  |      

Total Long-Term Debt

Long-term
debt consists of the
following at:

|                          |  | December   31,   |      
|------------------------- |  | ---------------- | -----
|                          |  |                  |      
|                          |  | 2004             |      
|                          |  |                  |      
|                          |  | (in   thousands) |      
|Notes payable             |  | $                | 6,365
|Capital lease obligations |  |                  | 1,616
|Auto loan                 |  |                  | 1    
|                          |  |                  |      
|                          |  |                  | 7,982
|Less current portion      |  |                  | 3,769
|                          |  |                  |      
|                          |  | $                | 4,213
|                          |  |                  |      

7. Series B-1 Preferred Stock

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

56



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

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

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

During 2004,
cash dividends in the
amount of $373,611 were paid to the Series B-1 Preferred stockholder.

8. Commitments and Contingencies

Advertising Fund

All domestic
franchisees are
required to pay a monthly advertising fee to the Company, for contribution to an advertising fund, equal to 2% of
their
franchises gross receipts, as defined, for the preceding month. In accordance with the terms of the
franchise agreements, the
Company is required to use all advertising fees it receives for the development, placement and distribution of
regional and national
consumer advertising, designed at its discretion to promote consumer demand for services and products available
from the
franchises.

The Company
is required to keep
separate advertising fund accounting records and to maintain the advertising funds collected from the franchisees
in a separate bank
account. Franchisee payments to the Company in respect of the advertising fund are recorded in the Companys
revenue and the
expenses of the advertising fund are recorded in the Companys Selling, General and Administrative
Expenses.

57



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

Office and Classroom Leases

The Company has
entered into various operating leases in excess of one year, primarily office and classroom site
locations. Minimum rental commitments under these leases, including fixed
escalation clauses, which are in excess of one year, as of December 31, 2004,
are approximately as follows:

|Years Ending December 31, |  | (in   thousands) |       
|------------------------- |  | ---------------- | ------
|                          |  |                  |       
|2005                      |  | $                | 4,411 
|2006                      |  |                  | 4,141 
|2007                      |  |                  | 3,970 
|2008                      |  |                  | 3,533 
|2009                      |  |                  | 3,037 
|Thereafter                |  |                  | 7,583 
|                          |  |                  |       
|                          |  | $                | 26,675
|                          |  |                  |       

Rent expense
for the years ended
December 31, 2004, 2003 and 2002 was approximately $8.6, $7.7 and $6.9 million, respectively. These amounts
include rent expense for
the rental of space on a month-to-month basis, as well as those amounts incurred under operating leases for
longer periods. Certain
leases provide for early termination without penalty.

Legal Matters

The Company is
party to various
litigation matters in the ordinary course of its business which, in the opinion of management, will not result in
a material loss to
the Company.

Co-authorship Agreements

In connection
with its publishing
agreements, the Company has entered into various co-authorship agreements for the preparation of manuscripts.
These agreements
require payment of nonrecourse advances for services rendered at various established milestones. The Company did
not have any future
contractual commitments under the co-authorship agreements for manuscripts not yet delivered for the year ended
December 31, 2004,
however there were approximately $30,000 in commitments as of December 31, 2003. In addition, the co-authors are
entitled to a
percentage of the future royalties earned by the Company, which are first to be offset against such advances. The
total costs
incurred under these co-authorship agreements by the Company for advances and royalties were approximately
$585,000, $528,000, and
$367,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

The expense
related to co-author
payments is accrued monthly. This expense is adjusted based upon actual expenditures paid to the co-authors.
These expenditures are a
percentage of the royalties paid to the Company by the publisher. Royalties from the publisher are recorded as
revenue with the
co-author expenditures recorded as expense.

58



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

9. Income Taxes

The (provision)
benefit for income
taxes consists of the following:

|                                           |  | Years   Ended December 31, |        
|------------------------------------------ |  | -------------------------- | -------
|                                           |  |                            |        
|                                           |  | 2004                       |        
|                                           |  |                            |        
|                                           |  | (in   thousands)           |        
|Current tax (provision)   benefit:         |  |                            |        
|U.S. Federal                               |  |                            |       
|State                                      |  |                            |       
|Foreign                                    |  |                            |       
|                                           |  |                            |        
|                                           |  |                            |       
|                                           |  |                            |        
|Deferred tax (provision)
benefit:          |  |                            |        
|U.S. Federal                               |  | $                          | (14,832
|State                                      |  |                            | (1,859 
|Foreign                                    |  |                            | (16    
|                                           |  |                            |        
|                                           |  |                            | (16,707
|                                           |  |                            |        
|Total (provision) benefit
for income
taxes |  | $                          | (16,707
|                                           |  |                            |        

Significant
components of the
Companys deferred tax assets and liabilities are as follows at:

|                                                              |  | December   31,   |        
|------------------------------------------------------------- |  | ---------------- | -------
|                                                              |  |                  |        
|                                                              |  | 2004             |        
|                                                              |  |                  |        
|                                                              |  | (in   thousands) |        
|Deferred tax assets:                                          |  |                  |        
|Net   operating loss
carryforward                             |  | $                | 20,764 
|Tax   credit carryforwards                                    |  |                  | 85     
|Allowance   for doubtful accounts                             |  |                  | 522    
|Equity
compensation                                           |  |                  | 187    
|Capitalized   inventory costs                                 |  |                  | 46     
|Deferred   rent                                               |  |                  | 574    
|Unrealized
losses                                             |  |                  | 147    
|Accumulated   amortization including writedown of intangibles |  |                  | 1,368  
|Other                                                         |  |                  | 401    
|                                                              |  |                  |        
|Total   deferred tax assets                                   |  |                  | 24,094 
|                                                              |  |                  |        
|Deferred tax
liabilities:                                     |  |                  |        
|Software   development costs                                  |  |                  | (1,155 
|Accumulated   amortization                                    |  |                  |       
|Accumulated
depreciation                                      |  |                  | (807   
|                                                              |  |                  |        
|Total   deferred tax liabilities                              |  |                  | (1,962 
|                                                              |  |                  |        
|Net   deferred tax assets before valuation allowance          |  |                  | 22,132 
|Valuation
allowance                                           |  |                  | (22,132
|                                                              |  |                  |        
|Net deferred tax assets                                       |  | $                |       
|                                                              |  |                  |        

The net
deferred income tax asset decreased from an asset of $16.7 million at December
31, 2003, to $0 at December 31, 2004. The $16.7 million change in the net
deferred tax balance is primarily attributable to the establishment of a
valuation allowance on the net deferred tax asset. The net deferred tax asset at
December 31, 2003 is classified in the Companys consolidated balance sheet
as other current assets of approximately $852,000, and noncurrent deferred tax
assets of approximately $15.8 million. As of December 31, 2004, the Company has
a net operating loss carryforward totaling approximately $50.1 million which
expires in the years 2020 through 2024, and other timing differences which will
be available to offset regular taxable income during the carryforward
period.

Deferred Tax Valuation Allowance

SFAS No. 109,
Accounting for Income Taxes, requires that a valuation allowance be established
when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The
cumulative pre-tax loss of $8.1 million incurred in the most recent three years
represents sufficient negative evidence under the provisions of SFAS No. 109 for the Company to determine that
the establishment of a full valuation allowance against the deferred
tax asset is appropriate. This valuation allowance will offset assets associated with future tax deductions as
well as carryforward items. Although management expects  that these assets will ultimately be fully utilized,
future performance cannot be assured.

A
reconciliation setting forth the differences between the effective tax rate of the Company
for the years ended December 31, 2004, 2003 and 2002 and the U.S. federal statutory tax rate is as
follows:

|                                                                         |  | Years   Ended December 31, |        
|------------------------------------------------------------------------ |  | -------------------------- | -------
|                                                                         |  |                            |        
|                                                                         |  | 2004                       |        
|                                                                         |  |                            |        
|                                                                         |  | (in   thousands)           |        
|U.S. Federal income tax
benefit (provision) expenses at   statutory
rate |  | $                          | 4,660  
|Effect of permanent
differences and
other                                |  |                            | 39     
|Effect of state taxes                                                    |  |                            | 726    
|Valuation allowance                                                      |  |                            | (22,132
|                                                                         |  |                            |        
|                                                                         |  | $                          | (16,707
|                                                                         |  |                            |        

59



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

10. Employee Benefits and Contracts

Retirement Plan

The Company
has a defined
contribution plan (the Plan) under Section 401(k) of the Internal Revenue Code, which provides that
eligible employees
may make contributions subject to Internal Revenue Code limitations. Employees become eligible to participate in
the Plan on the
first day of the quarter following the beginning of their full-time employment, but company matching
contributions do not begin until
one year after full-time employment. Under the provisions of the Plan, contributions made by the Company are
discretionary and are
determined annually by the trustees of the Plan. The Companys contributions to the Plan for the years ended
December 31, 2004,
2003 and 2002 were $230,000, $200,000, and $199,000, respectively.

Stock Incentive Plan

On April 1,
2000, the Company
adopted its 2000 Stock Incentive Plan (the Stock Incentive Plan) providing for the authorization and
issuance of up to
2,538,000 shares of common stock, as adjusted. In June 2000, June 2001, March 2003 and December 2004, an
additional 211,500, 846,000,
1,000,000 and 308,085 shares, respectively, were authorized. The Stock Incentive Plan provides for the granting
of incentive stock
options, non-qualified stock options, restricted stock and deferred stock to eligible participants. Options
granted under the Stock
Incentive Plan are for periods not to exceed ten years. Other than for options to purchase 133,445 shares granted
in 2000 to certain
employees which were vested immediately, options outstanding under the Stock Incentive Plan generally vest
quarterly over two to four
years. As of December 31, 2004, there were approximately 335,000 shares available for
grant.

60



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

A summary of the activity of the Stock Incentive Plan is as
follows:

|                                   |  | Options |           | Weighted-Average   Exercise Price |  
|---------------------------------- |  | ------- | --------- | --------------------------------- | -
|                                   |  |         |           |                                   |  
|Outstanding at December 31, 2001   |  |         | 1,856,904 |                                   | $
|Granted at Market                  |  |         | 769,050   |                                   |  
|Forfeited                          |  |         | (172,321  | )                                 |  
|Exercised                          |  |         | (40,271   | )                                 |  
|                                   |  |         |           |                                   |  
|Outstanding   at December 31, 2002 |  |         | 2,413,362 |                                   |  
|Granted at Market                  |  |         | 429,236   |                                   |  
|Forfeited                          |  |         | (170,330  | )                                 |  
|Exercised                          |  |         | (124,205  | )                                 |  
|                                   |  |         |           |                                   |  
|Outstanding   at December 31, 2003 |  |         | 2,548,063 |                                   |  
|Granted at Market                  |  |         | 1,098,473 |                                   |  
|Forfeited                          |  |         | (167,107  | )                                 |  
|Exercised                          |  |         | (120,926  | )                                 |  
|                                   |  |         |           |                                   |  
|Outstanding   at December 31, 2004 |  |         | 3,358,503 |                                   |  
|Exercisable At December   31, 2002 |  |         | 1,238,493 |                                   |  
|Exercisable At December   31, 2003 |  |         | 1,790,513 |                                   |  
|Exercisable At December   31, 2004 |  |         | 2,134,059 |                                   |  

Stock options
outstanding at
December 31, 2004 are summarized as follows:

|Options
Outstanding |  | Options   Exercisable |          
|------------------- |  | --------------------- | ---------
|                    |  |                       |          
|Exercise  Price     |  | Options   Outstanding |          
|                    |  |                       |          
|$1.73 - $2.30       |  |                       | 99,904   
|$2.31 - $7.30       |  |                       | 896,539  
|$7.31 - $7.39       |  |                       | 1,084,658
|$7.45 - $8.30       |  |                       | 1,051,911
|$8.31 - $11.00      |  |                       | 225,491  
|                    |  |                       |          
|                    |  |                       | 3,358,503
|                    |  |                       |          

During 2001,
the Company granted
116,500 stock options to non-employee advisors and, using the fair value method, recorded compensation expense of
approximately
$98,000, $151,000 and $256,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

61



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

11. Related Parties

Publisher

Random House,
Inc., a holder of 1,515,353 shares of the Companys common stock at
December 31, 2004, is also the publisher and distributor of substantially all of
the Companys books. For the years ended December 31, 2004, 2003 and 2002,
the Company earned $3.7, $3.6 and $3.5 million respectively, of book and
publication income from Random House, Inc. Total receivables at December 31,
2004 and 2003 included $2.8 and $2.4 million, respectively, due from Random
House, Inc. for royalties, book advances, copy editing and marketing fees. In
addition, Random House, Inc. has paid advances of $0 and $48,000, respectively,
to the Company for books that have not yet been completed as of December 31,
2004 and 2003, which are deferred as book advances. At December 31, 2002, the
Company had a liability to Random House, Inc. of $141,000 for advances.

Loans to Officers

As of December
31, 2004 and 2003
the Company had loans to two executive officers of approximately $1.3 million and $1.2 million, respectively. No
loans were made
to executive officers after February 2002, although interest continues to accrue. Such amounts and accrued
interest are included in Other Current Assets and Other assets at December 31, 2004 and
December 31, 2003. These loans are payable in four consecutive, equal annual
installments with the first payment to be made on the earlier of the fourth anniversary of the loan or 60 days
after termination of
employment, accrue interest at 7.3% per year and, as of December 31, 2004, are secured by the 299,066 shares of
the Companys
common stock owned by these officers.

12. Acquisitions

On July 11,
2003, the Company
acquired a 77% interest in Princeton Review of North Carolina, Inc. and the remaining 23% was acquired on
November 13, 2003. 
The total purchase price including both transactions was approximately $1,138,000, including imputed
interest.  The purchase
price exceeded the fair value of the net assets acquired resulting in goodwill of approximately $938,000. 
Princeton Review of
North Carolina, Inc. provided test preparation courses in North Carolina under the Princeton Review name through
a franchise
agreement with the Company. This acquisition has been accounted for as a purchase and has been included in the
Companys
operations from the date of the purchase.

Approximately
$170,000 of the
purchase price was paid in cash at the time of closings. The remaining approximately $968,000 of the purchase
price was paid by
delivery to the sellers of subordinated promissory notes (see Note 6).

62



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

The pro forma
effect of Princeton Review of North Carolina, Inc.  is not presented  because its results are not
significant.

13. Segment Reporting

The operating
segments reported
below are the segments of the Company for which separate financial information is available and for which
operating results as
measured by EBITDA are evaluated regularly by executive management in deciding how to allocate resources and in
assessing
performance. The accounting policies of the business segments are the same as those described in the summary of
significant
accounting policies (see Note 1).

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

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

|                                                               |  | Year Ended   December 31, 2004 |       
|-------------------------------------------------------------- |  | ------------------------------ | ------
|                                                               |  |                                |       
|                                                               |  | (in   thousands)               |       
|                                                               |  | Test   Preparation   Services  |       
|                                                               |  |                                |       
|Revenue                                                        |  | $                              | 74,744
|                                                               |  |                                |       
|Operating Expenses   (including depreciation and amortization) |  | $                              | 42,858
|                                                               |  |                                |       
|Segment operating income   (loss)                              |  |                                | 7,725 
|Depreciation &
Amortization                                    |  |                                | 1,804 
|Other                                                          |  |                                |      
|                                                               |  |                                |       
|Segment EBITDA                                                 |  | $                              | 9,529 
|                                                               |  |                                |       
|Total Segment Assets                                           |  | $                              | 29,529
|                                                               |  |                                |       
|Segment Goodwill                                               |  | $                              | 23,121
|                                                               |  |                                |       
|Expenditures for long   lived assets                           |  | $                              | 2,551 
|                                                               |  |                                |       

63



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

|                                                               |  | Year Ended   December 31, 2003 |       
|-------------------------------------------------------------- |  | ------------------------------ | ------
|                                                               |  |                                |       
|                                                               |  | (in thousands)                 |       
|                                                               |  | Test   Preparation   Services  |       
|                                                               |  |                                |       
|Revenue                                                        |  | $                              | 71,719
|                                                               |  |                                |       
|Operating Expenses   (including depreciation and amortization) |  | $                              | 39,123
|                                                               |  |                                |       
|Segment operating income   (loss)                              |  |                                | 11,787
|Depreciation &   Amortization                                  |  |                                | 1,522 
|Other                                                          |  |                                |      
|                                                               |  |                                |       
|Segment EBITDA                                                 |  | $                              | 13,309
|                                                               |  |                                |       
|Total Segment Assets                                           |  | $                              | 33,908
|                                                               |  |                                |       
|Segment Goodwill                                               |  | $                              | 22,991
|                                                               |  |                                |       
|Expenditures for long   lived assets                           |  | $                              | 1,480 
|                                                               |  |                                |       

|                                                             |  | Year Ended   December 31, 2002 |       
|------------------------------------------------------------ |  | ------------------------------ | ------
|                                                             |  |                                |       
|                                                             |  | (in thousands)                 |       
|                                                             |  | Test   Preparation   Services  |       
|                                                             |  |                                |       
|Revenue                                                      |  | $                              | 67,930
|                                                             |  |                                |       
|Operating Expenses
(including depreciation and
amortization) |  | $                              | 37,250
|                                                             |  |                                |       
|Segment operating income
(loss)                              |  |                                | 12,163
|Depreciation &   Amortization                                |  |                                | 1,804 
|Other                                                        |  |                                |      
|                                                             |  |                                |       
|Segment EBITDA                                               |  | $                              | 13,967
|                                                             |  |                                |       
|Total Segment
Assets                                         |  | $                              | 32,565
|                                                             |  |                                |       
|Segment Goodwill                                             |  | $                              | 21,861
|                                                             |  |                                |       
|Expenditures for long
lived assets                           |  | $                              | 2,169 
|                                                             |  |                                |       

64



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

Reconciliation of operating income (loss) to net income
(loss)

|                                            |  | Years   Ended December 31, |        
|------------------------------------------- |  | -------------------------- | -------
|                                            |  |                            |        
|                                            |  |                            | 2004   
|                                            |  |                            |        
|Total income (loss) for
reportable
segments |  | $                          | (13,448
|Unallocated
amounts:                        |  |                            |        
|Interest   expense                          |  |                            | (693   
|Other   income                              |  |                            | 435    
|(Provision)   benefit for income taxes      |  |                            | (16,707
|                                            |  |                            |        
|Net income (loss)                           |  | $                          | (30,413
|                                            |  |                            |        

14. Quarterly Results of Operations (Unaudited)

The following table presents unaudited statement of operations data for
each of the eight
quarters in the two-year period ended December 31, 2004. This information has been derived from the
Companys historical
consolidated financial statements and should be read in conjunction with the Companys historical
consolidated financial
statements and related notes appearing in this Annual Report on Form 10-K.

|                                                                      |  | Quarter   Ended                         |       
|--------------------------------------------------------------------- |  | --------------------------------------- | ------
|                                                                      |  |                                         |       
|                                                                      |  | Mar.   31,   2004                       |       
|                                                                      |  |                                         |       
|                                                                      |  | (in   thousands, except per share
data) |       
|Revenue                                                               |  |                                         |       
|Test   Preparation
Services                                           |  | $                                       | 18,830
|K-12   Services                                                       |  |                                         | 6,283 
|Admissions
Services                                                   |  |                                         | 2,834 
|                                                                      |  |                                         |       
|Total   revenue                                                       |  |                                         | 27,947
|                                                                      |  |                                         |       
|Cost of   revenue                                                     |  |                                         |       
|Test   Preparation
Services                                           |  |                                         | 5,820 
|K-12   Services                                                       |  |                                         | 3,664 
|Admissions
Services                                                   |  |                                         | 596   
|                                                                      |  |                                         |       
|Total   cost of
revenue                                               |  |                                         | 10,080
|                                                                      |  |                                         |       
|Gross
profit                                                          |  |                                         | 17,867
|                                                                      |  |                                         |       
|Operating   expenses                                                  |  |                                         |       
|Selling,   general and
administrative                                 |  |                                         | 19,003
|Impairment of
goodwill                                                |  |                                         |      
|                                                                      |  |                                         |       
|Total   operating
expenses                                            |  |                                         | 19,003
|                                                                      |  |                                         |       
|Income (loss) from   operations                                       |  |                                         | (1,136
|                                                                      |  |                                         |       
|Net income (loss)
attributed to common stockholders                   |  | $                                       | (706  
|                                                                      |  |                                         |       
|Basic income (loss) per   share                                       |  | $                                       | (0.03 
|                                                                      |  |                                         |       
|Diluted income (loss) per   share                                     |  | $                                       | (0.03 
|                                                                      |  |                                         |       
|Weighted average shares
used in computing net income (loss) per share |  |                                         |       
|                                                                      |  |                                         |       
|Basic                                                                 |  |                                         | 27,391
|                                                                      |  |                                         |       
|Diluted                                                               |  |                                         | 27,391
|                                                                      |  |                                         |       

65



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES Notes to Consolidated
Financial Statements
 (Continued)

15.  Earnings (Loss) Per Share

The following table sets forth the denominators used in computing basic and
diluted earnings
(loss) per common share for the periods indicated:

|                                                                          |  | Years Ended December 31, |       
|------------------------------------------------------------------------- |  | ------------------------ | ------
|                                                                          |  |                          |       
|                                                                          |  | 2004                     |       
|                                                                          |  |                          |       
|                                                                          |  | (in   thousands)         |       
|Weighted average common   shares outstanding                              |  |                          |       
|Basic                                                                     |  |                          | 27,468
|Net   effect of dilutive
stock options-based on
the treasury stock method |  |                          |      
|Other                                                                     |  |                          |      
|                                                                          |  |                          |       
|Diluted                                                                   |  |                          | 27,468
|                                                                          |  |                          |       

For the year
ended December 31,
2004, the following were excluded from the computation of diluted earnings per common share because of their
antidilutive
effect:  577,961 Series B-1 Preferred Shares, 230,215 stock options, and 9 of other.  For the year
ended December 31, 2002,
135,916 stock options were excluded from the computation of diluted earnings per common share due to their
antidilutive effect.

66



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Schedule II Valuation and Qualifying Accounts For the years
ended December 31, 2004,
2003 and 2002

|                                            |  | Balance   at   Beginning of
Period |     | Additions   Charged to   Expense |   | Deductions   From   Allowance(1) |  | Balance at   End of   Period |       
|------------------------------------------- |  | ---------------------------------- | --- | -------------------------------- | - | -------------------------------- |  | ---------------------------- | ------
|                                            |  |                                    |     |                                  |   |                                  |  |                              |       
|                                            |  | (in   thousands)                   |    
|Allowance   for Doubtful Accounts           |  |                                    |     |                                  |   |                                  |  |                              |       
|Year Ended December 31,   2004              |  | $                                  | 302 |                                  | $ | 1,521                            |  | $                            | (533  
|Year Ended December 31,
2003                |  | $                                  | 527 |                                  | $ | 380                              |  | $                            | (605  
|Year Ended December 31,   2002              |  | $                                  | 890 |                                  | $ | 655                              |  | $                            | (1,018
|Valuation allowance for deferred tax assets |  |                                    |     |                                  |   |                                  |  |                              |       
|Year
Ended December 31, 2004                |  |                                    |    |                                  | $ | 22,132                           |  |                              |      
|Year
Ended December 31, 2003                |  |                                    |    |                                  |   |                                 |  |                              |      
|Year
Ended December 31, 2002                |  |                                    |    |                                  |   |                                 |  |                              |      

|   
|---
|(1)
|   

Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial
Disclosure

None.

Item 9A. Controls and Procedures

Disclosure
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) of the Exchange Act, (Disclosure Controls) as of the end of the period covered by this
Annual 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).  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 Annual 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 and finance organization. The overall goals of these various evaluation activities
are to monitor our
Disclosure Controls and to modify them on an ongoing basis as necessary.

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

Based upon the
evaluation of our Disclosure Controls,
and in light of the control deficiencies described below under Internal Control Over Financial
Reporting, our CEO and CFO were not able to conclude that our Disclosure Controls were effective, as of the
end of the period covered by this Annual 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.

67



Internal
Control Over
Financial Reporting

We are in the
process of
documenting and testing our internal control over financial reporting in order to satisfy the requirements of
Section 404, which requires annual
management assessments of the effectiveness of our internal control over financial reporting and a report by our
independent auditor
addressing these assessments and its opinion of our internal control over financial reporting. In late November
2004, the Securities and Exchange Commission issued an exemptive order providing a
45-day extension for the filing of these reports and attestations by eligible companies. We have elected to
utilize this 45-day
extension, and, therefore, this Form 10-K does not include these reports. These reports will be included in an
amended Form 10-K.

In July
2004, our independent registered public accounting firm, Ernst & Young LLP, reported in writing to us
and our audit committee that it had identified two reportable
conditions relating to our internal control over
financial reporting.  One of these reportable conditions concerned the need
for better controls to handle a greater volume of multiple element contracts in
our K-12 Services division and address related revenue recognition issues. 
The other involved the need to strengthen certain review procedures during the
monthly closing process within the accounting department. We are dedicating
substantial resources to improving our internal control over financial
reporting, both in response to the identified reportable conditions and as part
of an ongoing initiative to test and strengthen internal control overall in
accordance with the requirements of Section 404.  In the course of this
broad review of our internal control structure, we have identified several
additional areas where our internal control over financial reporting needs to be
improved.  These additional areas include greater segregation of duties and
the need to hire additional qualified personnel in the accounting department,
better documentation of certain review processes, improvement in the financial
reporting close process, the design and implementation of a collections policy
and the reconciliation processes.

To address the
reportable
conditions identified by our auditor and the other issues identified as part of our review, we have made various
improvements in our
internal control over financial reporting, including the ongoing implementation of a new accounting and financial
reporting software system. 
In addition, we retained consultants to assist us with the implementation of this new system and with our overall
review of our
internal controls.  We have also hired and will continue to recruit and hire additional qualified personnel
for the accounting
department, as necessary to address identified concerns.

We have
expended significant resources in our efforts to comply with the requirements of
Section 404 and in remediating deficiencies or weaknesses identified. Although
our management believes we have made significant progress in this area, we have
not yet been able to complete our assessment of which, if any, of the identified
control deficiencies constitute material weaknesses as defined under Standard No. 2, and have
therefore not determined whether, as of December 31, 2004, our internal control
over financial reporting was effective. However, given the number of control
deficiencies that we have identified, and the fact that we believe that one or more of these control deficiencies
constitute a significant deficiency under Standard No. 2,
there is a strong likelihood that we will
conclude, when we are able to complete our assessment, that one or more of these
control deficiencies, individually or in the aggregate, constitute a
material weakness. This would then require us to conclude in our
report under Section 404 that our internal control over financial reporting was
not effective as of December 31, 2004. In addition, our independent registered public accounting firm has
notified the audit committee of our board of directors that it may not have
sufficient time to complete its assessment and report on our internal control
over financial reporting by the extended deadline.

Notwithstanding
the foregoing, the
reportable conditions and other areas of our internal control over financial reporting
identified by us as needing improvement have not resulted in a material restatement of our
financial statements. Nor are we aware of any instance where such reportable conditions or
other identified areas of weakness have resulted in a material misstatement or omission in
any report we have filed with or submitted to the SEC.

Except as
described above, there
has been no change in our internal control over financial reporting that occurred during the fourth fiscal
quarter of 2004 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.

Item 9B. Other Information

None

68



PART III

Item 10. Directors and Executive Officers of the
Registrant

The information
required by this
Item 10, other than information with respect to our executive officers, which is contained under Executive
Officers at
the end of Part 1 of this Annual Report on Form 10-K, is incorporated by reference from our definitive proxy
statement for our 2005
annual meeting of stockholders, scheduled to be held on June 9, 2005.

Item 11. Executive Compensation

The
information required by this
Item 11 is incorporated by reference from our definitive proxy statement for our 2005 annual meeting of
stockholders, scheduled to be
held on June 9, 2005.

Item 12. Security Ownership of Certain Beneficial Owners and
Management

The information
required by this
Item 12 is incorporated by reference from our definitive proxy statement for our 2005 annual meeting of
stockholders, scheduled to be
held on June 9, 2005.

Item 13. Certain Relationships and Related
Transactions

The information
required by this
Item 13 is incorporated by reference from our definitive proxy statement for our 2004 annual meeting of
stockholders, scheduled to be
held on June 9, 2005.

Item 14. Principal Accountant Fees and
Services

The information
required by this
Item 14 is incorporated by reference from our definitive proxy statement for our 2005 annual meeting of
stockholders, scheduled to be
held on June 9, 2005.

69



PART IV

Item 15. Exhibits and Financial Statement
Schedules

(a) The
following documents
are filed as part of this Report:

1. Financial
StatementsSee Index to Consolidated Financial Statements and Financial Statement Schedule at Item 8 on page 38 of this Annual
Report on Form 10-K.

2. Financial Statement
SchedulesSee Index to Consolidated Financial Statements and Financial Statement Schedule at Item 8 on page
38 of this Annual
Report on Form 10-K. All other schedules are omitted because they are not applicable or not required.

3. ExhibitsThe following
exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K:

|Exhibit   Number |   | Description                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.1              |  | Conversion and   Contribution Agreement, dated as of March 31, 2000, by and
among The
Princeton Review, Inc., the Non-Voting Members of Princeton Review Publishing   L.L.C., John S. Katzman and TPR
Holdings, Inc.
(1)                                                                                                                                                                                                                         
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.2              |  | RH Contribution Agreement,   dated as of March 31, 2000, by and among
Random House TPR, Inc.,
Random   House, Inc., The Princeton Review, Inc., John S. Katzman, and TPR Holdings,   Inc. (1)                                                                                                                                                                                                                                                    
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.3              |  | TPR Contribution   Agreement, dated as of March 31, 2000, by and among The
Princeton Review,
Inc., each of the persons listed on Schedule I attached to the agreement and   TPR Holdings, Inc. (1)                                                                                                                                                                                                                                               
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.4              |  | Option Agreement, dated as   of May 30, 2000, by and among Princeton Review
Operations, L.L.C.,
Princeton   Review of Boston, Inc. and Princeton Review of New Jersey, Inc. (1)                                                                                                                                                                                                                                                                  
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.5              |  | Option Agreement   Amendment, dated as of December 14, 2000, by and between
Princeton Review
Operations, L.L.C., Princeton Review of Boston, Inc. and Princeton Review of   New Jersey, Inc. (1)                                                                                                                                                                                                                                                 
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.6              |  | Option Agreement, dated as   of October 18, 2000, by and among Princeton
Review Operations,
L.L.C.,   T.S.T.S., Inc., Robert O. Case and Kevin D. Campbell. (1)                                                                                                                                                                                                                                                                                  
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.7              |  | Option Agreement, dated as   of December 15, 2000, by and between Princeton
Review Operations,
L.L.C. and   The Princeton Review Peninsula, Inc. (1)                                                                                                                                                                                                                                                                                             
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.8              |  | Asset Purchase Agreement,   dated as of January 18, 2001, by and among
Princeton Review Boston,
Inc.,   Princeton Review New Jersey, Inc., Robert L. Cohen, Matthew Rosenthal,   Princeton Review Operations,
L.L.C., and Princeton
Review Management, L.L.C.   (1)                                                                                                                                                                              
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.9              |  | Closing Agreement, dated   as of March 2, 2001, by and among Princeton
Review of Boston, Inc.,
Princeton   Review of New Jersey, Inc., Robert L. Cohen, Matthew Rosenthal, Princeton   Review Operations, L.L.C.
and Princeton
Review Management, L.L.C.   (incorporated herein by reference to Exhibit 2.8.1 to our Registration   Statement on
Form S-1 (File No.
333-43874) which was declared effective on   June 18, 2001 (the Form S-1)).
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.10             |  | Promissory Note, dated as   of March 2, 2001, made by Princeton Review
Operations, L.L.C. in
favor of   Princeton Review of Boston, Inc., in the principal amount of $3,125,000 (incorporated   herein by
reference to Exhibit 2.9
to our Form S-1).                                                                                                                                                                                             
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.11             |  | Promissory Note, dated as   of March 2, 2001, made by Princeton Review
Operations, L.L.C. in
favor of   Princeton Review of Boston, Inc., in the principal amount of $500,000   (incorporated herein by
reference to Exhibit 2.10
to our Form S-1).                                                                                                                                                                                              
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.12             |  | Asset Purchase Agreement,   dated as of March 6, 2001, by and among The
Princeton Review
Peninsula, Inc.,   the Hirsch Living Trust, Pamela N. Hirsch, Myles E. Hirsch, Frederick Sliter,   Princeton
Review Operations,
L.L.C. and Princeton Review Management, L.L.C.   (incorporated herein by reference to Exhibit 2.11 to our Form
S-1).                                                                                                    

70



|Exhibit   Number |   | Description                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|2.13             |  | Asset Purchase Agreement,   dated June 18, 2001, among Princeton Review
Operations, L.L.C.,
Princeton   Review Management, L.L.C., T.S.T.S., Inc., Robert O. Case and Kevin D.   Campbell (incorporated
herein by reference to
Exhibit 10.1 to our Quarterly   Report on Form 10-Q (File No. 000-32469), filed with the Securities and
Exchange Commission on
August 8, 2001 (the 2001 Second Quarter Form 10-Q)).
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|2.14             |  | Subordinated Promissory   Note, dated June 18, 2001, made by Princeton
Review Operations,
L.L.C. in   favor of T.S.T.S., Inc., in the principal amount of $1,475,000 (incorporated   herein by reference to
Exhibit 10.2 to our
2001 Second Quarter Form 10-Q).                                                                                                                                                     
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|2.15             |  | Asset Purchase Agreement,   dated as of October 1, 2001, by and among The
Princeton Review,
Inc.,   Princeton Review Publishing, L.L.C. and Embark.com, Inc. (incorporated herein   by reference to Exhibit
2.1 to our Current
Report on Form 8-K (File No.   000-32469), filed with the Securities and Exchange Commission on October 9,   2001
(the Form
8-K)).                                                 
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|3.1              |  | Amended and Restated   Certificate of Incorporation (incorporated herein by
reference to
Exhibit   3.1.2 to our Form S-1).                                                                                                                                                                                                                                                                                          
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|3.2              |  | Amended and Restated   By-laws (incorporated herein by reference to Exhibit
3.3.1 to our Form
S-1).                                                                                                                                                                                                                                                                                                                 
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.1              |  | Form of Specimen Common   Stock Certificate (1).                                                                                                                                                                                                                                                                                                                                                                    
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.2              |  | Certificate of Designation   of Series B-1 Cumulative Convertible Preferred
Stock of The
Princeton Review,   Inc. (incorporated   herein by reference to Exhibit 4.1 to our Current Report on Form 8-K
(File   No. 000-32469),
filed with the Securities and Exchange Commission on June 9,   2004)                                                                                                                 
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.1             |  | Stockholders Agreement,   dated as of April 1, 2000, by and among The
Princeton Review, Inc.,
and its   stockholders (1).                                                                                                                                                                                                                                                                                           
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.2             |  | Stock Purchase Agreement,   dated April 18, 2000, by and among The
Princeton Review, Inc., SG
Capital   Partners LLC, Olympus Growth Fund III, L.P. and Olympus Executive Fund, L.P.   (1).                                                                                                                                                                                                                         
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.3             |  | Joinder Agreement, dated   April 18, 2000, to the Stockholders Agreement
dated April 1, 2000,
among   stockholders of The Princeton Review, Inc. (1).                                                                                                                                                                                                                                                               
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.4             |  | Investor Rights Agreement,   dated April 18, 2000, by and among The
Princeton Review, Inc., SG
Capital   Partners LLC, Olympus Growth Fund III, L.P. and Olympus Executive Fund, L.P.   (1).                                                                                                                                                                                                                        
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.5             |  | The Princeton Review, Inc.   2000 Stock Incentive Plan, March 2000
(1).                                                                                                                                                                                                                                                                                                                                             
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.6             |  | Amendment to The Princeton   Review, Inc. 2000 Stock Incentive Plan
(incorporated herein by
reference to   Exhibit 10.5.1 to our Form S-1).                                                                                                                                                                                                                                                                         
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.7             |  | Form of Incentive Stock   Option Agreement (incorporated herein by
reference to Exhibit 10.6 to
our   Form S-1).                                                                                                                                                                                                                                                                                                    
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.8             |  | Software Purchase   Agreement, dated as of June 23, 1998, by and between
Learning Company
Properties and Princeton Review Publishing, L.L.C. (incorporated herein by   reference to Exhibit 10.10 to our
Form S-1).                                                                                                                                                                                                 
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.9             |  | The Princeton Review   Executive Compensation Policy Statement, as amended
(incorporated by
reference to Exhibit 10.12 of our Annual Report on Form 10-K for the year   ended December 31, 2001).                                                                                                                                                                                                                   
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.10            |  | Office Lease, dated as of   April 23, 1992, as amended, by and between The
Princeton Review,
Inc. and   2316 Broadway Realty Co. (incorporated herein by reference to Exhibit 10.12   to our Form
S-1).                                                                                                                                                                                                             
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.11            |  | Amendment to Office Lease,   dated December 9, 1993 (incorporated herein by
reference to
Exhibit 10.13 to   our Form S-1).                                                                                                                                                                                                                                                                                          
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.12            |  | Second Amendment to Office   Lease, dated February 6, 1995 (incorporated
herein by reference to
Exhibit   10.14 to our Form S-1).                                                                                                                                                                                                                                                                                   

71



|Exhibit   Number |   | Description                                                                                                                                                                                                                                                                                                                                                                      
|---------------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.13            |  | Third Amendment to Office   Lease, dated April 2, 1996 (incorporated herein
by reference to
Exhibit 10.15   to our Form S-1).                                                                                                                                                                                                                                                    
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.14            |  | Fourth Amendment to Office   Lease, dated July 10, 1998 (incorporated
herein by reference to
Exhibit 10.16   to our Form S-1).                                                                                                                                                                                                                                                   
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.15            |  | Employment Agreement,   dated as of April 11, 2002, by and between The
Princeton Review, Inc.
and   John Katzman (incorporated by reference to Exhibit 10.1 to our Quarterly   Report on Form 10-Q (file No.
000-32469), filed with
the Securities and   Exchange Commission on May 14, 2002 (the 2002 First Quarter Form
10-Q).                                               
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.16            |  | Employment Agreement,   dated as of April 10, 2002, by and between The
Princeton Review, Inc.
and   Mark Chernis (incorporated by reference to Exhibit 10.2 to our 2002 First   Quarter Form 10-Q).                                                                                                                                                                              
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.17            |  | Employment Agreement,   dated as of April 10, 2002, by and between The
Princeton Review, Inc.
and   Steve Quattrociocchi (incorporated by reference to Exhibit 10.3 to our 2002   First Quarter Form
10-Q).                                                                                                                                                                      
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.18            |  | Employment Agreement,   dated as of April 10, 2002, by and between The
Princeton Review, Inc.
and   Bruce Task (incorporated by reference to Exhibit 10.4 to our 2002 First   Quarter Form 10-Q).                                                                                                                                                                                
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.19            |  | Employment Agreement,   dated as of October 15, 2001, by and between The
Princeton Review, Inc.
and   Stephen Melvin (incorporated by reference to Exhibit 10.61 of our Annual   Report on Form 10-K for the year
ended December 31,
2001).                                                                                                                                      
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.20            |  | Office Lease by and   between The Rector, Church-Wardens and Vestrymen of
Trinity Church in
the   City of New York, as Landlord, and Princeton Review Publishing, L.L.C., as   Tenant (incorporated herein by
reference to
Exhibit 10.35 to our Form S-1).                                                                                                                       
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.21            |  | Agreement, dated September   1, 1998, by and between The Educational and
Professional
Publishing Group, a   unit of the McGraw-Hill Companies, Inc., and Princeton Review Publishing,   L.L.C.
(incorporated herein by
reference to Exhibit 10.36 to our Form   S-1).(2)                                                                                                         
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.22            |  | Franchise Agreement, dated   as of July 1, 1986, by and between The
Princeton Review Management
Corp. and   Lloyd Eric Cotsen (Lecomp Company, Inc.) (incorporated herein by reference to   Exhibit 10.39 to our
Form
S-1).                                                                                                                                                      
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.23            |  | Franchise Agreement, dated   as of September 13, 1986, by and between The
Princeton Review
Management   Corp. and Robert Case, Richard McDugald and Kevin Campbell (Test Services,   Inc.) (incorporated
herein by reference to
Exhibit 10.40 to our Form S-1).                                                                                                                  
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.24            |  | Addendum to the Franchise   Agreement, dated as of May 31, 1995, by and
between The Princeton
Review   Management Corp. and the persons and entities listed on the Franchisee   Joinders (incorporated herein
by reference to
Exhibit 10.41 to our Form S-1).                                                                                                                    
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.25            |  | Formation Agreement, dated   as of May 31, 1995, by and among The Princeton
Review Publishing
Company,   L.L.C., The Princeton Review Publishing Co., Inc., the Princeton Review   Management Corp. and the
independent franchisees
(incorporated herein by   reference to Exhibit 10.42 to our Form S-1).                                                                       
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.26            |  | Distance Learning Waiver,   dated as of June 21, 2000, by and between
Princeton Review
Management, L.L.C.   and Lecomp, Inc. (incorporated herein by reference to Exhibit 10.44 to our   Form
S-1).                                                                                                                                                                              
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.27            |  | Pledge and Security   Agreement, dated as of September 19, 2000, by and
between Steven Hodas
and   The Princeton Review, Inc. (incorporated herein by reference to Exhibit 10.45   to our Form
S-1)                                                                                                                                                                              
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.28            |  | Promissory Note, dated as   of September 19, 2000, made by Steven Hodas in
favor of The
Princeton Review,   Inc. (incorporated herein by reference to Exhibit 10.46 to our Form S-1).                                                                                                                                                                                            
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                  
|10.29            |  | Non-Recourse Promissory   Note, dated August 15, 2001, made by Bruce Task
in favor of The
Princeton   Review, Inc. (incorporated herein by reference to Exhibit 10.1 to our   Quarterly Report on Form 10-Q
(File No.
000-32469) for the third quarter of   2001, filed with the Securities and Exchange Commission on November 13,
2001   (the 2001
Third Quarter Form 10-Q)).

72



|Exhibit   Number |   | Description                                                                                                                                                                                                                                                                                                                                                                                                              
|---------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.30            |  | Pledge and Security   Agreement, dated as of August 15, 2001, by and
between Bruce Task and
The   Princeton Review, Inc. (incorporated herein by reference to Exhibit 10.2 to   our 2001 Third Quarter Form
10-Q).                                                                                                                                                                                                       
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.31            |  | Non-Recourse Promissory   Note, dated November 27, 2001, made by Mark
Chernis in favor of The
Princeton   Review, Inc. (incorporated by reference to Exhibit 10.53 of our Annual Report   on Form 10-K for the
year ended December
31, 2001).                                                                                                                                                                            
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.32            |  | Pledge and Security   Agreement, dated as of November 27, 2001, by and
between Mark Chernis and
The   Princeton Review, Inc. (incorporated by reference to Exhibit 10.54 of our   Annual Report on Form 10-K for
the year ended
December 31, 2001).                                                                                                                                                                      
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.33            |  | Non-Recourse Promissory   Note, dated March 7, 2002, made by Mark Chernis
in favor of The
Princeton   Review, Inc. (incorporated by reference to Exhibit 10.55 of our Annual Report   on Form 10-K for the
year ended December
31, 2001).                                                                                                                                                                                
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.34            |  | Agreement, dated as of May   28, 2004, by and between The Princeton Review,
Inc. and Fletcher
International, Ltd. (incorporated herein by reference to Exhibit 4.1 to our   Current Report on Form 8-K (File
No. 000-32469), filed
with the Securities   and Exchange Commission on June 9, 2004).                                                                                                                       
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.35            |  | Lease, dated as of August   1, 2004, by and between The Rector,
Church-Wardens and Vestrymen of
Trinity   Church in the City of New York, as Landlord and The Princeton Review, Inc.,   as Tenant. (incorporated
herein by reference
to Exhibit 10.1 to our Quarterly   Report on Form 10-Q (File No. 000-32469) for the third quarter of 2004,
filed   with the
Securities and Exchange Commission on November 9, 2004).
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|21.1             |  | Subsidiaries of the   Registrant.                                                                                                                                                                                                                                                                                                                                                                                        
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|23.1             |  | Consent of Ernst &   Young LLP.                                                                                                                                                                                                                                                                                                                                                                                          
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|24.1             |  | Powers of Attorney   (included on the signature pages hereto).                                                                                                                                                                                                                                                                                                                                                           
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|31.1             |  | Certification of CEO   Pursuant to Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
|31.2             |  | Certification of CFO   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.                                                                                                                                                                                                                                                                                             

|   
|---
|(1)
|(2)

73



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on March 23,
2005.

| | THE PRINCETON   REVIEW,
INC
| | ---------------------------
| |                            
| | By:                        
| |                            
| |                            
| |                            
| |                            

POWER OF ATTORNEY

Each individual
whose signature
appears below constitutes and appoints each of John S. Katzman, Mark Chernis and Stephen Melvin, such
persons true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution, for such person and in such
persons name, place
and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file the
same, with all
exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and
necessary to be done
in and about the premises, as fully to all intents and purposes as such person might or could do in person,
hereby ratifying and
confirming all that any said attorney-in-fact and agent, or any substitute or substitutes of any of
them, may lawfully do or cause to be done by virtue hereof.

Pursuant to
the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in
the capacities and on the dates indicated.

|Signature                      |  | Title                                  |  | Date          
|------------------------------ |  | -------------------------------------- |  | --------------
|                               |  |                                        |  |               
|/s/   JOHN S. KATZMAN          |  | Chairman and Chief   Executive Officer |  | March 23, 2005
|                               |  | (Principal   Executive Officer)        |  |               
|(John S.   Katzman)            |  |                                        |  |               
|                               |  |                                        |  |               
|                               |  |                                        |  |               
|/s/   STEPHEN MELVIN           |  | Chief Financial Officer   (Principal   |  | March 23, 2005
|                               |  | Financial and   Accounting Officer)    |  |               
|(Stephen   Melvin)             |  |                                        |  |               
|                               |  |                                        |  |               
|                               |  |                                        |  |               
|/s/   RICHARD KATZMAN          |  | Director                               |  | March 23, 2005
|                               |  |                                        |  |               
|(Richard   Katzman)            |  |                                        |  |               
|                               |  |                                        |  |               
|/s/   JOHN C. REID             |  | Director                               |  | March 23, 2005
|                               |  |                                        |  |               
|(John C.   Reid)               |  |                                        |  |               
|                               |  |                                        |  |               
|/s/   RICHARD SARNOFF          |  | Director                               |  | March 23, 2005
|                               |  |                                        |  |               
|(Richard   Sarnoff)            |  |                                        |  |               
|                               |  |                                        |  |               
|/s/   SHEREE T. SPEAKMAN       |  | Director                               |  | March 23, 2005
|                               |  |                                        |  |               
|(Sheree T.   Speakman)         |  |                                        |  |               
|                               |  |                                        |  |               
|/s/   HOWARD A.
TULLMAN        |  | Director                               |  | March 23, 2005
|                               |  |                                        |  |               
|(Howard A.   Tullman)          |  |                                        |  |               
|                               |  |                                        |  |               
|/s/   FREDERICK   S. HUMPHRIES |  | Director                               |  | March 23, 2005
|                               |  |                                        |  |               
|(Frederick   S. Humphries)     |  |                                        |  |               

74