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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
 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.
  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 RegisteredCommon stock, $0.01 par value
    
    NASDAQ Stock Market LLC (Nasdaq Global Market)
 Securities registered pursuant to Section 12(g) of the Act:
 None
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 PART I
    
    
    
    2Item 1.
    
    Business
    
    2Item 1A.
    
    Risk Factors
    
    12Item 1B.
    
    Unresolved Staff Comments
    
    21Item 2.
    
    Properties
    
    21Item 3.
    
    Legal Proceedings
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    21PART II
    
    
    
    21Item 5.
    
    Market for Registrants Common Stock and Related Stockholder Matters
    
    21Item 6.
    
    Selected Consolidated Financial Data
    
    22Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    24Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    33Item 8.
    
    Financial Statements and Supplementary Data
    
    35Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    66Item 9A.
    
    Controls and Procedures
    
    66Item 9B.
    
    Other Information
    
    67PART III
    
    
    
    67Item 10.
    
    Directors and Executive Officers of the Registrant
    
    67Item 11.
    
    Executive Compensation
    
    67Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    67Item 13.
    
    Certain Relationships and Related Transactions
    
    67Item 14.
    
    Principal Accountant Fees and Services
    
    67PART IV
    
    
    
    67Item 15.
    
    Exhibits and Financial Statement Schedules
    
    67SIGNATURES
    
    72POWER OF ATTORNEY
    
    72EX-23.1: CONSENT OF ERNST & YOUNG LLPEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
  -1-




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PART I
   
 Item 1. Business
 Overview
   
    
    The Test Preparation Services division,founded in 1981, provides classroom-based, as well as online test preparation courses. The Test Preparation Services
division also provides tutoring and No Child Left Behind (NCLB) Supplemental Education
Services. Additionally, the division receives monthly royalties from its independent
franchisees who provide classroom-based test preparation courses and Supplemental Education
Services 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 materials to support school-based intervention programs.
    
    The Admissions Services division,founded in 1986, provides marketing services to higher
education institutions, and post-secondary counseling services and web-based products to
secondary schools and school districts. Until February 2007, when we sold this business, the
Admissions Services Division also provided web-based admission products to higher education
institutions.
  www.PrincetonReview.com www.PrincetonReview.com
 Our Products and Services
 Test Preparation Services Division
  -2-




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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)
    
    PSATUSMLE (United States Medical Licensing Examination)
    
    SAT II
 Our Classroom-Based Course Offerings
   Our Private Tutoring Offerings
  Our Online Course Offerings
  Our School-Based Offerings
   Our Test Preparation Publications and Software
  Cracking the SAT
    
    Cracking the AP Calculus
    
    Anatomy Coloring BookCracking the GMAT
    
    Cracking the AP Chemistry
    
    Human Brain Coloring BookCracking the LSAT
    
    Cracking the AP US History
    
    Essential High School Dictionary
 -3-




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Cracking the GRE
    
    Cracking the AP European History
    
    Cracking the PraxisWordSmart
    
    Cracking the GED
    
    Cracking the ASVABMathSmart
    
    Math Workout for the GMAT
    
    Crash Course for the SATGrammarSmart
    
    Verbal Workout for the GMAT
    
    Crash Course for the GRE
 The Princeton Review: Cracking the SAT, ACT, GMAT, LSAT & GRE 2008 Editions software
 Roadmap to the CAHSEE(California)
    
    Roadmap to the Regents(New York)
    
    Cracking the Virginia SOL SeriesRoadmap to the FCAT(Florida)
    
    North Carolina Roadmap Series
    
    Know It All SeriesRoadmap to the HSPA(New Jersey)
    
    Ohio Roadmap Series
    
    Smart Junior SeriesRoadmap to the MCAS(Massachusetts)
    
    Virginia Roadmap Series
    
    Cracking the Texas
End-of-Course Series
 K-12 Services Division
 Services for Schools
       
    
    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.
   -4-




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
    
    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. Our consultants help each teacher evaluate data and reports gathered from
low-stakes assessments administered throughout the program and subsequently recommend
individualized professional development in order to expand each teachers knowledge of his or
her students skill set.
    
    Product Training.Training is a crucial component of any successful, comprehensive program.
Every program The Princeton Review offers contains some form of training and/or staff
development.
     Admissions Services Division
   Post Secondary Institutions
 Secondary Schools and School Districts
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
    
    Post-secondary 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.
    
    Post-Secondary Counseling Support. We provide teams of specialists who provide professional
development and counseling services on-line and/or in schools, supporting the efforts of
school-based counselors.
 Princetonreview.com visitors.
 
    
    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 derived from our bestselling guidebooks.
    
    Major, Career and Other Searches. Through a series of wizards or matching tools, 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.
 Our Admissions Services Publications
 Americas Best Value Colleges
    
    Guide to College MajorsBest 361 Colleges
    
    Guide to Study AbroadBest 282 Business Schools
    
    Guide to Summer ProgramsBest 170 Law Schools
    
    K&W Guide(Learning Disabilities Guide)Best 168 Medical Schools
    
    Parents Guide to College LifeComplete Book of Colleges
    
    Paying for College Without Going BrokeCollege Essays That Made a Difference
    
    Visiting College CampusesGraduate School Companion
    
    145 Things to Do When You Grow Up
 Our Franchised Operations
    -6-




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Number ofCountiesCalifornia
    
    
    12Colorado
    
    
    8Connecticut
    
    
    7Florida
    
    
    57Massachusetts
    
    
    4Michigan
    
    
    4Nevada
    
    
    1New Mexico
    
    
    33New York
    
    
    5Ohio
    
    
    4Pennsylvania
    
    
    4Rhode Island
    
    
    5Utah
    
    
    29
   Acquisitions
and Dispositions
    Sales and Marketing
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Test Preparation Services Division.
 K-12 Services Division.
 Admissions Services Division.
 Product Design and Development
  Test Preparation Services Division
 
    
    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.
  K-12 Services Division
 -8-




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Admissions Services Division
 Significant Customers
  Competition
  Test Preparation Services Division
 K-12 Services Division
 Admissions Services Division.
  
    
    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.
  Intellectual Property and Property Rights
  -9-




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Government Regulation
   
    
    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.
   Employees
  -10-




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Segment Information
  Executive
Officers of the Registrant
  Name
    
    Age
    
    PositionJohn S. Katzman
    
    
    47
    
    
    Chief Executive OfficerMark Chernis
    
    
    40
    
    
    President, Chief Operating OfficerStephen Melvin
    
    
    55
    
    
    Chief Financial Officer and TreasurerKevin A. Howell
    
    
    48
    
    
    Executive Vice President, General Manager K-12 Services DivisionMargot Lebenberg
    
    
    39
    
    
    Executive Vice President, General Counsel and SecretaryYoung J. Shin
    
    
    40
    
    
    Executive Vice President, General Manager Admissions Services Division
 John S. Katzman,
 Mark Chernis,
 Stephen Melvin,
 Kevin A. Howell
 Margot Lebenberg
 Young J. Shin,
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Item 1A. Risk Factors
  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 increase revenue from our newer products and services and
successfully implement a number of new initiatives, in which case we could experience an adverse
change in the market price of our common stock.
    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.
  Our contracts with schools, school districts, municipal agencies and other governmental bodies
present several risks, including the nature and timing of revenue recognition, which, combined with
fixed expenses, puts a strain on our working capital requirements.
   -12-




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We face risks related to the implementation of a new technology platform in our K-12 Services
division in 2007.
  If we fail to comply with applicable state and federal regulations, we may face government
sanctions and other adverse consequences.
  We face intense competition that could adversely affect our revenue, profitability and market
share.
  
    
    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 or recruiting.
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Negative developments in school funding or education laws could reduce our institutional revenue.
   The ineffectiveness of our internal control over financial reporting could result in a loss of
investor confidence in our financial reports and have an adverse effect on our stock price.
   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.
  Our quarterly operating results are not indicative of future performance and are difficult to
forecast.
  
    
    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.
  Loss of significant customers could significantly adversely affect our revenue or cause disruptions
in our operations.
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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 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 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.
  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.
  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.
  -15-




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The loss of our senior management could have a material adverse effect on our business.
  Our business may be harmed by actions taken by our franchisees that are outside our control.
  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.
   The terms of our secured credit facility restrict us from engaging in many activities and require
us to satisfy various financial tests. We expect that any credit facilities that we obtain in the
future will contain similar restrictions and requirements.
  If we are unable to obtain additional capital, our business may be adversely affected.
 -16-




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
    
    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.
 Charges related to completed acquisitions could negatively affect our results of operations.
 Goodwill and Other Intangible Assets
 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.
  
    
    issuing equity securities or convertible debt securities, which would dilute current
stockholders percentage ownership;
    
    incurring substantial debt; or
    
    assuming contingent liabilities.
  
    
    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.
 We may undertake divestitures that may limit our ability to manage and maintain our business and
may adversely affect our business.
  
    
    Diversion of management attention and transaction costs associated with negotiating and
closing the transaction;
 -17-




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
    
    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.
  If we experience system failures, our reputation may be harmed and users may seek alternate service
providers causing us to lose revenue.
   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.
  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.
  -18-




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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.
  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.
  
    
    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
    
    fluctuations in stock market price and volume, and
    
    our continuing operating losses.
  We have anti-takeover protections, which may discourage or prevent a takeover of us, even if an
acquisition would be beneficial to our stockholders.
  
    
    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
 -19-




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
    
    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.
  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.
  Certain risks associated with our Series B-1 Cumulative Convertible Preferred Stock.
    -20-




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
      
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Stock and Related Stockholder Matters
 Price Range of Common Stock
  -21-




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2006
    
    2005Fiscal Quarter
    
    High
    
    Low
    
    High
    
    LowFirst
    
    $
    6.05
    
    
    $
    5.05
    
    
    $
    6.14
    
    
    $
    5.25Second
    
    
    6.45
    
    
    
    5.32
    
    
    
    5.95
    
    
    
    5.46Third
    
    
    5.45
    
    
    
    5.10
    
    
    
    6.25
    
    
    
    5.70Fourth
    
    
    5.51
    
    
    
    5.17
    
    
    
    6.03
    
    
    
    5.05
  Dividend Policy
  
 Item 6. Selected Consolidated Financial Data
  -22-




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Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in thousands, except per share data)Statement of Operations Data:RevenueTest Preparation Services
    
    $
    92,405
    
    
    $
    87,360
    
    
    $
    74,297
    
    
    $
    71,719
    
    
    $
    67,930K-12 Services
    
    
    35,694
    
    
    
    31,932
    
    
    
    28,403
    
    
    
    21,525
    
    
    
    10,066Admissions Services
    
    
    12,641
    
    
    
    11,252
    
    
    
    11,085
    
    
    
    11,218
    
    
    
    11,240Total Revenue
    
    
    140,740
    
    
    
    130,544
    
    
    
    113,785
    
    
    
    104,462
    
    
    
    89,236Cost of revenueTest Preparation Services
    
    
    31,907
    
    
    
    27,917
    
    
    
    23,553
    
    
    
    20,809
    
    
    
    18,516K-12 Services
    
    
    21,703
    
    
    
    16,274
    
    
    
    13,308
    
    
    
    8,328
    
    
    
    3,533Admissions Services
    
    
    5,510
    
    
    
    4,251
    
    
    
    2,941
    
    
    
    2,836
    
    
    
    2,888Total cost of revenue
    
    
    59,120
    
    
    
    48,442
    
    
    
    39,802
    
    
    
    31,973
    
    
    
    24,937Gross profit
    
    
    81,620
    
    
    
    82,102
    
    
    
    73,983
    
    
    
    72,489
    
    
    
    64,299Operating expensesSelling, general and administrative
    
    
    90,012
    
    
    
    86,352
    
    
    
    79,231
    
    
    
    65,634
    
    
    
    65,482Impairment of investment and goodwill
    
    
    300
    
    
    
    
    
    
    
    8,199
    
    
    
    
    
    
    
    344Total operating expenses
    
    
    90,312
    
    
    
    86,352
    
    
    
    87,430
    
    
    
    65,634
    
    
    
    65,826Income (loss) from operations
    
    
    (8,692
    )
    
    
    (4,250
    )
    
    
    (13,447
    )
    
    
    6,855
    
    
    
    (1,527
    )Net income (loss)
    
    
    (9,531
    )
    
    
    (2,185
    )
    
    
    (29,495
    )
    
    
    4,309
    
    
    
    (1,090
    )Dividends and accretion on Series B-1
Preferred Stock
    
    
    (517
    )
    
    
    (2,443
    )
    
    
    (1,439
    )
    
    
    
    
    
    
    Net income (loss) attributed to common
stockholders
    
    
    (10,048
    )
    
    
    (4,628
    )
    
    
    (30,934
    )
    
    $
    4,309
    
    
    $
    (1,090
    )Basic income (loss) per share
    
    $
    (0.36
    )
    
    $
    (0.17
    )
    
    $
    (1.13
    )
    
    $
    0.16
    
    
    $
    (0.04
    )Diluted income (loss) per share
    
    $
    (0.36
    )
    
    $
    (0.17
    )
    
    $
    (1.13
    )
    
    $
    0.16
    
    
    $
    (0.04
    )Weighted average shares used in computing
net income (loss) per shareBasic
    
    
    27,578
    
    
    
    27,570
    
    
    
    27,468
    
    
    
    27,306
    
    
    
    27,239Diluted
    
    
    27,578
    
    
    
    27,570
    
    
    
    27,468
    
    
    
    27,467
    
    
    
    27,239
 As of December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    10,822
    
    
    $
    8,002
    
    
    $
    19,197
    
    
    $
    13,937
    
    
    $
    11,963Total assets
    
    
    118,108
    
    
    
    105,371
    
    
    
    107,641
    
    
    
    121,697
    
    
    
    112,116Long-term debt, net of current portion
    
    
    14,127
    
    
    
    2,845
    
    
    
    4,213
    
    
    
    5,710
    
    
    
    5,656Series B-1 Preferred Stock
    
    
    6,000
    
    
    
    10,000
    
    
    
    8,147
    
    
    
    
    
    
    
    Stockholders equity
    
    
    41,163
    
    
    
    50,453
    
    
    
    55,104
    
    
    
    84,467
    
    
    
    79,298
 
       -23-




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
        -24-




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##### Table of Contents



Revenue
 Test Preparation Services
 
    
    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 46% of our total
revenue in 2006.
    
    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 6% of our total revenue in
2006, almost double the rate in 2005.
    
    royalty fees paid to us by our independent franchisees. These
royalties in 2006 are 8%-9.5% of all
cash receipts collected by our franchisees for all test preparation and tutoring services
performed by them under the Princeton Review name. Royalties received from franchisees also
include a $27.00 per student fee, for use by their
students, of our online supplemental course tools. Royalties also include a fee of 2% of the
domestic franchisees cash receipts for contribution to a marketing fund. For a description of
the marketing fund, see Note 8 to the consolidated financial
statements. Finally, those of our
franchisees that purchased the rights to offer SES courses in their
territories also pay us a 8% royalty with respect to the cash
receipts they earn from those courses. This revenue represented approximately 3% of our
total revenue in 2006.
    
    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 2006.
    
    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
2006.
 K-12 Services
  
    
    fees for training and professional development for school teachers and administrators, which
we recognize over the period that the services are provided;
    
    fees for paper-based and online benchmark testing, which we recognize over the period the services are delivered;
 -25-




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##### Table of Contents




    
    sales of printed materials, which we recognize when the materials are delivered; and,
    
    annual subscription fees for the Assessment Center (formerly called Homeroom) subscription
service, recognized by us ratably over the life of the subscription period, which is typically
one or two years.
    Admissions Services
 
    
    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 (which business was sold in the Embark sale),
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 are typically one or two years. We recognize the application processing fees in
the month that the relevant applications are submitted. This revenue represented approximately
6% of our total revenue in 2006.
    
    college counseling fees paid by high schools. This revenue consists of annual subscription
fees paid to us by secondary schools. We recognize these fees over the contract period, which
is typically one to three years. This revenue represented approximately 2% of our total
revenue in 2006.
    
    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 2006.
    
    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 2006.
    
    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 less than 1% of our
total revenue in 2006.
 Cost of Revenue
 Test Preparation Services
 K-12 Services
 -26-




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##### Table of Contents



Admissions Services
 Operating Expenses
    As a Percentage of Total Revenue2006
    
    
    2005
    
    
    2004Salaries, labor and employee benefits
    
    
    33.9
    %
    
    
    36.5
    %
    
    
    37.5
    %General and administrative
    
    
    20.7
    %
    
    
    19.6
    %
    
    
    28.6
    %Advertising and marketing
    
    
    4.6
    %
    
    
    5.2
    %
    
    
    5.6
    %Depreciation and amortization
    
    
    5.0
    %
    
    
    4.8
    %
    
    
    5.1
    %Total operating expenses
    
    
    64.2
    %
    
    
    66.1
    %
    
    
    76.8
    %
 Income Taxes
 Accounting for Income Taxes
 Accounting for Income Taxes,
 -27-




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##### Table of Contents



Results of Operations
 Comparison of Years Ended December 31, 2006 and 2005
 Revenue
     Cost of Revenue.
    -28-




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##### Table of Contents



Selling, General and Administrative Expenses
  
    
    Test Preparation Services increased by $5.2 million, or 12.6%, from $41.3 million in 2005 to
$46.5 million in 2006. Salaries and related costs increased by approximately $1.4 million as
a result of the timing of the hiring of new employees, part time support costs, bonus payments
and commissions. Bad debt expense increased by approximately
$1.2 million primarily related to an
increase in the reserve for aged student receivables; professional fees increased by $1.4
million due primarily to SES related legal fees and third party SES commissions, and corporate
allocations increased by approximately $1.2 million related to technology, legal and facility
charges.
    
    K-12 Services increased by $1.4 million, or 8.7%, from $16.0 million in 2005 to $17.4 million
in 2006. Salaries and related costs increased by approximately $2.2 million related to new
hires and part time employees.
    
    Admissions Services decreased by $329,000 or 3.9%, from $8.4 million in 2005 to $8.1 million
in 2006. This decrease is primarily the result of a reduction in salary and related costs of
approximately $401,000, lower travel and entertainment expenses of approximately $341,000,
lower local business taxes of $121,000 and lower training costs of $91,000. These decreases
were partially offset by an increase in development expenses of $321,000 and bad debt expenses
of $339,000.
    
    Corporate decreased by $2.3 million or 11.2%, from
$20.6 million in 2005 to $18.3 million in
2006. Professional service fees decreased by $787,000 due to
lower Sarbanes-Oxley
compliance costs. Salaries and related expense decreased by $2.3 million, due primarily to the
benefits of the restructuring program. Depreciation and amortization expense increased
by $961,000 due
primarily to the installation of an enterprise resource management system.
 Interest expense
  Other income (expense)
  Income Taxes
  Comparison of Years Ended December 31, 2005 and 2004
 Revenue
  -29-




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##### Table of Contents



Cost of Revenue
     Selling, General & Administrative Expenses
  Impairment of goodwill
  Interest expense
  Other income (expense)
  Liquidity and Capital Resources
  -30-




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##### Table of Contents



B-1
Preferred
  Contractual Obligations and Commercial Commitments
   Payments due by period($ in millions)Contractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1 - 3 years
    
    
    3 - 5 years
    
    
    More than 5 yearsLong-term debt obligations
    
    $
    17.4
    
    
    $
    3.7
    
    
    $
    1.7
    
    
    $
    12.0
    
    
    $
    Capital lease obligations
    
    
    1.1
    
    
    
    0.7
    
    
    
    0.4
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    30.6
    
    
    
    5.5
    
    
    
    9.9
    
    
    
    7.2
    
    
    
    8.0Purchase
obligations (1)
    
    
    4.4
    
    
    
    3.4
    
    
    
    1.0
    
    
    
    
    
    
    
    Total
    
    $
    53.5
    
    
    $
    13.3
    
    
    $
    13.0
    
    
    $
    19.2
    
    
    $
    8.0
 
 (1)
    
    Purchase obligations consist of payments required under employment agreements. Adoption of New Accounting Pronouncements
 Accounting Changes and Error Corrections  a
Replacement of APB Opinion No. 20 and FASB Statement No. 3
 -31-




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##### Table of Contents



Critical Accounting Policies
   Accounts Receivable
 Goodwill and Territorial Marketing Rights
 Long-Lived Assets.
 Embedded Derivatives and Warrant. Accounting for Derivative Instruments and Hedging Activities
 -32-




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##### Table of Contents



Income Taxes
  Accounting for Income Taxes
 Revenue Recognition Revenue
Arrangements with Multiple Deliverables
 Stock Based Compensation.
 Stock-based
Compensation
    Impact of Inflation
  Seasonality in Results of Operations
  
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
  -33-




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-34-




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Index to Consolidated Financial Statements and Financial Statement Schedule
 PageConsolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    36Consolidated Balance Sheets
    
    
    37Consolidated Statements of Operations
    
    
    38Consolidated Statements of Stockholders Equity
    
    
    39Consolidated Statements of Cash Flows
    
    
    40Notes to Consolidated Financial Statements
    
    
    41Financial Statement Schedule:Schedule II  Valuation And Qualifying Accounts
    
    
    65
 -35-




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
        
 -36-




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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
 December 31,2006
    
    
    2005ASSETS:Current assets:Cash and cash equivalents (including restricted cash of $488 in 2006 and $255 in 2005)
    
    $
    10,822
    
    
    $
    8,002Accounts receivable, net of allowance of $2,848 in 2006 and $1,601 in 2005
    
    
    31,531
    
    
    
    22,493Accounts receivable-related parties
    
    
    124
    
    
    
    1,591Other receivables, including $1,891 in 2006 and $788 in 2005 from related parties
    
    
    1,999
    
    
    
    813Inventory
    
    
    2,950
    
    
    
    2,798Prepaid expenses
    
    
    1,834
    
    
    
    2,229Other current assets
    
    
    2,612
    
    
    
    1,307Total current assets
    
    
    51,872
    
    
    
    39,233Furniture, fixtures, equipment and software development, net
    
    
    16,209
    
    
    
    16,155Goodwill
    
    
    31,506
    
    
    
    31,506Investment in affiliates
    
    
    1,639
    
    
    
    1,938Other intangibles, net
    
    
    12,810
    
    
    
    13,371Other assets
    
    
    4,072
    
    
    
    3,168Total assets
    
    $
    118,108
    
    
    $
    105,371LIABILITIES & STOCKHOLDERS EQUITY:Current liabilities:Line of credit
    
    $
    3,000
    
    
    $
    Accounts payable
    
    
    15,220
    
    
    
    10,449Accrued expenses
    
    
    11,954
    
    
    
    10,826Current maturities of long-term debt
    
    
    1,369
    
    
    
    1,530Deferred income
    
    
    22,536
    
    
    
    16,548Total current liabilities
    
    
    54,079
    
    
    
    39,353Deferred rent
    
    
    2,558
    
    
    
    2,327Long-term debt
    
    
    14,127
    
    
    
    2,845Fair value of derivatives and warrant
    
    
    181
    
    
    
    393Series B-1 Preferred Stock, $0.01 par value; 10,000 shares authorized;
6,000 shares issued and outstanding at December 31, 2006 and
10,000 shares issued and outstanding at December 31, 2005
    
    
    6,000
    
    
    
    10,000Stockholders equityPreferred stock, $0.01 par value; 4,990,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common
stock, $0.01 par value; 100,000,000 shares authorized; 27,601,268 and 27,572,172 issued and outstanding at December 31, 2006 and 2005, respectively
    
    
    276
    
    
    
    276Additional paid-in capital
    
    
    117,082
    
    
    
    116,279Accumulated deficit
    
    
    (75,871
    )
    
    
    (65,823
    )Accumulated other comprehensive loss
    
    
    (324
    )
    
    
    (279
    )Total stockholders equity
    
    
    41,163
    
    
    
    50,453Total liabilities and stockholders equity
    
    $
    118,108
    
    
    $
    105,371
  -37-




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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004RevenueTest Preparation Services
    
    $
    92,405
    
    
    $
    87,360
    
    
    $
    74,297K-12 Services
    
    
    35,694
    
    
    
    31,932
    
    
    
    28,403Admissions Services
    
    
    12,641
    
    
    
    11,252
    
    
    
    11,085Total revenue
    
    
    140,740
    
    
    
    130,544
    
    
    
    113,785Cost of revenueTest Preparation Services
    
    
    31,907
    
    
    
    27,917
    
    
    
    23,553K-12 Services
    
    
    21,703
    
    
    
    16,274
    
    
    
    13,308Admissions Services
    
    
    5,510
    
    
    
    4,251
    
    
    
    2,941Total cost of revenue
    
    
    59,120
    
    
    
    48,442
    
    
    
    39,802Gross Profit
    
    
    81,620
    
    
    
    82,102
    
    
    
    73,983Operating expensesSelling, general and administrative
    
    
    90,012
    
    
    
    86,352
    
    
    
    79,231Impairment of investment and goodwill
    
    
    300
    
    
    
    
    
    
    
    8,199Total operating expenses
    
    
    90,312
    
    
    
    86,352
    
    
    
    87,431Loss from operations
    
    
    (8,692
    )
    
    
    (4,250
    )
    
    
    (13,447
    )Interest income (expense)
    
    
    (650
    )
    
    
    (354
    )
    
    
    (361
    )Other income (expense)
    
    
    (36
    )
    
    
    2,415
    
    
    
    918Equity in the income (loss) of affiliates
    
    
    
    
    
    
    4
    
    
    
    103Income (loss) before income taxes
    
    
    (9,378
    )
    
    
    (2,185
    )
    
    
    (12,787
    )(Provision) benefit for income taxes
    
    
    (153
    )
    
    
    
    
    
    
    (16,708
    )Net income (loss)
    
    
    (9,531
    )
    
    
    (2,185
    )
    
    
    (29,495
    )Dividends and accretion on Series B-1
Preferred Stock
    
    
    (517
    )
    
    
    (2,443
    )
    
    
    (1,439
    )Income (loss) attributed to common
stockholders
    
    $
    (10,048
    )
    
    $
    (4,628
    )
    
    $
    (30,934
    )Basic income (loss) per share
    
    $
    (0.36
    )
    
    $
    (0.17
    )
    
    $
    (1.13
    )Diluted income (loss) per share
    
    $
    (0.36
    )
    
    $
    (0.17
    )
    
    $
    (1.13
    )Weighted average shares used in
computing basic
basic income (loss) per shareBasic
    
    
    27,578
    
    
    
    27,570
    
    
    
    27,468Diluted
    
    
    27,578
    
    
    
    27,570
    
    
    
    27,468
  -38-




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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
(in thousands)
 Stockholders Equity (Deficit)Accumulated
    
    
    TotalAdditional
    
    
    
    
    
    
    Other
    
    
    StockholdersCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income (loss)
    
    
    (Deficit)Balance at January 1, 2004
    
    
    27,385
    
    
    $
    274
    
    
    $
    114,829
    
    
    $
    (30,260
    )
    
    $
    (376
    )
    
    $
    84,467Exercise of stock options
    
    
    121
    
    
    
    1
    
    
    
    834
    
    
    
    
    
    
    
    
    
    
    
    835Shares issued in connection
with an equity investment
    
    
    64
    
    
    
    1
    
    
    
    499
    
    
    
    
    
    
    
    
    
    
    
    500Stock based compensation
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    98Dividends and accretion on
Series B-1 Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,439
    )
    
    
    
    
    
    
    (1,439
    )Comprehensive lossNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,495
    )
    
    
    
    
    
    
    (29,495
    )Foreign currency gain (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    138Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,357
    )Balance at December 31, 2004
    
    
    27,570
    
    
    $
    276
    
    
    $
    116,260
    
    
    $
    (61,194
    )
    
    $
    (238
    )
    
    $
    55,104Exercise of stock options
    
    
    2
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19Dividends and accretion on
Series B-1 Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,443
    )
    
    
    
    
    
    
    (2,443
    )Comprehensive lossNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,185
    )
    
    
    
    
    
    
    (2,185
    )Foreign currency gain (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42
    )
    
    
    (42
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,227
    )Balance at December 31, 2005
    
    
    27,572
    
    
    $
    276
    
    
    $
    116,279
    
    
    $
    (65,823
    )
    
    $
    (279
    )
    
    $
    50,453Exercise of stock options
    
    
    14
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    62Stock-based compensation
    
    
    15
    
    
    
    
    
    
    
    741
    
    
    
    
    
    
    
    
    
    
    
    741Dividends on
Series B-1 Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (517
    )
    
    
    
    
    
    
    (517
    )Comprehensive lossNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,531
    )
    
    
    
    
    
    
    (9,531
    )Foreign currency gain (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    (45
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,176
    )Balance at December 31, 2006
    
    
    27,601
    
    
    $
    276
    
    
    $
    117,082
    
    
    $
    (75,871
    )
    
    $
    (324
    )
    
    $
    41,163
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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows provided by (used for) operating activities:Net income (loss)
    
    $
    (9,531
    )
    
    $
    (2,182
    )
    
    $
    (29,495
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    2,429
    
    
    
    1,776
    
    
    
    1,609Amortization
    
    
    6,721
    
    
    
    5,897
    
    
    
    5,393Impairment
of investment and goodwill
    
    
    300
    
    
    
    
    
    
    
    8,199Bad debt expense
    
    
    2,772
    
    
    
    1,328
    
    
    
    1,521Write-off of deferred financing costs
    
    
    347
    
    
    
    117
    
    
    
    Write-off of inventory
    
    
    281
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    (2,851
    )
    
    
    (1,520
    )
    
    
    (5,425
    )Valuation allowance for deferred tax assets
    
    
    2,851
    
    
    
    1,520
    
    
    
    22,132Deferred rent
    
    
    231
    
    
    
    
    
    
    
    Stock based compensation
    
    
    741
    
    
    
    
    
    
    
    98Other, net
    
    
    (1,497
    )
    
    
    (52
    )
    
    
    (698
    )Net change in operating assets and liabilities:Accounts receivable
    
    
    (11,530
    )
    
    
    (2,785
    )
    
    
    (3,510
    )Inventory
    
    
    (433
    )
    
    
    (1,744
    )
    
    
    (153
    )Prepaid expenses
    
    
    362
    
    
    
    (211
    )
    
    
    9Other assets
    
    
    (1,598
    )
    
    
    880
    
    
    
    (93
    )Accounts payable and accrued expenses
    
    
    5,834
    
    
    
    5,575
    
    
    
    (360
    )Deferred income
    
    
    5,988
    
    
    
    (1,089
    )
    
    
    4,758Net cash provided by (used for) operating activities
    
    
    1,417
    
    
    
    7,510
    
    
    
    3,985Cash provided by (used for) investing activities:Purchases of furniture, fixtures, equipment and software development
    
    
    (5,293
    )
    
    
    (8,258
    )
    
    
    (5,208
    )Additions to capitalized K-12 content, capitalized course costs
    
    
    (2,697
    )
    
    
    (5,595
    )
    
    
    (2,518
    )Investment in affiliates
    
    
    
    
    
    
    
    
    
    
    (850
    )Purchases of franchises and other businesses, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (130
    )Payment of related party loan
    
    
    526
    
    
    
    33
    
    
    
    Payment of note receivable
    
    
    516
    
    
    
    250
    
    
    
    400Net cash provided by (used for) investing activities
    
    
    (6,948
    )
    
    
    (13,570
    )
    
    
    (8,306
    )Cash flows provided by (used for) financing activities:Proceeds from the sale of Series B-1 Preferred Stock, net of issuance cost
    
    
    
    
    
    
    
    
    
    
    9,682Redemption of Series B-1 Preferred Stock
    
    
    (4,377
    )
    
    
    
    
    
    
    Proceeds (payments) from revolving credit facility and term loan
    
    
    15,000
    
    
    
    (2,000
    )
    
    
    2,000Payment of credit facility deferred financing costs
    
    
    (296
    )
    
    
    
    
    
    
    (145
    )Notes issued in connection with sale of rights to franchisees
    
    
    
    
    
    
    (956
    )
    
    
    Long-term debt borrowings
    
    
    
    
    
    
    367
    
    
    
    Capital lease payments
    
    
    (786
    )
    
    
    (717
    )
    
    
    (555
    )Dividends on Series B-1 Preferred Stock
    
    
    (517
    )
    
    
    (591
    )
    
    
    (374
    )Notes payable related to acquisitions
    
    
    (735
    )
    
    
    (1,257
    )
    
    
    (1,779
    )Proceeds from exercise of options
    
    
    62
    
    
    
    19
    
    
    
    752Net cash provided by (used for) financing activities
    
    
    8,351
    
    
    
    (5,135
    )
    
    
    9,581Net increase (decrease) in cash and cash equivalents
    
    
    2,820
    
    
    
    (11,195
    )
    
    
    5,260Cash and cash equivalents, beginning of period
    
    
    8,002
    
    
    
    19,197
    
    
    
    13,937Cash and cash equivalents, end of period
    
    $
    10,822
    
    
    $
    8,002
    
    
    $
    19,197Supplemental cash flow disclosures:Cash paid during the period for interest
    
    $
    1,012
    
    
    $
    580
    
    
    $
    564Supplemental schedule of noncash financing activites:Equipment acquired through capital leases
    
    $
    878
    
    
    $
    316
    
    
    $
    1,276
  -40-




---



##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 1. Nature of Business and Significant Accounting Policies
 Business
    Principles of Consolidation
  Use of Estimates
  Reclassifications
  Cash and Cash Equivalents
  Restricted Cash
 -41-




---



##### Table of Contents



Accounts Receivable and Allowance for Doubtful Accounts
  Inventories
  Furniture, Fixtures and Equipment
  Software and Web Site Development
 Accounting for the Costs of Computer Software Developed or Obtained for Internal Use Accounting for Web site Development Costs.
  Goodwill, Capitalized Course Costs, Capitalized K-12 Content and Other Intangible Assets.
    -42-




---



##### Table of Contents



Cracking the SAT/PSAT, Cracking the
LSAT, Cracking the GRE, Cracking the GMAT, The Best 361 Colleges Word Smart
     Impairment
 Goodwill and Territorial Marketing Rights
 Goodwill and Other Intangible Assets
 Long-Lived Assets
  Investments in Affiliates
 Consolidation of Variable Interest Entities,
 -43-




---



##### Table of Contents



Deferred Income
  Revenue Recognition
  Course and Tutoring Income
  Book, Software and Publication Income and Expenses
  Royalty Service Fees
  Course Materials and Other Products
  Lead Generation Fees
  College Marketing and Subscription Fees
  Transaction Processing Fees
  Multiple-deliverable contracts
 Revenue Arrangements with Multiple Deliverables
 -44-




---



##### Table of Contents



Other Revenue
  Revenue Components
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(in thousands)RevenueServices
    
    $
    111,935
    
    
    $
    110,292
    
    
    $
    96,031Products
    
    
    19,706
    
    
    
    11,361
    
    
    
    8,702Other
    
    
    9,099
    
    
    
    8,890
    
    
    
    9,053Total revenue
    
    $
    140,740
    
    
    $
    130,544
    
    
    $
    113,785Cost of RevenueServices
    
    $
    52,870
    
    
    $
    42,090
    
    
    $
    37,331Products
    
    
    5,635
    
    
    
    5,836
    
    
    
    1,886Other
    
    
    615
    
    
    
    516
    
    
    
    585Total cost of revenue
    
    $
    59,120
    
    
    $
    48,442
    
    
    $
    39,802
 Foreign Currency Translation
  Advertising and Promotion
  Fair Value of Financial Instruments
  Embedded Derivatives and Warrant
 Accounting for
Derivative Instruments and Hedging Activities
 -45-




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##### Table of Contents



Concentration of Credit Risk
   Income Taxes
 Accounting
for Income Taxes
 Income (Loss) Per Share
 Earnings per Share
  Stock-Based Compensation
 Accounting
for Stock Issued to Employees Accounting for Stock-Based Compensation Share-Based Payment
  -46-




---



##### Table of Contents



Year Ended December 31,2005
    
    
    2004(in thousands, except per shareamounts)Net income (loss) attributed to common stockholders,
as reported
    
    $
    (4,628
    )
    
    $
    (30,934
    )Total stock-based employee compensation expense determined
under fair-value based method for all awards, net of related
tax effects
    
    
    (3,467
    )
    
    
    (1,178
    )Pro forma net income (loss) attributed to common
stockholders
    
    $
    (8,095
    )
    
    $
    (32,112
    )Basic and diluted income (loss) per share:As reported
    
    $
    (0.17
    )
    
    $
    (1.13
    )Pro forma
    
    $
    (0.29
    )
    
    $
    (1.17
    )
  Year Ended December 31,2006
    
    
    2005
    
    
    2004AssumptionsExpected volatility
    
    
    40
    %
    
    
    54
    %
    
    
    66
    %Risk-free rate
    
    
    5.00
    %
    
    
    4.25
    %
    
    
    4.25
    %Expected dividends
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected term (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
   -47-




---



##### Table of Contents



WeightedNumber of
    
    AverageAccelerated
    
    Exercise PriceOfficer
    
    Title
    
    Options
    
    Per ShareMargot Lebenberg
    
    Executive Vice President, Secretary
and General Counsel
    
    
    27,500
    
    
    $
    7.56Stephen
Quattrociocchi
    
    Executive Vice President
    
    
    23,019
    
    
    $
    7.35Young J. Shin.
    
    Executive Vice President
    
    
    10,000
    
    
    $
    7.30
 Share-Based Payment
 New Accounting Pronouncements
 Accounting Changes and Error Corrections  a
Replacement of APB Opinion No. 20 and FASB Statement No. 3
  2. Other Assets
  December 31,2006
    
    
    2005(in thousands)Deferred book costs
    
    $
    1,988
    
    
    $
    297Deferred financing expenses
    
    
    51
    
    
    
    (0
    )Loans to officers, current portion
    
    
    360
    
    
    
    369Loan receivable
    
    
    140
    
    
    
    580Other
    
    
    73
    
    
    
    61$
    2,612
    
    
    $
    1,307
  -48-




---



##### Table of Contents



December 31,2006
    
    
    2005(in thousands)Content and software development in progress
    
    $
    2,328
    
    
    $
    910Security deposits
    
    
    671
    
    
    
    655Loans to officers
    
    
    495
    
    
    
    876Loan receivable
    
    
    568
    
    
    
    726Other
    
    
    10
    
    
    
    $
    4,072
    
    
    $
    3,168
 3. Furniture, Fixtures, Equipment and Software Development
 December 31,2006
    
    
    2005(in thousands)Computer equipment
    
    $
    7,634
    
    
    $
    7,019Furniture, fixtures and equipment
    
    
    2,502
    
    
    
    2,054Computer,copier and phone equipment under capital lease
    
    
    3,876
    
    
    
    3,258Software and web site development  third party
    
    
    6,388
    
    
    
    4,648Software and web site development  internally developed
    
    
    12,691
    
    
    
    10,374Leasehold improvements
    
    
    7,052
    
    
    
    6,73240,142
    
    
    
    34,085Less accumulated depreciation and amortization, including $2,240 in 2006
and
$1,719 in 2005 of accumulated depreciation for assets under capital leases
    
    
    23,933
    
    
    
    17,930$
    16,209
    
    
    $
    16,155
 4. Investment in Affiliates
     -49-




---



##### Table of Contents



5. Goodwill and Other Intangible Assets
  TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Total(in thousands)Balance as of January 1, 2005
    
    
    31,011
    
    
    
    
    
    
    
    500
    
    
    
    31,511Other
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )Balance as of December 31,
2005
    
    $
    31,006
    
    
    
    
    
    
    $
    500
    
    
    $
    31,506Balance as of December 31,
2006
    
    $
    31,006
    
    
    
    
    
    
    $
    500
    
    
    $
    31,506
   December 31, 2006
    
    
    December 31, 2005(in thousands)Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetSubject to AmortizationFranchise costs
    
    $
    283
    
    
    $
    259
    
    
    $
    24
    
    
    $
    283
    
    
    $
    239
    
    
    $
    44Publishing rights
    
    
    1,761
    
    
    
    830
    
    
    
    931
    
    
    
    1,761
    
    
    
    757
    
    
    
    1,004Capitalized K-12 content
    
    
    15,413
    
    
    
    7,131
    
    
    
    8,282
    
    
    
    12,867
    
    
    
    4,617
    
    
    
    8,250Trademark / tradename
    
    
    338
    
    
    
    316
    
    
    
    22
    
    
    
    338
    
    
    
    254
    
    
    
    84Non-compete agreements
    
    
    1,244
    
    
    
    1,239
    
    
    
    5
    
    
    
    1,244
    
    
    
    1,198
    
    
    
    46Customer lists
    
    
    2,700
    
    
    
    1,418
    
    
    
    1,283
    
    
    
    2,700
    
    
    
    1,147
    
    
    
    1,553Capitalized course costs
    
    
    1,762
    
    
    
    980
    
    
    
    782
    
    
    
    1,610
    
    
    
    701
    
    
    
    909$
    23,501
    
    
    $
    12,173
    
    
    
    11,329
    
    
    $
    20,803
    
    
    $
    8,913
    
    
    
    11,890Not Subject to AmortizationTerritorial marketing rights
    
    
    
    
    
    
    
    
    
    
    1,481
    
    
    
    
    
    
    
    
    
    
    
    1,481$
    12,810
    
    
    
    
    
    
    
    
    
    
    $
    13,371
 (in thousands)Aggregate amortization expense:Actual:2004
    
    $
    2,1522005
    
    
    2,2552006
    
    
    3,260Estimate for fiscal year:2007
    
    
    3,6082008
    
    
    3,5642009
    
    
    2,5102010
    
    
    3422011
    
    
    279
 6. Line of Credit and Long-Term Debt
 -50-




---



##### Table of Contents



Credit Agreement
          -51-




---



##### Table of Contents



Notes Payable
    AmountAs of December 31,
    
    Maturing(In thousands)2007
    
    $
    7502008
    
    
    7582009
    
    
    7652010
    
    
    144$
    2,417
 Capital Lease Obligations
   Year ending December 31,
    
    (in thousands)2007
    
    $
    6472008
    
    
    2742009
    
    
    1302010
    
    
    502011
    
    
    18Thereafter
    
    
    2Total
    
    
    1,121Less: amounts representing interest (effective interest rate
ranges from 6% to 11%)
    
    
    (42
    )Present value of minimum lease payments
    
    
    1,079Less: current portion of capital lease obligations
    
    
    618Long-term portion of capital lease obligations
    
    $
    461
 Total Long-Term Debt
  -52-




---



##### Table of Contents



December 31,2006
    
    
    2005(in thousands)Line of
credit
    
    $
    15,000
    
    
    $
    Notes payable
    
    
    2,417
    
    
    
    3,161Capital lease obligations
    
    
    1,079
    
    
    
    1,214Auto loan
    
    
    
    
    
    
    18,496
    
    
    
    4,375Less current portion
    
    
    4,369
    
    
    
    1,530$
    14,127
    
    
    $
    2,845
 7. Series B-1 Preferred Stock
       -53-




---



##### Table of Contents



Redemptions
   Embedded derivatives and warrant
  
    
    Holder Conversion Option  The Series B-1 Preferred Stock is convertible into the Companys common
stock at the option of the holder at any time. The initial conversion price was $11.00 per
common share, but was decreased to $8.0860 per common share due to a delay in the
effectiveness of the registration statement relating to the Companys common stock issuable
upon conversion of the Series B-1 Preferred Stock and the subsequent failure to keep the registration
statement effective in accordance with the agreement with the holder. The Company may be
required to further reduce the conversion price upon certain events such as the issuance of
common stock at a price below the conversion price or if the Company fails to keep the
registration statement current.
 
    
    Make Whole Provision  In the event that the Company is party to one of several
transactions classified as a business combination, upon consummation of the transaction, the
holder is entitled to receive (at the holders election)
 a)
    
    the consideration to which the holder would have been
entitled had it converted the Series B-1 Preferred
Stock into common stock immediately prior to consummation,b)
    
    the consideration to which the holder would have been
entitled had it redeemed the Series B-1 Preferred
Stock for common stock immediately prior to consummation, orc)
    
    cash, initially equal to 160% of the aggregate redemption
amount of the Series B-1 Preferred Stock less
5% of the redemption amount for each full year the Series B-1 Preferred Stock was outstanding.
 Accounting for Derivatives and
Hedging Activities
    -54-




---



##### Table of Contents



Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
     8. Commitments and Contingencies
 Marketing Fund
   -55-




---



##### Table of Contents



Office and Classroom Leases
  Years EndingDecember 31,
    
    (in thousands)2007
    
    $
    5,4292008
    
    
    5,2152009
    
    
    4,6962010
    
    
    4,0012011
    
    
    3,209Thereafter
    
    
    8,043$
    30,593
  Legal Matters
      Co-authorship Agreements
  -56-




---



##### Table of Contents



9. Income Taxes
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(in thousands)Current tax (provision) benefit:U.S. Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    (153
    )
    
    
    
    
    
    
    (153
    )
    
    
    
    
    
    
    Deferred tax (provision) benefit:U.S. Federal
    
    
    
    
    
    
    
    
    
    
    (14,832
    )State
    
    
    
    
    
    
    
    
    
    
    (1,859
    )Foreign
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    
    (16,707
    )Total (provision) benefit for income taxes
    
    $
    (153
    )
    
    $
    
    
    
    $
    (16,707
    )
  December 31,2006
    
    
    2005(in thousands)Deferred tax assets:Net operating loss carryfoward
    
    $
    26,314
    
    
    $
    22,281Tax credit carryfowards
    
    
    85
    
    
    
    85Allowance for doubtful accounts
    
    
    982
    
    
    
    663Equity compensation
    
    
    186
    
    
    
    188Capitalized inventory costs
    
    
    180
    
    
    
    168Deferred rent
    
    
    1,052
    
    
    
    911Unrealized loses
    
    
    269
    
    
    
    147Accumulated amortization including write down of intangibles
    
    
    
    
    
    
    621Other
    
    
    453
    
    
    
    464Total deferred tax assets
    
    
    29,521
    
    
    
    25,528Deferred tax liabilities:Software development costs
    
    
    (2,277
    )
    
    
    (1,133
    )Accumulated amortization, including write down of intangibles
    
    
    (204
    )
    
    
    Accumulated depreciation
    
    
    (537
    )
    
    
    (743
    )Total deferred tax liabilities
    
    
    (3,018
    )
    
    
    (1,876
    )Net deferred tax liabilities before valuation allowance
    
    
    26,503
    
    
    
    23,652Valuation allowance
    
    
    (26,503
    )
    
    
    (23,652
    )Net deferred tax liabilities assets
    
    $
    
    
    
    $
    
  Deferred Tax Valuation Allowance
 -57-




---



##### Table of Contents



Accounting for Income Taxes,
  Years ended December 31,2006
    
    
    2005
    
    
    2004(in thousands)U.S. Federal income tax benefit {provision)
expenses at statutory rate
    
    $
    3,053
    
    
    
    34
    %
    
    $
    1,181
    
    
    
    34
    %
    
    $
    4,660
    
    
    
    34
    %Effect of permanent differences and other
    
    
    (686
    )
    
    
    (8
    %)
    
    
    15
    
    
    
    0
    %
    
    
    39
    
    
    
    0
    %Effect of state taxes
    
    
    331
    
    
    
    3
    %
    
    
    324
    
    
    
    9
    %
    
    
    726
    
    
    
    5
    %Valuation allowance
    
    
    (2,851
    )
    
    
    (30
    %)
    
    
    (1,520
    )
    
    
    (43
    %)
    
    
    (22,132
    )
    
    
    (161
    %)$
    (153
    )
    
    
    1
    %
    
    $
    
    
    
    
    0
    %
    
    $
    (16,707
    )
    
    
    (122
    %)
 10. Employee Benefits and Contracts
 Retirement Plan
  Stock Incentive Plan
   -58-




---



##### Table of Contents



Weighted-AverageOptions
    
    Exercise PriceOutstanding at December 31, 2003
    
    
    2,548,063
    
    
    $
    6.96Granted at Market
    
    
    1,098,473
    
    
    $
    7.48Forfeited
    
    
    (167,107
    )
    
    $
    7.60Exercised
    
    
    (120,926
    )
    
    $
    6.19Outstanding at December 31, 2004
    
    
    3,358,503
    
    
    $
    7.13Granted at Market
    
    
    224,900
    
    
    $
    5.77Forfeited
    
    
    (282,503
    )
    
    $
    7.57Exercised
    
    
    (2,406
    )
    
    $
    4.96Outstanding at December 31, 2005
    
    
    3,298,494
    
    
    $
    7.00Granted at Market
    
    
    133,320
    
    
    $
    5.99Forfeited
    
    
    (262,192
    )
    
    $
    6.85Exercised
    
    
    (14,095
    )
    
    $
    3.66Outstanding at December 31, 2006
    
    
    3,155,527
    
    
    $
    6.98Exercisable at December 31, 2004
    
    
    2,134,059
    
    
    $
    6.99Exercisable at December 31, 2005
    
    
    2,461,129
    
    
    $
    7.02Exercisable at December 31, 2006
    
    
    2,804,991
    
    
    $
    7.04
  Weighted-AverageGrant DateOptions
    
    Fair ValueNonvested options outstanding at December 31, 2005
    
    
    460,386
    
    
    
    $4.12Options granted
    
    
    133,320
    
    
    
    $2.57Options vested
    
    
    (37,378)
    
    
    
    $4.29Options forfeited
    
    
    (205,792)
    
    
    
    $4.86Nonvested options outstanding at December 31, 2006
    
    
    350,536
    
    
    
    $3.08
     -59-




---



##### Table of Contents



Performance Stock Awards
    Restricted Stock Awards
    11. Related Parties
 Publisher
  Loans to Officers
  12. Segment Reporting
  -60-




---



##### Table of Contents



Year Ended December 31, 2006(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    92,406
    
    
    $
    35,694
    
    
    $
    12,641
    
    
    $
    
    
    
    $
    140,740Operating expense (including depreciation
and amortization)
    
    
    46,519
    
    
    
    17,413
    
    
    
    8,068
    
    
    
    18,313
    
    
    
    90,312Operating income (loss)
    
    
    13,980
    
    
    
    (3,422
    )
    
    
    (937
    )
    
    
    (18,313
    )
    
    
    (8,692
    )Depreciation and amortization
    
    
    1,896
    
    
    
    3,611
    
    
    
    1,784
    
    
    
    1,863
    
    
    
    9,154Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (35
    )Segment EBITDA
    
    
    15,876
    
    
    
    189
    
    
    
    847
    
    
    
    (16,485
    )
    
    
    427Total segment assets
    
    $
    46,143
    
    
    $
    33,661
    
    
    $
    11,164
    
    
    $
    27,141
    
    
    $
    118,108Segment goodwill
    
    $
    31,006
    
    
    $
    
    
    
    $
    500
    
    
    $
    
    
    
    $
    31,506Expenditures for long lived assets
    
    $
    1,115
    
    
    $
    4,103
    
    
    $
    632
    
    
    $
    2,140
    
    
    $
    7,990
 -61-




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##### Table of Contents



Year Ended December 31, 2005(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    87,360
    
    
    $
    31,932
    
    
    $
    11,252
    
    
    $
    
    
    
    $
    130,544Operating expense (including depreciation
and amortization)
    
    
    41,316
    
    
    
    16,016
    
    
    
    8,397
    
    
    
    20,623
    
    
    
    86,352Operating income (loss)
    
    
    18,128
    
    
    
    (359
    )
    
    
    (1,396
    )
    
    
    (20,623
    )
    
    
    (4,250
    )Depreciation and amortization
    
    
    1,853
    
    
    
    2,853
    
    
    
    1,723
    
    
    
    1,250
    
    
    
    7,679Other income (expense)
    
    
    
    
    
    
    990
    
    
    
    (39
    )
    
    
    1,469
    
    
    
    2,420Segment EBITDA
    
    
    19,981
    
    
    
    3,484
    
    
    
    288
    
    
    
    (17,904
    )
    
    
    5,849Total segment assets
    
    
    36,441
    
    
    
    20,524
    
    
    
    17,527
    
    
    
    30,880
    
    
    
    105,371Segment goodwill
    
    $
    31,007
    
    
    $
    
    
    
    $
    500
    
    
    $
    
    
    
    $
    31,506Expenditures for long lived assets
    
    $
    1,275
    
    
    $
    8,268
    
    
    $
    1,636
    
    
    $
    3,142
    
    
    $
    14,322
 Year Ended December 31, 2004(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    74,297
    
    
    $
    28,403
    
    
    $
    11,085
    
    
    $
    
    
    
    $
    113,785Operating expense (including depreciation
and amortization)
    
    
    39,016
    
    
    
    16,366
    
    
    
    20,900
    
    
    
    11,149
    
    
    
    87,431Operating income (loss)
    
    
    11,729
    
    
    
    (1,271
    )
    
    
    (12,756
    )
    
    
    (11,149
    )
    
    
    (13,447
    )Depreciation and amortization
    
    
    1,827
    
    
    
    2,166
    
    
    
    1,894
    
    
    
    1,112
    
    
    
    6,999Other income (expense)
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    1,089
    
    
    
    1,022Segment EBITDA
    
    $
    13,556
    
    
    $
    895
    
    
    $
    (10,929
    )
    
    $
    (8,948
    )
    
    $
    (5,426
    )Total segment assets
    
    $
    37,419
    
    
    $
    21,827
    
    
    $
    17,532
    
    
    $
    30,823
    
    
    $
    107,641Segment goodwill
    
    $
    31,011
    
    
    $
    
    
    
    $
    500
    
    
    $
    
    
    
    $
    31,511Expenditures for long lived assets
    
    $
    2,551
    
    
    $
    3,385
    
    
    $
    427
    
    
    $
    2,639
    
    
    $
    9,002
 Reconciliation of operating income (loss) to net income (loss)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Total
operating income (loss) from reportable segments
    
    $
    (8,692
    )
    
    $
    (4,250
    )
    
    $
    (13,447
    )Unallocated amounts:Interest income (expense)
    
    
    (650
    )
    
    
    (354
    )
    
    
    (361
    )Other income (expense)
    
    
    (36
    )
    
    
    2,415
    
    
    
    918Equity in loss of affiliate
    
    
    
    
    
    
    4
    
    
    
    103(Provision) benefit for income taxes
    
    
    (153
    )
    
    
    
    
    
    
    (16,708
    )Net income (loss)
    
    $
    (9,531
    )
    
    $
    (2,185
    )
    
    $
    (29,495
    )
 13. Quarterly Results of Operations (Unaudited)
  -62-




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Quarter EndedMar. 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,
    
    
    Mar. 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,2006
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2005(in thousands, except per share data)RevenueTest Preparation Services
    
    $
    25,063
    
    
    $
    21,682
    
    
    $
    25,008
    
    
    $
    20,653
    
    
    $
    22,900
    
    
    $
    20,630
    
    
    $
    26,748
    
    
    $
    17,084K-12 Services
    
    
    6,873
    
    
    
    9,828
    
    
    
    7,331
    
    
    
    11,663
    
    
    
    7,919
    
    
    
    7,122
    
    
    
    5,280
    
    
    
    11,610Admissions Services
    
    
    3,174
    
    
    
    2,516
    
    
    
    3,573
    
    
    
    3,376
    
    
    
    2,794
    
    
    
    2,045
    
    
    
    2,767
    
    
    
    3,645Total revenue
    
    
    35,110
    
    
    
    34,026
    
    
    
    35,912
    
    
    
    35,692
    
    
    
    33,613
    
    
    
    29,798
    
    
    
    34,795
    
    
    
    32,339Cost of revenueTest Preparation Services
    
    
    7,816
    
    
    
    7,448
    
    
    
    8,372
    
    
    
    8,271
    
    
    
    7,017
    
    
    
    6,458
    
    
    
    7,979
    
    
    
    6,462K-12 Services
    
    
    4,755
    
    
    
    4,830
    
    
    
    5,446
    
    
    
    6,673
    
    
    
    4,068
    
    
    
    2,935
    
    
    
    2,841
    
    
    
    6,430Admissions Services
    
    
    1,290
    
    
    
    1,495
    
    
    
    1,501
    
    
    
    1,223
    
    
    
    773
    
    
    
    1,009
    
    
    
    1,159
    
    
    
    1,310Total cost of revenue
    
    
    13,861
    
    
    
    13,773
    
    
    
    15,319
    
    
    
    16,167
    
    
    
    11,857
    
    
    
    10,402
    
    
    
    11,979
    
    
    
    14,203Gross profit
    
    
    21,249
    
    
    
    20,253
    
    
    
    20,593
    
    
    
    19,525
    
    
    
    21,756
    
    
    
    19,395
    
    
    
    22,816
    
    
    
    18,137Operating expensesSelling, general and
administrative
    
    
    23,119
    
    
    
    21,018
    
    
    
    22,833
    
    
    
    23,042
    
    
    
    21,565
    
    
    
    19,772
    
    
    
    22,154
    
    
    
    22,861Impairment of investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    23,119
    
    
    
    21,018
    
    
    
    22,833
    
    
    
    23,342
    
    
    
    21,565
    
    
    
    19,772
    
    
    
    22,154
    
    
    
    22,861Income (loss) from operations
    
    
    (1,870
    )
    
    
    (765
    )
    
    
    (2,240
    )
    
    
    (3,817
    )
    
    
    190
    
    
    
    (377
    )
    
    
    662
    
    
    
    (4,724
    )Net income (loss) attributed to
common stockholders
    
    
    (2,065
    )
    
    
    (1,244
    )
    
    
    (2,497
    )
    
    
    (4,241
    )
    
    $
    (194
    )
    
    
    (1,137
    )
    
    
    849
    
    
    
    (4,146
    )Basic income (loss) per share
    
    $
    (0.07
    )
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    (0.15
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )
    
    $
    0.03
    
    
    $
    (0.15
    )Diluted income (loss) per share
    
    $
    (0.07
    )
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    (0.15
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )
    
    $
    0.03
    
    
    $
    (0.15
    )Weighted average shares used in
computing net income (loss)
per shareBasic
    
    
    27,572
    
    
    
    27,574
    
    
    
    27,575
    
    
    
    27,587
    
    
    
    27,570
    
    
    
    27,570
    
    
    
    27,571
    
    
    
    27,570Diluted
    
    
    27,572
    
    
    
    27,574
    
    
    
    27,575
    
    
    
    27,587
    
    
    
    27,570
    
    
    
    27,570
    
    
    
    28,733
    
    
    
    27,570
 14. Earnings (Loss) Per Share
  Year Ended December 31,2006
    
    2005
    
    2004(in thousands)Weighted average common shares outstandingBasic
    
    
    27,578
    
    
    
    27,570
    
    
    
    27,468
  Year Ended December 31,2006
    
    2005
    
    2004(in thousands)Net effect of dilutive stock options-based on the
treasury stock method
    
    
    163
    
    
    
    132
    
    
    
    230Effect of convertible preferred stock-based on the
if converted method
    
    
    1,299
    
    
    
    1,007
    
    
    
    578Other
    
    
    9
    
    
    
    9
    
    
    
    91,471
    
    
    
    1,148
    
    
    
    817
 15.
Restructuring
  16. Subsequent Events
 Disposition of a Business
 -63-




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For the Years Ended December 31,2006
    
    2005
    
    2004(in thousands)Operating income (loss) from discontinued operations
    
    
    ($319
    )
    
    
    ($1,429
    )
    
    
    ($2,613
    )
 As of December 31,2006
    
    2005Assets related to discontinued operations
    
    $
    13,142
    
    
    $
    9,098Liabilities related to discontinued operations
    
    
    9,956
    
    
    
    6,318
 Amendments to Credit Facility
    -64-




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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 Schedule II
Valuation and Qualifying Accounts
For the years ended December 31, 2006, 2005 and 2004
 DeductionsBalance at
    
    Additions
    
    From
    
    Balance atBeginning of
    
    Charged to
    
    Allowance
    
    End ofPeriod
    
    Expense
    
    (1)
    
    Period(in thousands)Allowance for doubtful accountsYear Ended December 31, 2006
    
    $
    1,601
    
    
    $
    2,772
    
    
    $
    (1,525
    )
    
    $
    2,848Year Ended December 31, 2005
    
    $
    1,290
    
    
    $
    1,328
    
    
    $
    (1,017
    )
    
    $
    1,601Year Ended December 31, 2004
    
    $
    302
    
    
    $
    1,521
    
    
    $
    (533
    )
    
    $
    1,290Valuation allowance for deferred tax assetsYear Ended December 31, 2006
    
    $
    23,652
    
    
    $
    2,851
    
    
    $
    
    
    
    $
    26,503Year Ended December 31, 2005
    
    $
    22,132
    
    
    $
    1,520
    
    
    $
    
    
    
    $
    23,652Year Ended December 31, 2004
    
    $
    
    
    
    $
    22,132
    
    
    $
    
    
    
    $
    22,132
 
 (1)
    
    Consists primarily of amounts written off during the period. -65-




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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 (a) Disclosure Controls and Procedures
    (b) Managements Report on Internal Control over Financial Reporting
   
 
 -66-




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
    
    
    Financial Statement Close Process
The Company concluded that controls over the financial statement close process related
to various account reconciliations and analyses, including bank accounts, accounts
receivable, deferred projects costs, other assets and accrued liabilities were not effective.
As a result, a large volume of adjustments were necessary to present the financial
statements in accordance with generally accepted accounting principles. Due to the
significance of the adjustments identified and the significance of the financial
statement close process to the preparation of reliable financial statements, there is
more than a remote likelihood that a material misstatement of the interim and annual
financial statements would not have been prevented or detected.
    
    Estimation Process on Collectibility of Accounts Receivable
The Company concluded that controls over accumulating information necessary to properly
assess the collectibility of aged accounts receivable balances were not effective. The
calculations prepared relied on customer and account information that was not current
and which adversely impacted the Companys ability to properly estimate the allowance
for doubtful accounts. In addition to the staffing and procedures issues noted above,
factors contributing to this material weakness include certain organizational changes
related to the Companys credit and collections efforts that were unsuccessful. This
material weakness resulted in a number of adjustments to record additional allowance for
doubtful accounts to present the financial statements in accordance with generally
accepted accounting principles. Due to the adjustments identified, there is more than a remote likelihood that a material
misstatement of the interim and annual financial statements would not have been
prevented or detected.
 -67-




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
    
    Revenue Recognition
The Company concluded that controls to ensure that revenue was appropriately recognized
for certain unusual or complex transactions in accordance with generally accepted
accounting principles were not effective. This included the accounting for certain
multiple-element arrangements within its K-12 and Admission Services divisions and a
specific barter transaction as a nonmonetary exchange. This deficiency also extends to
revenue recognition for certain accounts receivable billings that are heavily reliant on
manual processes. In addition to the staffing and procedural issues noted above,
factors contributing to this control deficiency were poor recordkeeping and lack of
transparency of certain underlying transaction details for the manual billings. Due to
the significance of the adjustments identified, there is more than a remote likelihood
that a material misstatement of the interim and annual financial statements would not
have been prevented or detected.
    
    Series B-1 Preferred Stock
In responding to a comment letter from the Securities and Exchange Commission, the Company
determined that its controls over the accounting for certain embedded derivatives
contained within the Series B-1 Preferred Stock and a related warrant were not
effective. In addition to the staffing and procedural issues noted above, this control
deficiency is also attributed to insufficient documentation of policies and procedures.
This deficiency was determined to be a material weakness as there is
more than a remote likelihood that a material misstatement of the
interim and annual financial statements would not have been prevented or
detected.
   (c) Changes in Internal Control over Financial Reporting
   
    
    Hiring of more qualified and experienced accounting personnel to perform the
month-end review and closing processes as well as provide additional oversight and
supervision within the accounting department,
    
    use of an outside consultant to work with our accounting personnel to improve
our account analyses to ensure that account reconciliations and amounts recorded, as
well as the review of these areas, are substantiated by detailed and contemporaneous
documentary support and that reconciling items are investigated, resolved and recorded
in a timely manner,
    
    updating of our policies and procedures along with control
matrices and implementing
procedures to ensure timely compliance, including the use of internal
audit,
    
    establishing programs to provide ongoing training and professional education
and development plans for the accounting department
 -68-




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
    
    with respect to revenue recognition, improving the communications and workflow
by which unusual or complex transactions are evaluated for revenue recognition as well
as the process for manual accounts receivable billings.
 -69-




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Report of Independent Registered Public Accounting Firm
 
      
    
    Financial Statement Close Process
The Company concluded that controls over the financial statement close process related
to various account reconciliations and analyses, including bank accounts, accounts
receivable,
 -70-




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deferred projects costs, other assets and accrued liabilities were not effective. As a
result, a large volume of adjustments were necessary to present the financial statements
in accordance with generally accepted accounting principles. Due to the significance of
the adjustments identified and the significance of the financial statement close process
to the preparation of reliable financial statements, there is more than a remote
likelihood that a material misstatement of the interim and annual financial statements
would not have been prevented or detected.
 
    
    Estimation Process on Collectibility of Accounts Receivable
The Company concluded that controls over accumulating information necessary to properly
assess the collectibility of aged accounts receivable balances were not effective. The
calculations prepared relied on customer and account information that was not current
and which adversely impacted the Companys ability to properly estimate the allowance
for doubtful accounts. In addition to the staffing and procedures issues noted above,
factors contributing to this material weakness include certain organizational changes
related to the Companys credit and collections efforts that were unsuccessful. This
material weakness resulted in a number of adjustments to record additional allowance for
doubtful accounts to present the financial statements in accordance with generally
accepted accounting principles. Due to the adjustments identified,
there is more than a remote likelihood that a material
misstatement of the interim and annual financial statements would not have been
prevented or detected.
 
    
    Revenue Recognition
The Company concluded that controls to ensure that revenue was appropriately recognized
for certain unusual or complex transactions in accordance with generally accepted
accounting principles were not effective. This included the accounting for certain
multiple-element arrangements within its K-12 and Admission Services divisions and a
specific barter transaction as a nonmonetary exchange. This deficiency also extends to
revenue recognition for certain accounts receivable billings that are heavily reliant on
manual processes. In addition to the staffing and procedural issues noted above,
factors contributing to this control deficiency were poor recordkeeping and lack of
transparency of certain underlying transaction details for the manual billings. Due to
the significance of the adjustments identified, there is more than a remote likelihood
that a material misstatement of the interim and annual financial statements would not
have been prevented or detected.
 
    
    Series B-1 Preferred Stock
In responding to a comment letter from the Securities and Exchange Commission, the Company
determined that its controls over the accounting for certain embedded derivatives
contained within the Series B-1 Preferred Stock and a related warrant were not
effective. In addition to the staffing and procedural issues noted above, this control
deficiency is also attributed to insufficient documentation of policies and procedures.
This deficiency was determined to be a material weakness. As there is more than a remote
likelihood that a material misstatement of the interim and annual
financial statements would not have been prevented or detected.
   -71-




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-72-




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##### Table of Contents



Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
     -74-




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ExhibitNumber
    
    
    
    Description2.1
    
    
    
    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).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
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##### Table of Contents



ExhibitNumber
    
    
    
    Descriptionwith 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).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
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##### Table of Contents



ExhibitNumber
    
    
    
    Descriptionreference 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)).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).10.36
    
    
    
    Amendment to Employment Agreement, dated September 12, 2005, between The Princeton Review, Inc. and
Stephen Melvin (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (File
No. 0000-32469) for the third quarter of 2005, filed with the Securities and Exchange Commission on
November 9, 2006).10.37
    
    
    
    Employment Agreement, dated September 9, 2005, between The Princeton Review, Inc. and Stephen Melvin
(incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q (File No. 0000-32469)
for the third quarter of 2005, filed with the Securities and Exchange Commission on November 9, 2006).10.38
    
    
    
    Office Lease Extension, dated November 18, 2005, as amended, by and between The Princeton Review, Inc.
and 2315 Broadway Realty Co.10.39
    
    
    
    Credit Agreement, dated April 10, 2006, by and among The Princeton Review, Inc., Princeton Review
Operations, L.L.C., lenders who become signatory from time to time, and Golub Capital Incorporated
(incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No.
000-32469), filed with the Securities and Exchange Commission on April 14, 2006).10.40
    
    
    
    Security Agreement, dated April 10, 2006, by and
among The Princeton Review, Inc., Princeton
Review Operations, L.L.C. and Golub Capital
Incorporated (incorporated herein by reference
to Exhibit 10.2 to our Current Report on Form
8-K (File No. 000-32469), filed with the
Securities and Exchange Commission on April 14,
2006).
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##### Table of Contents



ExhibitNumber
    
    
    
    Description10.41
    
    
    
    Employment Agreement, dated April 26, 2004,
between The Princeton Review, Inc. and Margot
Lebenberg (incorporated herein by reference to
Exhibit 10.41 to our Quarterly Report on Form
10-Q (File No. 000-32469), filed with the
Securities and Exchange Commission on May 10,
2006).10.42
    
    
    
    Employment Agreement, dated February 18, 2003,
between The Princeton Review, Inc. and Young
Shin (incorporated herein by reference to
Exhibit 10.42 to our Quarterly Report on Form
10-Q (File No. 000-32469), filed with the
Securities and Exchange Commission on May 10,
2006).10.43
    
    
    
    Indemnification Agreement, dated December 14,
2004, between The Princeton Review, Inc. and
Margot Lebenberg (incorporated herein by
reference to Exhibit 10.43 to our Quarterly
Report on Form 10-Q (File No. 000-32469), filed
with the Securities and Exchange Commission on
May 10, 2006).10.44
    
    
    
    The Princeton Review, Inc. Bonus Policy for G-0
Employees for Calendar Year 2006 (incorporated
herein by reference to Exhibit 10.44 to our
Quarterly Report on Form 10-Q (File No.
000-32469), filed with the Securities and
Exchange Commission on May 10, 2006).10.45
    
    
    
    Form of Restricted Stock Agreement pursuant to
The Princeton Review, Inc. 2000 Stock Incentive
Plan (as amended and restated effective March
24, 2003) (incorporated herein by reference to
Exhibit 10.45 to our Quarterly Report on Form
10-Q (File No. 000-32469), filed with the
Securities and Exchange Commission on May 10,
2006).10.46
    
    
    
    Form of Performance Based Deferred Stock Award
Agreement pursuant to the Princeton Review, Inc.
2000 Stock Incentive Plan (as amended and
restated effective March 24, 2003) (incorporated
herein by reference to Exhibit 10.46 to our
Quarterly Report on Form 10-Q (File No.
000-32469), filed with the Securities and
Exchange Commission on May 10, 2006).10.47
    
    
    
    First Amendment to Credit Agreement, dated May
25, 2006, by and among The Princeton Review,
Inc., Princeton Review Operations L.L.C., the
lender party thereto and Golub Capital
Incorporated, as Administrative Agent
(incorporated herein by reference to Exhibit
10.1 to our Current Report on Form 8-K (File No.
000-32469), filed with the Securities and
Exchange Commission on June 1, 2006.)10.48
    
    
    
    Amendment to Employment Agreement, dated
September 25, 2006, between The Princeton
Review, Inc. and Andrew Bonnani (incorporated
herein by reference to Exhibit 10.1 to our
Current Report on Form 8-K (File No. 000-32469),
filed with the Securities and Exchange
Commission on September 27, 2006).10.49
    
    
    
    Limited Waiver and Second Amendment to Credit
Agreement, dated November 3, 2006, by and among
The Princeton Review, Inc., Princeton Review
Operations L.L.C., the lender party thereto and
Golub Capital Incorporated, as Administrative
Agent (incorporated herein by reference to
Exhibit 10.1 to our Current Report on Form 8-K
(File No. 000-32469), filed with the Securities
and Exchange Commission on November 8, 2006).10.50
    
    
    
    Letter Agreement, dated December 15, 2006, by
and among The Princeton Review, Inc., Princeton
Review Operations, L.L.C., lenders who become
signatory from time to time, and Golub Capital
Incorporated (incorporated herein by reference
to Exhibit 10.1 to our Current Report on Form
8-K (File No. 000-32469), filed with the
Securities and Exchange Commission on December
20, 2006).21.1
    
    
    
    Subsidiaries of the registrant (incorporated herein by reference to Exhibit 21.1 to our Annual Report
on Form 10-K for the year ended December 31, 2004).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)
    
    Incorporated herein by reference to the exhibit with the same number to our Registration
Statement on Form S-1 (File No. 333-43874), which was declared effective on June 18, 2001.(2)
    
    Confidential portions of this document are omitted pursuant to a request for confidential
treatment that has been granted by the Commission, and have been filed separately with the
Commission. -78-




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##### Table of Contents



SIGNATURES
  The Princeton Review, Inc.By:
    /s/ Stephen MelvinStephen MelvinChief Financial Officer and
Treasurer 
 POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Howard A. Tullman
    
    Chairman and Director
    
    March 30, 2007(Howard A. Tullman)/s/ John S. Katzman

(John S. Katzman)
    
    Chief Executive Officer
(Principal Executive Officer)
    
    March 30, 2007/s/ Stephen Melvin

(Stephen Melvin)
    
    Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    March 30, 2007/s/ Robert E. Evanson

(Robert E. Evanson)
    
    Director
    
    March 30, 2007/s/ Richard Katzman

(Richard Katzman)
    
    Director
    
    March 30, 2007/s/ John C. Reid

(John C. Reid)
    
    Director
    
    March 30, 2007/s/ Richard Sarnoff

(Richard Sarnoff)
    
    Director
    
    March 30, 2007/s/ Sheree T. Speakman

(Sheree T. Speakman)
    
    Director
    
    March 30, 2007
 -79-