**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C.20549**

**FORM 10-K**

**Annual ReportPursuant to Section 13 or 15(d) of the**

**SecuritiesExchange Act of 1934**

**For the fiscalyear ended December 31, 2006**

**WHITNEY INFORMATIONNETWORK, INC.**

(Exact name of registrantas specified in charter)

 
| **Colorado**(State or other jurisdiction of  incorporation or organization) | ** ** | **0-27403**(Commission File Number) | ** ** | **84-1475486**(I.R.S. Employer  Identification Number) |
|-----------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------------------------|

 
|                                                                                                      |
|------------------------------------------------------------------------------------------------------|
| **1612  East Cape Coral Parkway, Cape Coral, Florida 33904**(Address of principal executive offices) |
| ** **                                                                                           |
| Registrant’s  telephone number, including area code: (**239) 542-0643**                         |
| ** **                                                                                           |
| Securities  registered under Section 12 (b) of the Exchange Act:**NONE**                             |
| ** **                                                                                           |
| Securities registered  under Section 12 (g) of the Exchange Act:                                     |
|                                                                                                 |
| **COMMON  STOCK**                                                                                    |
|                                                                                                 |
| **No par  value per share**                                                                          |
| (Title of Class)                                                                                     |

 

Indicate by check mark if the Registrant is a well-knownseasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the Registrant is not requiredto file reports pursuant to Section 13 or Section 15 (d) of the ExchangeAct.  Yes o No x

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by section 13 or 15 (d) of the Exchange Act during thepreceding 12 months (or such shorter period that the Registrant was required tofile such reports) and (2) has been subject to such filing requirements for thepast 90 days.  Yes x No o

Indicate by check mark whether the Registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of  “accelerated filer and large acceleratedfiler” in rule 12b-2 of the Exchange Act.

| o  Large Accelerated filer |   | o  Accelerated filer |   | x  Non-accelerated filer |
|----------------------------|--------|----------------------|--------|--------------------------|

 

Indicate by check mark whether the Registrant is a shellcompany (as defined in Rule 12b -2 of the Exchange Act).  Yes o No x

The aggregate market value of the voting and nonvoting common equityheld by nonaffiliates of the Registrant, computed by reference to the closingsale price of such common equity as quoted on the NASD’s Over the CounterElectronic Bulletin Board of $8.30 per share as of June 30, 2006, was $45.5million.

The Registrant had 11,738,587 shares of common stockoutstanding as of March 30, 2007.

The Registrant’s revenues for the year ended December 31,2006 were $224.7 million.

DOCUMENTS INCORPORATED BYREFERENCE

Portions of the Registrant’s Proxy Statement for the 2007Annual Meeting of Shareholders are incorporated by reference in Part III ofthis Form 10-K to the extent described herein.

 

 

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**SPECIAL NOTEREGARDING FORWARD LOOKING STATEMENTS**

This document contains certain forward looking statementswithin the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934. Forward-lookingstatements deal with our current plans, intentions, beliefs and expectationsand statements of future economic performance. In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “should,”“could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,”or “predicts” or the negative of such terms. These forward-lookingstatements include, without limitation, statements about our marketopportunity, our strategies, competition, expected activities and expendituresas we pursue our business plan, and the adequacy of our available cashresources. Although we believe that the expectations reflected in the forward-lookingstatements are reasonable, we cannot guarantee future results, levels ofactivity, performance or achievements. Forward-looking statements involveknown and unknown risks and uncertainties which may cause our actual results infuture periods to differ materially from what is currently anticipated. We makecautionary statements in certain sections of this document, including under theheading “Risk Factors.” You should read these cautionary statements as beingapplicable to all related forward-looking statements wherever they appearin this document, in the materials referred to in this document, in the materialsincorporated by reference into this document, or in our press releases. Noforward-looking statement is a guarantee of future performance, and youshould not place undue reliance on any forward-looking statement. Weundertake no obligation to update publicly any forward-looking statementsfor any reason, even if new information becomes available or other events occurin the future.

Industry data and other statistical information used in this documentare based on independent publications, government publications, reports bymarket research firms or other published independent sources. Some data arebased on pure good faith estimates, derived from our review of internal surveysand the independent sources just listed. Although we believe these sources tobe reliable, we have not independently verified the information.

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**TABLE OFCONTENTS**
| **PART I**     |   |                                                                                            |   |   |
|----------------|--------|-------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.        |   | Business                                                                                        |   | 4      |
| Item 1A.       |   | Risk factors                                                                                    |   | 12     |
| Item 1B.       |   | Unresolved staff comments                                                                       |   | 17     |
| Item 2.        |   | Properties                                                                                      |   | 18     |
| Item 3.        |   | Legal proceedings                                                                               |   | 19     |
| Item 4.        |   | Submission of matters to vote of security holders                                               |   | 20     |
|           |   |                                                                                            |   |   |
| **PART II**    |   |                                                                                            |   |   |
| Item 5.        |   | Market for Registrant’s common equity and related  stockholder matters                     |   | 21     |
| Item  6.       |   | Selected  financial data                                                                        |   | 24     |
| Item 7.        |   | Management’s discussion and analysis of financial  condition and results of operations     |   | 26     |
| Item 7A.       |   | Quantitative and qualitative disclosure about market  risk                                      |   | 44     |
| Item 8.        |   | Financial statements and supplemental data                                                      |   | 45     |
| Item 9.        |   | Changes in and disagreements with accountants on  accounting and financial disclosure           |   | 73     |
| Item 9A.       |   | Controls and procedures                                                                         |   | 74     |
| Item  9B.      |   | Other  information                                                                              |   | 74     |
|           |   |                                                                                            |   |   |
| **PART III**   |   |                                                                                            |   |   |
| Item 10.       |   | Directors, executive officers and corporate governance                                          |   | 75     |
| Item 11.       |   | Executive compensation                                                                          |   | 79     |
| Item 12.       |   | Security  ownership of certain of beneficial owners and management related stockholder  matters |   | 80     |
| Item 13.       |   | Certain relationships and related transactions, and  director independence                      |   | 81     |
| Item 14.       |   | Principal accountant fees and services                                                          |   | 82     |
|           |   |                                                                                            |   |   |
| **PART IV**    |   |                                                                                            |   |   |
| Item 15.       |   | Exhibits and financial statement schedules                                                      |   | 83     |
|           |   |                                                                                            |   |   |
| **SIGNATURES** |   | 84                                                                                              |
|           |   |                                                                                            |   |   |

 

 

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**ITEM 1. BUSINESS**

**Current operations**

Since 1992, we have provided postsecondary educationaland training courses for students throughout the United States. In recentyears, we have expanded our operations to include course offerings to studentsin Canada and the United Kingdom. Our courses provide instruction in:

·                  realestate investing

·                  businessstrategies

·                  stockmarket investment techniques

·                  cashmanagement

·                  assetprotection

·                  otherfinancially-oriented subjects

We also develop and sell educational resource materials,which we prepare, to support our course offerings and for sale to the generalpublic.

Beginning in 1992, we focused primarily on basic andadvanced real estate training programs which we offered throughout the UnitedStates. In 2002, we expanded our offerings to include financial marketseducation, which has come to represent a substantial part of our business.

Since 2001, we have gradually expanded our courseofferings and geographical markets. We currently offer approximately 200educational courses and training programs per month covering more than 22financially-oriented subjects which we provide either for free or on afee basis.

For the year ended December 31, 2006, approximately92.1% of our revenue was generated from domestic operations and 7.9% of revenuewas generated from operations in Canada and the United Kingdom. Our tuitionweighted average is approximately $364 for a basic training session andapproximately $14,159 for an advanced course package. We conduct our courseworkat:

·                  leasedtraining and meeting facilities and conference centers;

·                  regionaltraining centers located in hotels or other temporarily rented facilitiesselected by us; and

·                  ourown facilities in the United States, United Kingdom or Costa Rica.

Our students are primarily recruited by attending freeintroductory workshops related to a specific educational subject which arehosted by one of our trainers or others and held at a local hotel or otherrented auditorium facility. The subject, date and location of the trainingsession are generally advertised in local newspapers, on the Web site of ourrespective brands, in television advertisements and through direct mailings andtelemarketing. We hold these sessions in metropolitan areas throughout theUnited States, Canada, and the United Kingdom. Following the free informationaltraining workshop, the student may purchase reference materials on the subjectdiscussed or may elect to receive further fee-based training in the many courseswe offer, either in the student’s hometown or in regional training centers. Weengage approximately 300 trainers, instructors, coaches and mentors inconnection with our various educational course offerings.

Following the first fee-based training session, studentsinterested in learning more on the course topics may also subscribe to ourperiodic publications, purchase books or software programs or attend advancedtraining courses. In addition to our over 25 resource publications, we offeradvanced courses throughout the United States, Canada, the United Kingdom andCosta Rica. We also provide post training programs conducted by over 100mentors.

Our outreach (or telemarketing) business is responsiblefor approximately 26.8% of cash receipts. We currently telemarket our productsand services to two types of potential students, consisting of those who:

·                  attendedone of our workshop events, who purchased another of our courses, and whocompleted training within the last six months

·                  contactedus via the Internet and requested to be contacted

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In 2007, we intend totelemarket our products to two additional types of potential students,consisting of those who:

·                  registeredto attend one of our free preview workshops, but did not attend

·                  attendedone of our free introductory workshops and chose not to purchase anything

**Our strategy**

Our purpose is to be the leading content developer anddistributor of nondegreed postsecondary education and related services in theworld.  We will maintain a motivated anddedicated employee base by providing opportunities for our employees to expandtheir capabilities through training and by developing succession planningprocesses.  Customer centricity will be adefining value in everything we do.  Inorder to accomplish our purpose, we have implemented a strategy that includes:

·                  *Talent acquisition and development.*Without the right people skills, we will not be able to easily sustain additionalgrowth objectives.  To allow for futuregrowth, the talent acquisition and development strategy has been identified asa crucial step.  Key points in this areainclude:

·                  identifying talent needs;

·                  enacting effective hiring approaches;

·                  creating a training strategy for allstrata of employees;

·                  developing and implementing enhancedmotivation and rewards guidelines; and

·                  implementing succession planningapproaches.

·                  *Improved technology and innovation capabilities. *Achieving the necessary steps for us to grow may require significantimprovements to our technology and innovation structure and external deliveryplatforms.  We intend to developenhanced technology platforms capable of streaming video, interactivee-learning, distributed e-learning and Web advertising.  We also intend to improve the technologyplatforms currently used in our financial markets and real estate courses.  Further, we intend to enhance our internalfinancial systems and fully utilize our customer relationship management (CRM)capabilities.

·                  *Expanded channel reach. *Through strategic partnerships, alliances and new business models, wemay be able to generate new revenues without incurring significant additionalmarketing or administrative costs.  Weintend to identify potential partnerships and alliances that can result inincreased revenues. We will research underserved market segments and changes inthe postsecondary market that will provide insights to reach new marketsegments.  We will evaluate complementarybusiness possibilities, including potentially entering business-to-businessmarkets.

·                  *Enhanced core offerings and e-enablements.*Our overall brand strategy will be redefined and redirected to maximizemarketing effectiveness and to improve customer understanding.  We intend to develop a system of ongoingstudent involvement to enhance the student life cycle, resulting in anenhancement to the student experience. Further, we intend to develop new interactive and online distributedcourse content for all brands.

·                  *Increased lifetime customer value.*  We intend to continually enhance the studentexperience and increase the lifetime value of a customer in order to retaincustomers, attract new customers and generate additional revenues.  We intend to accomplish this in part bycreating student communities through online channels, thus allowing us tobetter control customer “touchpoints.” This may allow us to provide valuable ancillary services and createadditional revenue flows through implementation of CRM and data mining results.

·                  *International expansion. *We believe that there are many valuable international markets where wecould introduce our products in a cost-effective and profitable manner.  It is our intention to explore potentialmarket expansion in Canada, the United Kingdom, Europe and Asia.  We believe that with the right resources andtechnological support, we can potentially increase our student base across theglobe.

·                  *New business acquisition and opportunities.*  We believe that viable, new markets existwhere we could utilize our existing resources for additional growth within thesame (or similar) industries.  We intendto identify potential new markets to enter within our current scope of corecompetencies and industries.  Further, wewill

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identify attractivemarkets and acquisition targets outside of our current core competencies withinadjacent, complementary markets.

**Educational training**

Following a free introductory workshop, we offer ourstudents a variety of educational courses, as well as educational materials.These courses provide the opportunity to train either in the student’s hometownor at local or regional locations. Our trainers take students step-by-stepthrough a curriculum that stresses a broad range of real estate and financialeducational training, risk management and asset protection.  Our educational training is taught tostudents in the United States, Canada and the United Kingdom throughtraditional course study and hands-on training, and includes the followingsubjects:

*Basic Training*

Following the free educational training session, ourstudents may elect to learn more about the subject by attending a basic course.

Our  *Russ Whitney*®*’s*  *BuildingWealth* basic training is a program offering a curriculum thatfocuses on the general business of real estate and teaches the fundamentals ofnegotiating real estate purchases with sellers, rehabilitating distressedproperties, leasing rental units to tenants and using a database to generatemultiple sources of cash flow. Students are taught the mechanics of completinga real estate transaction in their community, from making an offer to closingthe transaction, with emphasis upon creative financing strategies.

Our *Teach Me**TM Foreclosure& Real Estate Investing* basictraining is a local training program offering a curriculum in realestate focusing on pre foreclosures.  The course teaches how to locate andpurchase homes in foreclosure.  Studentswill also learn strategies for improving return on their investment inforeclosed properties including wholesaling, rehabilitation and creativefinancing.

Our *Rich Dad*®* Education*basic**training was created by Rich DadEducation, LLC, our 51% owned subsidiary, in conjunction with Rich Global, LLC. The course focuses on the real estate teachings and philosophies ofRobert Kiyosaki, author of *Rich Dad Poor Dad*. The course concentrates on real estate principles while allowing studentsto apply what they have learned from playing the board game, *CASHFLOW*®. The *Rich Dad*® and *CASHFLOW*® wordmarks and/or logos are owned by CASHFLOW Technologies, Inc. and any use of suchmarks by Rich Dad Education, LLC is under license.

Our *Teach Me To Trade*® basictraining program offers curriculum that focuses on stock market tradingstrategies and uses software and specific teaching techniques designed by us.Students are taught to understand the stock markets, investment strategies,risks and how to improve returns in both bull and bear markets.

*Advanced real estate courses*

Upon completion of a local basic training program,students may seek more advanced training, which are generally three days inlength and are held in locations around the student’s respective country. Someof these programs offer local tours so that students can observe marketsegmentation techniques and view properties in the area.

*MillionaireU*TM* Real Estate Training.*  Our *Millionaire U**TM* real estate training course isoffered at our training center in Cape Coral, Florida and in other states. Thiscourse expands upon the students’ knowledge of real estate gained from ourbasic course. During Millionaire UTM,students learn how to locate and analyze various property types and how toeffectively analyze property income and expense. Students telephone actualsellers and then tour properties throughout the Cape Coral and Fort Myers,Florida areas. Guest speakers including investors, property managers,developers, grant officers, loan officers, realtors and mortgage brokersexplain how students can locate financing for a variety of transactions, frommulti-unit apartment complexes to unimproved land.

Our *Rich U*TM* * advanced course teaches *Rich Dad*®* Education*students how to locate properties using conventional and nonconventionalstrategies, evaluate property deals, create marketing techniques and strategiesfor the real estate entrepreneur and utilize various financing options.  Students will also learn about thevarious types of agreements and documents utilized

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in typical realestate transactions, creation of a real estate action plan and the selectionprocess of advisors to assist in achieving the student’s objectives.

*Wholesale Buying.*  OurWholesale Buying course instructs students on the fundamentals of identifying,locating, negotiating, financing and disposing of wholesale properties.Students are also taught how to develop an investor database and how to manageout-of-state properties. While enrolled in this program, students develop afive-year investment plan with the help of our instructors. This program isfocused upon taking students from the level of novice investor to a proficiencyin managing a real estate investment portfolio.

*Foreclosure.*  OurAdvanced Foreclosure course teaches the intricacies of the real estateforeclosure process, how and why foreclosures occur and the role of securedlenders in foreclosure actions. Our instructors also teach students how to readforeclosure notices and how to refinance their acquisitions to generate cash atthe closing. Students also learn how to inspect, estimate the value of andrehabilitate houses.

*Lease Option.*  Our LeaseOption advanced course is designed to teach students how to control anequitable interest in property without actually owning the property and how tocreate lease options on properties. Students learn how to structure leaseoptions and purchase options. Other sessions include negotiating withprospective sellers and prospecting for tenants, buyers and lessees.

*Property Management & Cash Flow.*  OurProperty Management & Cash Flow advanced course teaches students howto manage their rental properties, including how to analyze monthly cash flows.Students also learn how to earn income by managing the properties of others andhow to find and retain tenants. The course curriculum includes numerousapproaches to resolving tenant-landlord problems such as delinquentrents, raising rents and evicting tenants. Students learn about the profitpotential for acquiring student housing and rooming houses as well as learninghow to find and rehabilitate distressed properties. The program also teachesbasic marketing techniques to increase profits.

*Manufactured/Mobile Homes and RV Parks.*  OurManufactured/Mobile Homes & Recreational Vehicle Parks advanced courseteaches students how to buy, sell and rent mobile homes and parks, an oftenoverlooked segment of the real estate market. While mobile homes cost far lessthan frame constructed homes, they can yield a significant rate of return oninvestment. Other subjects include developing and operating a mobile home park,expanding rental “pads” and lots to hold more units, obtaining standard andunconventional financings, estimating fix-up, improvement and moving costs,obtaining seller financing terms and identifying attractive properties atforeclosures and repossessions.

*Commercial Real Estate Investing.*  OurCommercial Real Estate Investing advanced course highlights the fundamentals ofanalyzing, buying, managing and disposing of commercial properties. Studentsalso learn how to establish relationships with lenders and government financingagencies. This course, like many of our courses, teaches students how torehabilitate properties and how to locate and pre-qualify tenants. Our trainersalso teach students about various leasing arrangements and describe forms usedin commercial property management.

*Keys to Creative Real Estate Financing.*  Our Keysto Creative Real Estate Financing advanced course teaches students how tocreate and refinance mortgages and how to structure financings in light ofprior credit problems. Discussions also include determining home equity,engaging in real estate negotiations and the use of hard-money lenders.

*Tax Liens and Deeds. *Our Tax Liens and Deeds advanced course focuses onthe purchase of tax liens and deeds from local tax agencies.  Tax lien certificates have been widelyknown by real estate agents, bankers, and attorneys for many years. In thisclass, our students will learn how to build a financial portfolio through thepurchase of tax liens and deeds.  Duringthis training, students may attend an actual tax deed sale.

*Rehabbing for Profits.*  Our Rehabbing for Profitsadvanced course has been designed to not only teach students, but toshow them how to quickly turn an “ugly house” investment into either awholesaleable or rentable house with the least amount of effort andexpense.  The class will take students,step-by-step, how to inspect, evaluate, and estimate rehabilitation jobs sothey can decide how much of the work to do themselves and how such to contractout. Negotiating the best deals on materials is also discussed.

*Land Investment and Development: Domestic. *During this advancedcourse, land investment and development students are presented with a powerfulstep-by-step system for locating and developing vacant land. These strategieswill take students from finding the land right through platting, permitting,zoning, to selling their own developments.

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*Land Investment and Development: International.*  Our LandInvestment and Development: International advanced course in international landdevelopment and investment is offered in Costa Rica. This program offers acurriculum that includes wealth building and investment opportunities overseas.The training also addresses the benefits of establishing a businessinternationally, investing in foreign markets and raising venture and workingcapital.

*Asset Protection and Tax Relief.*  Our AssetProtection and Tax Relief advanced course taught by a third party group ofattorneys describes various legal entities used to hold property such aspartnerships, corporations, and land and international trusts and the use ofthese entities to protect assets. Students also learn how to minimize incometax and estate tax liabilities and to develop their own personal investmentplans.

*Discount Notes and Mortgages.*  OurDiscount Notes and Mortgages advanced training course teaches students how tobroker and buy commercial paper at a discount. Students learn how to locatefunding sources for discounted notes and mortgages. Trainers also teachstudents how to discount other sources of debt such as business leases,business notes, inheritances, lotteries, life insurance policies and structuredsettlements.

*Advancedfinancial markets courses*

Our advanced financial markets education courses aredesigned to help students learn about equity and options investing.

*Master Trader*TM*.*  Our *Master Trader*TM advanced course is a three-day programoffering intensified training designed to provide traders and investors withthe knowledge needed to prosper in various market environments. This programoffers the students a selection of long and short-term strategies. Course workincludes technical analysis and fundamental analysis.

*Advanced Covered Calls.*  Our Advanced Covered Callscourse describes step-by-step how to create cash flow in trading options.  The course covers the basic terminology of acall, put, covered call, LEAPS and spread trading.  The course offers long and short-termstrategies for trading options.

*Trading P.I.T.* TM  Our *Trading P.I.T.*TM advanced course describes the tradingapproaches of top money managers. The course teaches students how to create anincome stream using more conservative trading techniques and other strategiesdesigned to limit risk while increasing the probability of profits. Strategiescovered include a number of trading approaches such as bidirectional trading,hedged directional trading, nondirectional trading, floor-trading strategiesand capital preservation.  We teachstudents the skills to quickly scan the market, generate forecasts and selectstrategies.

*The Trading Room**TM.*  *The Trading Room**TM* advanced class provides a frameworkof discipline and strategy.   Studentswill have the opportunity to papertrade and develop a system that fits theirpersonal trading style and objectives. Whether they are trading stocks, optionsor futures, students will understand how to identify trades, triggers, manageprice action and targets.

*Advanced Technical Analysis.*  As part of the AdvancedTechnical Analysis class, our students will learn strategies that will sharpentheir trading skills.  The course will break down the mystery of tradinginto a manageable study of price action, pivot points, price extensions, priceretracements and average range. Students learn high probability tradingtechniques for finding trade set-ups, triggers and targets.

*Advanced P.I.T.* TM  Our *Advanced P.I.T.* TM course offers our students the opportunity toexperience the market from the inside, directly from the floor of an organizedexchange during a market visit followed by a simulated floor trading sessionafter the market closes. Instruction is provided by our options trainers.Subjects include advanced spread trading strategies and portfolio repair.

*H.I.T.S.*  Our singlestock futures advanced course addresses changes in rules regarding single stockfutures. We discuss tools associated with spread trading and leveraged trading.Students are taught the framework of single stock futures, set-ups andstrategies and where single stock futures may fit into their diversified portfolios.

*Mentoring Programs*

We offer advanced training programs conducted by over 100mentors, who work with students individually in “hands-on” training.

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*Real estate mentors.*  Our realestate mentoring program applies the curriculum of our real estate classes tothe student’s city of choice. Under this program, one of our mentors travels tothe student’s city for three days. Students review the real estate acquisitiontechniques involved and learn the real estate characteristics of the localmarket. Students can put to practice the skills they have gained while workingdirectly with an experienced mentor.

*Financial markets mentors.*  Formentored financial markets education, our students travel to our mentor’slocation and spend two days coached by an experienced mentor.

Each of these mentorship programsappeals to different students depending upon business acumen and risktolerances.

*Additional Offerings*

We market directly to customers a wide range ofeducational and reference products that supplement our training programs, suchas our *Building Wealth*TM Real EstateHome Study Course; *Real Estate Success System*software; *Business Success System* software;Discount Notes and Mortgages Home Study Course; self-help courses and manualsthat provide students with information about their credit along with first-timehomebuyers’ manuals.

**Marketing**

We create an awareness of and demand for our educationalprograms, products and services through a mix of television advertising, printadvertising, direct mail, email, attendance at trade shows and Internetmarketing. We employ approximately 200 individuals trained to handle the needsof new students, to promote new products and services to existing and formerstudents and to respond to customer inquiries via phone, email or the Internet.

Our marketing programs include:

·                  Televisionadvertising, which is our primary means for promoting our educational courses.We generally concentrate our television advertising in the cities where ourcourses are scheduled to be held. Television advertising is often used incoordination with direct mail marketing and newspaper advertising, in order tomaximize sales efforts and create greater name recognition within the targetpopulation.

·                  Limitednewsprint advertising, which we also purchase in markets where our trainingcourses are scheduled to be held.

·                  Directmail and email marketing, which we use in promoting our educational trainingcourses and marketing new educational products, programs and services to our currentand former students and to prospects whose names have been provided to us bythird party vendors.

·                  Internetmarketing is primarily focused on Web sites of our respective brands.  The sites contain information about ourproducts, programs and services, many of which may be purchased online.

·                  Crosspromotional advertising campaigns, which we employ from time to time.

In the past, we entered into strategic alliances withpromoters that market products and services other than ours to potentialstudents in large and small venues. These alliances allowed us an agreed uponamount of time at the programs to attract students for our introductorycourses. Our alliances were with unrelated third parties and create studentsfor us with no requirement for us to expend funds on initial advertising ormarketing. Our strategic alliances receive from us a commission on any advancedcourse tuition we collect resulting from the access provided us to theirstudents. The amount of compensation these alliances receive varies dependingon the quality of the student, the negotiated amounts with the strategicalliance partner, the costs associated with enrollment and the cost ofdelivery.

Cash received and commissions paid from course andproduct sales through strategic alliances are shown in the following table (inthousands, except the number of strategic alliances):

 
| ** **                               | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Strategic  alliances                     |       | 7                                           |       | 6 |   | 6 |   |
| Cash received  from courses and products |       | $                                           | 14,083     |   | $ | 16,249 |   | $ | 17,799 |   |
| Commissions paid                         |       | $                                           | 4,234      |   | $ | 2,916 |   | $ | 3,803 |   |

 

As of March 2007, we do not have any material strategicalliance arrangements.

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**Competition**

The postsecondary education training business is highly-fragmentedand intensely competitive. In a broad sense, we compete with national andinternational postsecondary education companies, such as Apollo Group, Inc.,ITT Education Services, Inc., DeVry, Inc., Corinthian Colleges, Inc., StrayerEducation, Inc. and United Technical Institute, Inc., which offer technical andindustrial training and career training. We do not, however, compete with theseor other companies that offer undergraduate or advanced degrees or continuingeducation programs. More specifically, we compete with a number of smallercompanies, such as INVESTools, Inc., Franklin Covey Company, WizetradeTM,Robbins Research International and Dynetech Corporation, which offer trainingon specific business subjects including real estate and stock market investing.Generally, competitive factors within the proprietary educational marketinclude the range and depth of course offerings, the quality of teachers andtrainers, the quality of reference materials provided in connection with coursestudies and the cost of the educational process.

We believe that the range and depth of our courseofferings and our brand name offer competitive advantages over many of ourdirect competitors. We train our instructors and we prepare most of our owncourse materials which we believe offer us competitive advantages overcompanies that do not train their own instructors or develop their owneducational materials. As a result of constantly attending the trainingsessions of our competitors, we believe that the quality of our teachers,trainers and reference materials are comparable or superior to those of ourcompetitors. Charges for our educational courses are also consistent with thoseof our competitors.

**Intellectual property**

We regard our educational materials and products,trademarks, service marks, trade dress,  tradenames and patents as proprietary and we rely primarily on federal statutory andcommon law protections, to protect our interests in these materials. While someof our proprietary materials may contain commonly used terms and do not affordus significant trademark protection, we also use employee and third-partynoncompete and confidentiality agreements and other contractual methods ofprotecting proprietary rights to safeguard our intellectual property.

**Employees**

On March 30, 2007, we had approximately 472 employees,plus approximately 272 independent contractors who act as trainers,instructors, coaches and mentors. Our employees are not represented by a laborunion, and we believe our relations with our employees are satisfactory. Ourindependent contractors are paid commissions based upon the tuition dollarvalue of courses selected by students at our free informational workshops andbasic training sessions, or are paid fixed fees for teaching and mentoringadvanced courses. All independent contractors execute agreements with us whichset forth commission structures and provide for confidentiality and covenantsnot to compete.

**Government regulation**

On November 14, 2006 we werenotified by the United States Securities and Exchange Commission that theCommission was conducting a formal, nonpublic investigation to determinewhether we have complied with securities laws in connection with (i) theclaimed efficacy or trading success of our stock market education programs,and, (ii) our acquisition of certain other companies.  To date, we haveprovided the Commission with the requested information and intend to continueto do so in the future.

On December 11, 2006, we receiveda subpoena requesting documents in connection with the commencement of a grandjury investigation by the United States Attorney in the Eastern District ofVirginia. The investigation is related to our marketing activities from January1, 2002 to the present. Our Board of Directors has established a SpecialCommittee of independent directors to investigate these activities as part ofits efforts to fully comply with the grand jury inquiry.

A Florida investigation wascommenced in 2005 and stems from consumer complaints made to the Statefrom the years 2002 to 2005. According to information provided to us bythe State of Florida, there were approximately 50 complaints from across thecountry made to the State of Florida’s Attorney General’s telephone hotlineduring that time period. This averages about 13 complaints per year orapproximately one complaint for every 21,000 students we have educated over the

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four year period. Our records indicate that many of thesecomplaints were already handled directly with the consumer or resolved throughanother agency. Our legal team has worked diligently to resolve the fewremaining complaints and we believe that our continued cooperation with Floridaregulators will result in closure of the investigation without further legalproceedings.

In addition, the Florida AttorneyGeneral’s office recently inquired about approximately 55 complaints related tocertain student transactions by and between our students and GulfstreamDevelopment Corp. (“Gulfstream”), a company that our Chairman and ChiefExecutive Officer owns 25% and received compensation as well. The complaintshave resulted in the commencement of a lawsuit by Glenn Acciard, et al. namingGulfstream and, among others, Russell A. Whitney, individually, John Kane,individually and Whitney Education Group, Inc., a wholly owned subsidiary, asdefendants.

Indiana filed a lawsuit againstus in March 2005 alleging that our operations fall within certain businessopportunity regulations and that we failed to register accordingly. We believethe lawsuit has no merit and are aggressively defending the action.

In March 2005 and February 2006,we received subpoenas from Wisconsin and Kansas, respectively, requestinginformation about our advertising and student testimonials. We believe theseare routine inquiries and expect no further action.

**Subsidiaries**

We conduct a significant portionof our business through the following 11 subsidiaries.

·                  WhitneyEducation Group, Inc. provides educational programs in the United States.

·                  WealthIntelligence Academy, Inc. provides advanced educational programs in the UnitedStates.

·                  WhitneyU.K. Limited provides educational programs throughout the United Kingdom.

·                  WhitneyCanada, Inc. provides educational programs in Canada.

·                  WhitneyInternational Limited provides education and training, primarily in the UnitedKingdom.

·                  WhitneyConsulting Services, Inc. performs telemarketing services in real estate,investments and financial training seminars and individual one-on-one coachingprograms.

·                  WhitneyLeadership Group, Inc. formerly held all of the copyright and intellectualproperty rights associated with our educational materials and licenses theserights for payments.

·                  WhitneyDevelopment Limited.

·                  MortgageReduction System Equity Corp. manages the processing of the payments ofhomeowners that purchase a program we offer that allows for them to pay theirmortgages every two weeks instead of monthly.

·                  EduTrades,Inc. provides financial markets education courses.

·                  RichDad Education, LLC, a 51% owned subsidiary, provides education under *Rich Dad**®Education*in the United States.

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**ITEM 1A.  RISK FACTORS**

**The SEC’sinvestigation****todetermine whether we violated any securities laws in connection with (i) theefficacy or trading success of our financial markets education programs, and,(ii) our acquisition of certain other companies,****may result in penalties thatcould have an adverse affect on us, perhaps materially so.**

On November 14, 2006, wereceived a notice from the United States Securities and Exchange Commissionthat the Commission was conducting a formal, nonpublic investigation to determinewhether we complied with securities laws in connection with (i) the efficacy ortrading success of our stock market education programs, and, (ii) ouracquisition of certain other companies.

The SEC has requesteddocuments and information from us in the course of their investigation and wehave provided our full cooperation. However, we cannot predict the ultimateimpact, if any, that the SEC’s investigation may have on our business oroperations. It is possible that the SEC’s investigation may result inpenalties. The nature of the penalties that the SEC may seek against us cannotbe predicted at this time but it could have an adverse affect on us, perhapsmaterially so.

**Theinvestigation by the United States Department of Justice in the EasternDistrict of Virginia in connection with certain of our marketing activitiescould result in fines or penalties that could have an adverse affect on us.**

On December 11, 2006, wereceived a subpoena from the United States Attorney for the Eastern District ofVirginia requesting documents and information in connection with aninvestigation relating to our product marketing activities from January 1, 2002to the present. We were notified that a grand jury investigation related tothis matter has commenced.

We intend to cooperate fullywith this investigation. Our Board of Directors established a Special Committeeof independent directors to conduct an internal investigation of theseactivities. The Committee has engaged the law firm of Wilmer Cutler PickeringHale and Dorr to assist it with this investigation.  While we cannot predict the ultimate impact,if any, that the Department of Justice’s investigation may have on our businessor operations, a material adverse affect is possible.

**Class action lawsuits filed against us could result infines or penalties that could have a material affect on our financial results.**

On January 30,2007, we were served a complaint by Rodney Durham on behalf of himself and allothers similarly situated v. Whitney Information Network, Inc., Russell A.Whitney and Nicholas S. Maturo filed on December 28, 2006 in the United StatesDistrict Court in the Middle District of Florida accusing us of securitiesviolations.  The complaint seeks damagesfor violations of federal securities laws on behalf of all investors whoacquired our stock from November 18, 2003 through and including December 15,2006 (the “Class Period”).  We willvigorously defend ourselves in this action, but our operating results andmanagement’s attention may be adversely impacted by the outcome of thislawsuit.

OnMarch 8, 2007, we were served a complaint by Robert Ghosio, Jr. on behalf ofNominal Defendant Whitney Information Network, Inc. v. Russell A. Whitney,Nicholas S. Maturo, Frederick A. Cardin, Chester P. Schwartz, Ronald S. Simonand Whitney Information Network, Inc., filed in the United States DistrictCourt in the Middle District of Florida. This action is a derivative complaint alleging that the named defendantsviolated certain fiduciary and securities laws. We believe that the complaint is without merit and intend to vigorouslydefend ourselves. However, our operating results and management’s attention maybe adversely impacted by the outcome of this lawsuit.

**We have expended significant time andresources to restate our previously submitted Consolidated Financial Statementsfor years 2001 through 2005. As a result, our business was adversely affected bythe time and expense devoted by our staff and management. In addition, ourinvestors may call into question future Consolidated Financial Statementsissued by us.**

The time and resources expendedto restate the Consolidated Financial Statements for years 2001 through 2005increased our cost and required the attention of our financial managementpersonnel. In addition, our future stock price and

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volume may be adversely affected by the lack of investorconfidence in the accuracy of our future Consolidated Financial Statements.

**We currently have material weaknesses inour internal controls related to our accounting processes and financial recordswhich may result in inaccurate financial reporting, restatements and /or theinability to prevent fraud.**

Wemaintain disclosure controls and procedures designed to provide reasonableassurance that information required to be disclosed in our reports under theUnited States Securities and Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated toour management, including our Chairman and Chief Executive Officer and ourCo-President and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Our management, with the participationand oversight of our Chairman and Chief Executive Officer and our Co-Presidentand Chief Financial Officer, evaluated the design and effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport.

On thebasis of their findings, our Chairman and Chief Executive Officer and ourCo-President and Chief Financial Officer have concluded that our disclosurecontrols and procedures were not effective, as of the end of the period coveredby this report.   In conducting thisevaluation, we identified material weaknesses in our internal controls thatcould cause misstatements in our Consolidated Financial Statements. Thesematerial weaknesses included:

·         Lackof knowledgeable personnel in accounting and financial reporting areas, a lackof formalized processes and procedures over key areas in the accounting andreporting functions, and inadequate supervision and review over the financialreporting function. These deficiencies are particularly significant in thefollowing areas:

·                  Foreigncurrency translation exchange calculations

·                  Incometax provision calculation

We initiatedcorrective actions to address material internal control deficiencies and haveremediated some of the weaknesses reported last year.  We will continue to evaluate theeffectiveness of our disclosure controls and internal controls and procedureson an ongoing basis, taking corrective action as appropriate. In 2006, we hiredan experienced Chief Financial Officer (now Co-President and Chief FinancialOfficer). In addition, we hired or appointed a new Chief Information Officer, aVice President, Operations Finance, a Vice President, Strategy and BusinessDevelopment, a Vice President, Finance, a Director, Financial Systems, aDirector, Sarbanes-Oxley Compliance and Implementation, a Manager,Information Technology Sarbanes-Oxley Compliance and Implementation, twoSenior Financial Analysts, and two Senior Business Development Analysts. We areactively recruiting for several new positions that have been approved by theBoard of Directors in the areas of financial reporting, financial planning andanalysis and financial systems. We will continue to upgrade our personnel andour financial reporting systems to improve our internal controls.

**Failure to develop a system to evaluatethe effectiveness of our internal controls may impact our ability to accuratelyreport our financial results or prevent financial fraud. As a result, currentand potential stockholders could lose confidence in our financial reporting,which could reduce our ability to obtain subsequent financing, if necessary, aswell as reduce the trading price of our common stock.**

We will need to document and testour internal control procedures, our management will need to assess and reporton our internal control over financial reporting and our independentaccountants will need to issue an opinion on that assessment and theeffectiveness of those controls, subject to the requirements of Section 404of the *Sarbanes-Oxley Act of 2002*.We will be subject to Section 404 requirements at the end of our fiscalyear ending December 31, 2007. This will require us to develop, fund andstaff a department to document and test the design and effectiveness of our internalcontrols.

**Failure to maintain an effective systemof internal controls may impact our ability to accurately report our financialresults or prevent financial fraud. As a result, current and potentialstockholders could lose confidence in our financial reporting, which wouldreduce our ability to obtain subsequent financing, if necessary, as well asreduce the trading price of our common stock.**

We cannot be certain that ourefforts to improve our internal controls will be successful or that we will beable to maintain adequate controls over our financial processes and reportingin the future. We may be hampered in this regard by our current level ofstaffing or our current accounting system. Any failure to develop or maintaineffective controls, or difficulties

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encountered in the effective improvement of our internalcontrols, could harm our operating results, cause us to fail to meet ourreporting obligations, result in misstatements in our Consolidated FinancialStatements or cause investors to lose confidence in our reported financialinformation, which would likely have a negative effect on the trading price ofour common stock.

**Issues discovered while evaluating theinternal controls could result in having to expend significant time andresources to improve our internal controls which if not successful couldadversely affect our reputation and /or the investor’s perception of us andlead to other issues.**

Efforts to improve our internalcontrols could require us to expend significant personnel time, managementresources and capital assets or make other substantial changes. If our internalcontrols are deemed to be inadequate, or if other unforeseen events occur, ourexternal auditors could resign, leading to a delay in the preparation of ourConsolidated Financial Statements and an increase in our audit fees. If we wererequired to obtain new external auditors, those auditors could require alengthy period to become familiar with our operations. The process of retainingnew external auditors could also limit our access to the capital markets for anextended period of time. Multiple issues listed above could lead to reputationand perception issues that could adversely affect the trading price of ourcommon stock.

**Accounting errors could adversely affectour ability to meet our reporting obligations, could result in futurerestatements and/or cause material weaknesses in our internal control overfinancial reporting.**

The accounting errors aredirectly related to a lack of sufficient and qualified personnel over theaccounting and reporting function, a lack of formalized processes andprocedures over key areas in the accounting and reporting functions andinadequate supervision and review over the financial reporting function.  These errors, if not corrected, could causeus to fail to meet our reporting obligations, result in misstatements in ourConsolidated Financial Statements or cause investors to lose confidence in ourreported financial information, which would likely have a negative effect onthe trading price of our common stock. The accounting errors, if not corrected, could also result in futurematerial weaknesses in our internal control over financial reporting.

**Inadequate review of our systems andprocesses could result in accounting errors, inaccurately reported financialresults, financial fraud, and an inability to adequately safeguard ourassets.  As a result, current andpotential stockholders could lose confidence in our financial reporting, whichwould reduce our ability to obtain subsequent financing, if necessary, as wellas reduce the trading price of our common stock.**

Our internal controls, related toaccounting processes and financial reporting, have not been effective. We havenot developed strong controls that are adequate to ensure that our results arewithout errors. If we do not correct this problem, additional materialweaknesses could be discovered and disclosed which would result in an inabilityto rely on our internal controls.

**Volatility in the real estate orsecurities markets may reduce interest in our educational courses, therebyreducing our revenue.**

The level of public interest ininvesting in real estate or in securities significantly influences the demandfor our educational and training programs. The real estate and securitiesmarkets have experienced varying levels of volatility in recent years. Negativedevelopments in either market could cause a reduced demand for our programs,products and services, thereby reducing our revenue.

**Failure to comply with federal and/or statelaws regulating the marketing and sale of our educational courses could harmour reputation and reduce the demand for our course offerings.**

Many states regulate themarketing and sale of our educational courses, including the content ofadvertisements to attract students. Failure to comply with these regulationscould result in legal action instituted by the states, including cease anddesist and injunction actions. In the event we are subject to such legalaction, our reputation would be harmed and the demand for our course offeringscould be significantly reduced. In the past, we have been involved in fourstate regulatory investigations which we have resolved and we are currentlyinvolved in four other such regulatory investigations. See “GovernmentRegulation” for a detailed discussion of these regulatory investigations.

**Inability to successfully introduce new programs,products and services would negatively impact our revenue growth.**

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Our growth strategy is dependent on our ability tosell existing education and training programs, products and services to newstudents, to open new markets and to develop and introduce new educationalprograms, products and services. If we are unable to expand our markets andproducts, our growth rate and revenue will be reduced. Market conditions andthe level of customer interest may be different for our current products thanfor new products, and there can be no assurance that we will be able to competefavorably with, and obtain market acceptance for, any such new programs,products or services.

**The current market price of our commonstock significantly exceeds our book value per share and increases the riskthat our market price per share may decline in the future.**

The market price of our commonstock was $3.50 per share at the close of business on March 30, 2007 andexceeded our December 31, 2006 book value, which was a stockholders’deficit of $45.1 million or $(3.84) book value per share deficit. Thelower book value per share compared to our market price per share increases therisk that our market price per share may decline in the future.

**Our Chairman and Chief ExecutiveOfficer, Russell A. Whitney and Ingrid Whitney, also an employee, ownapproximately 44% of our outstanding common stock, which means they have theability to significantly influence any matter requiring stockholder approval orprevent a change of control in our Company.**

Russell A. Whitney, our Chairmanand Chief Executive Officer, and Ingrid Whitney, also an employee, own approximately 44% of our outstanding commonstock.  As such, the Whitneys cansignificantly influence any matter requiring the vote of our stockholders,including the election of directors. The Whitneys could, with a relatively smallnumber of other stockholders, vote to approve a transaction that may not be inthe best interests of other stockholders or reject a transaction that may be inthe best interests of other stockholders. Moreover, the Whitneys’ stockownership may prevent a third party from acquiring a controlling position inour common stock because in many instances, a third party desiring to purchasea controlling position in a public company is willing to pay a premium to themarket price. The Whitneys’ stock ownership would likely prevent such an eventfrom occurring.

**Outside business ventures ofMr. Whitney could result in conflicts of interest that could negativelyimpact our ability to attract investors.**

Mr. Whitney has outsidepassive investment interests in real estate and owns a 25% interest in GulfstreamDevelopment Corp., a residential construction company. In the past,Mr. Whitney owned residential real estate lots in Cape Coral, Florida,some of which were purchased by our students. From time to time, some of ourstudents used Gulfstream to build residences upon lots which they havepurchased from Mr. Whitney or others. These kinds of arrangements couldcreate, or appear to create, conflicts of interest if our students purchasedlots from Mr. Whitney or contracted with Gulfstream to construct residenceson such lots. Any conflict of interest or appearance of a conflict of interestin connection with our arrangements with our students could negatively impactinvestor interest in us and therefore our stock price and liquidity. We do nothave any formal procedure for resolving any such conflicts of interest.

On March 22, 2007, acomplaint was received by our subsidiary, Whitney Education Group, Inc. Thecase is Glenn Acciard, et. al. vs. Russell A. Whitney, individually, John Kane,individually and Whitney Education Group, Inc. et. al., Case No. 07-CA-002190in the Circuit Court of the Fifth Judicial Court in and for Lee County, Floridaalleging that a subsidiary of ours and 18 other defendants not associated withthe Company, including two of our executive officers, breached certain of theirfiduciary duties to the named plaintiffs, all of whom were our allegedstudents. The allegations in the complaint include claims of constructive andcommon law fraud and other violations. See “Related Party Transactions” fora more detailed discussion of potential conflicts of interest.

**Our relationship with third party providers who introduce real estateinvestment opportunities to our students may subject us to liability.**

In the past andcurrently, we permit third party providers to provide real estate investmentopportunities to our students. Such arrangements have in the past and may inthe future subject us to significant liabilities if such investments do notmeet student expectations or result in economic losses to the students.

For instance, inJanuary 11, 2007, Whitney Canada, Inc., a wholly owned subsidiary, and WhitneyInformation Network, Inc.  receivednotice of an Amended Motion for Authorization to Institute a Class Action inthe Province of Québec, Canada. A class action was requested for all personswho have made various real estate investments, at the alleged inducement, orthrough, Marc Jémus, François Roy, Robert Primeau and/or their companies,and/or B2B Trust, and/or Whitney Canada, Inc., and/or Whitney InformationNetwork, Inc. and/or Jean Lafrenière.

**The loss of any of our key personnel,especially Mr. Whitney and high performing instructors, could disrupt ouroperations and reduce our profitability.**

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Our future success also depends to a significantextent on the continued services of our executive management, includingMr. Whitney. We do not maintain key-man life insurance on the life ofMr. Whitney. The loss of the services of Mr. Whitney or other seniormanagement could disrupt our operations and reduce our profitability.

Our future success also depends on our ability toretain and attract high performing instructors. The loss and/or inability torecruit suitable replacements may impact our performance and reduce ourprofitability.

**The loss of Board of Director members has created a non-independentBoard and could create a perception of a lack of stability.**

On March 22, 2007, Stephen L.Cootey, a member of the Board of Directors since 2006, resigned. Mr. Cootey wasChairman of the Compensation Committee.

On March 23, 2007, AnthonyB. Petrelli, a member of the Board of Directors since 2006, resigned. Mr.Petrelli was a member of the Audit Committee, the Governance and NominatingCommittee and the Special Committee.

Future departures orperceived instability on our Board may adversely affect investor confidence inthe governance of the Company.

**Our Board of Directors, withoutstockholder approval, may issue preferred stock which could reduce the votingpower or rights of our other stockholders and make it more difficult for athird party to acquire a majority of our outstanding voters stock.**

Our Board of Directors, withoutstockholder approval, may issue up to 10.0 million shares of preferredstock. The Board of Directors can fix the rights, preferences and privileges ofthe shares of each series and any qualifications, limitations or restrictions,which could reduce the voting power or other rights of the holders of commonstock. Issuance of preferred stock could also have the effect of making it moredifficult for a third-party to acquire, or of discouraging a third-partyfrom attempting to acquire, a majority of our outstanding voting stock.

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**Item 1B. UNRESOLVED STAFF COMMENTS**

Not applicable.

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**ITEM 2. PROPERTIES**

The following chart summarizesour office locations (in thousands, except square footage).
| **Purpose**                                       | ** ** | **Location**         | ** ** | **Own/Lease** | ** ** | **Approximate  square footage** | ** ** | **Lease  expiration** | ** ** | **Annual  rent** |
|---------------------------------------------------|------------|----------------------|------------|---------------|------------|---------------------------------|------------|-----------------------|------------|------------------|
| Corporate headquarters                            |       | Cape Coral, FL       |       | Own           |       | 40,734                          |       | —                |       | —           |
| Conference center                                 |       | Monterey, Costa Rica |       | Own           |       | 7,200                           |       | —                |       | —           |
| European headquarters                             |       | London, England      |       | Own           |       | 5,600                           |       | —                |       | —           |
| Former EduTrades  and telemarketing headquarters  |       | Draper, UT           |       | Lease         |       | 13,553                          |       | October 2007          |       | $                | 168 |
| Current  EduTrades and telemarketing headquarters |       | Murray, UT           |       | Lease         |       | 32,646                          |       | December 2012    |       | 392              |
| Canadian headquarters                             |       | Ontario, Canada      |       | Lease         |       | 1,200                           |       | April 2010            |       | 20               |
| Training center                                   |       | Salt Lake City, UT   |       | Lease         |       | 6,783                           |       | September 2010   |       | 112              |
| Training center                                   |       | Cape Coral, FL       |       | Lease(1)      |       | 2,200                           |       | Month-to-Month        |       | 23               |
| Support facility                                  |       | Cape Coral, FL       |       | Lease(1)      |       | 9,000                           |       | June 2009        |       | 167              |
| Training center                                   |       | Cape Coral, FL       |       | Lease(1)      |       | 4,802                           |       | June 2007             |       | 87               |
|                                              |       |                 |       |          |       | 123,718                         |       |                  |       | $                | 969 |

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(1)           Related party lease.

We own the land and building of our executive offices inCape Coral, Florida. Our executive office building is approximately 40,734square feet in size and is situated on approximately 4.5 acres. We own anapproximately 7,200 square foot conference and training center in Monterey,Costa Rica, which we designed and built in 2002.

We currently own our European headquarters in London,England.  However, we negotiated to sellthis building for approximately ₤1.9 million.  We intend to lease office space ofapproximately 2,727 square feet.  Weexpect the sale of the building and the execution of the lease to be completedin the second quarter of 2007.

We lease 13,553 square feet of office space in Draper,Utah. The lease expires in October 2007 and is payable at the rate of$13,975 per month. To support our expanding business operations, we enteredinto a 72-month office lease in Murray, Utah and moved in March 2007. Thelease is for 32,646 square feet. We intend to assign or sublease our existingspace in Draper, Utah. We will receive a credit on our lease in Murray, Utah,prior to any assignment or sublease of the Draper, Utah lease.

Our Canadian subsidiary leases approximately 1,200 squarefeet of office space in Ontario, Canada. The lease expires in April 2010and is payable at rates increasing from $1,081 to $1,654 per month over theterm of the lease.

We lease approximately 6,783 square feet of office spacein Salt Lake City, Utah. The lease expires in 2010 and is payable at the rateof $9,327 per month. The facilities are being used as a training center.

*Related party leases*

We lease approximately 2,200 square feet of trainingfacilities at 1611 East Cape Coral Parkway (“1611 Cape Coral Parkway”),approximately 9,000 square feet of space at 1625 East Cape Coral Parkway (“1625Cape Coral Parkway”) which is used for offices and shipping and 4,802 squarefeet at 1630 Southeast 47th Terrace which we use as a training facility,all in Cape Coral, Florida from Cape Promenade Trust which is for the benefitof our Chairman and Chief Executive Officer and Ingrid Whitney. 

The leases are for three years and began on March 1,2003, March 1, 2003 and June 1, 2004 respectively. The monthlyrentals are $1,943, $13,913 and $7,238 respectively. We are on a month-to-monthbasis with respect to the 1611 Cape Coral Parkway lease that expired inMarch 2006. We extended the lease with respect to 1625 East Cape CoralParkway through June 2009.

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**ITEM 3. LEGAL PROCEEDINGS**

From time to time, Whitney is involved in legalproceedings that we consider to be in the normal course of business.  We do not know if any of these proceedings willhave a material adverse effect on our business.

As previouslydisclosed, on January 11, 2007, Whitney Canada, Inc., a wholly ownedsubsidiary, and Whitney Information Network, Inc. received notice of an AmendedMotion for Authorization to Institute a Class Action in the Province of Québec,Canada. A class action was requested for all persons who have made various realestate investments, at the alleged inducement, or through, Marc Jémus, FrançoisRoy, Robert Primeau and/or their companies, and/or B2B Trust, and/or WhitneyCanada, Inc., and/or Whitney Information Network, Inc. and/or Jean Lafrenière.

As previouslydisclosed, on January 30, 2007, we were served a complaint by Rodney Durham onbehalf of himself and all others similarly situated v. Whitney InformationNetwork, Inc., Russell A. Whitney and Nicholas S. Maturo. The complaint wasfiled on December 28, 2006 in the United States District Court in the MiddleDistrict of Florida accusing us of securities violations.  The plaintiffs seek damages for violations offederal securities laws on behalf of all investors who acquired Whitney stockfrom November 18, 2003 through and including December 15, 2006 (the “ClassPeriod”).  We will vigorously defendourselves in this action, but our operating results may be adversely impactedby the outcome of this lawsuit.

As previouslydisclosed, on March 8, 2007, we were served a complaint styled Robert Ghosio,Jr. on behalf of nominal defendant Whitney Information Network, Inc. v. RussellA. Whitney, Nicholas S. Maturo, Frederick A. Cardin, Chester P. Schwartz,Ronald S. Simon and Whitney Information Network, Inc., filed in the UnitedStates District Court in the Middle District of Florida.  This action is a derivative complaintalleging that the named defendants violated certain fiduciary and securitieslaws.  We believe that the complaint iswithout merit and intend to vigorously defend ourselves.

As previouslydisclosed, on March 22, 2007, a complaint was received by our wholly-ownedsubsidiary, Whitney Education Group, Inc. The case is Glenn Acciard, et. al.vs. Russell A. Whitney, individually, John Kane, individually and WhitneyEducation Group, Inc. et. al., Case No. 07-CA-002190 in the Circuit Court ofthe Fifth Judicial Court in and for Lee County, Florida alleging that theCompany and 18 other defendants not associated with the Company, including twoof our executive officers, breached certain of their fiduciary duties to thenamed plaintiffs, all of whom were our alleged students. The allegations in thecomplaint include claims of constructive and common law fraud and otherviolations.

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**ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS**

None.

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**PART II**

**ITEM 5.  MARKET FOR COMMON EQUITYAND RELATED STOCKHOLDER MATTERS**

Our common stock is quoted on NASD’s Over-the-CounterBulletin Board under the trading symbol “RUSS” since August 1998.  The high and low closing prices of our commonstock for the last two years, by calendar quarter, are set forth below.  These quotations reflect interdealer prices,without retail mark-up, markdown or commissions and may not represent actualtransactions.
| ** **                       | ** ** | **High closing  price** | ** ** | **Low closing  price** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Year ended December 31, 2006** |       |                         |       |                        |       |
| Fourth Quarter                   |       | $                            | 10.00      |                        | $          | 3.25 |   |
| Third Quarter                    |       | 9.90                         |       | 7.80                        |       |
| Second Quarter                   |       | 11.26                        |       | 7.70                        |       |
| First Quarter                    |       | 10.80                        |       | 7.10                        |       |
|                             |       |                         |       |                        |       |
| **Year ended December 31, 2005** |       |                         |       |                        |       |
| Fourth Quarter                   |       | $                            | 9.75       |                        | $          | 4.55 |   |
| Third Quarter                    |       | 5.00                         |       | 2.82                        |       |
| Second Quarter                   |       | 3.40                         |       | 1.20                        |       |
| First Quarter                    |       | 2.38                         |       | 1.10                        |       |

 

As of March 30, 2007, we hadapproximately 500 record and beneficial stockholders.

The information under theprincipal heading “Equity Compensation Plan Information” in our definitiveProxy Statement for the Annual Meeting of Shareowners to be filed with the Securitiesand Exchange Commission, is incorporated herein by reference.

**DIVIDEND POLICY**

During our two most recent fiscal years we authorized onecash dividend of $1.00 per share to the holders of record on September 15,2006, and paid on October 2, 2006, on our common stock.  This was deemed a return of capital forincome tax purposes.  We do not have anyplans to pay dividends in the future.

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***Five year performance graph: 2002-2006***

The following graph shows a comparison of cumulativetotal returns for an investment in the common stock of Whitney InformationNetwork, Inc., the Russell 2000 Microcap® Indexand a self-determined peer group of public companies within the educationindustry.  The peer group of companiesincludes the following six education companies: Bright Horizons FamilySolutions, Inc., Corinthian Colleges, Inc., eCollege.com, Franklin CoveyCompany, INVESTools, Inc., and Strayer Education, Inc..

The annual changes for the five year period shown inthe graph on this page are based on the assumption that $100 had been investedin Whitney Information Network, Inc. stock, the Russell Microcap® Index and the self-determined peer grouppreviously described, on December 31, 2001. In addition, it is assumed the self-determined peer group and WhitneyInformation Network, Inc. reinvest its dividends. The total cumulative dollarreturns shown on the graph represent the value that such investments would havehad on December 31, 2006.

This graph is not deemed to be “soliciting material”or to be “filed” with the SEC, and the graph shall not be deemed to beincorporated by reference into any prior or subsequent filing under theSecurities Act of 1933 or the Securities Exchange Act of 1934.

***Recent Sales ofUnregistered Securities***

During the last three years, we have not sold anysecurities which were not registered under the Securities Act, except:

(i)                                     In December 2005, we issued 1,750,000 sharesand 875,000 warrants and Russell A. Whitney, our Chairman and Chief ExecutiveOfficer, issued 1,250,000 shares and 625,000 warrants to 17 accreditedinvestors.  The securities were issued inunits consisting of one share and one-half warrant for $4.50 per unit. We alsoissued a unit purchase warrant to Noble International Investments, Inc. topurchase up to 300,000 units at $4.50 per unit as part of its compensation foracting as our placement agent in the offering, each unit consisting of oneshare of common stock and one warrant to purchase one half share of commonstock.

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(ii)                                  In September 2006, we received $5,395,851 ofcash proceeds from holders who exercised the following outstanding warrants andstock options:
| **Form of security** | ** ** | **Description**         | ** ** | **Number of  holders** | ** ** | **Number of  common shares** | ** ** | **Exercise price  per share** | ** **    | **Proceeds** | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------------|------------|----------------------------------------|------------|-----------------------------------------|---------------|--------------|------------|
| Warrants                  |       | PIPE  warrants          |       | 11                          |       | 859,743                                |       | $                                       | 4.50 to $6.00 |         | $          | 4,915,602 |   |
| Options                   |       | 1998  Stock Option Plan |       | 5                           |       | 217,900                                |       | $                                       | 1.81 to $5.60 |         | 480,249    |   |
| Total                     |       |                    |       | 16                          |       | 1,077,643                              |       |                                    |          | $            | 5,395,851  |   |

 

Included in the above proceeds are warrants issued by theour Chairman and Chief Executive Officer exercised by three holders totaling375,000 shares of common stock with proceeds amounting to $2,250,000. Theseproceeds were issued to the Chairman and Chief Executive Officer inOctober 2006.

We paid no incremental placement fees in connection withthe warrants or options. We expect used the cash proceeds from warrant andoption exercises for working capital.

We offered and sold the warrants without registrationunder the Securities Act of 1933 to a limited number of accredited investors inreliance upon the exemption provided by Rule 506 of Regulation Dthereunder. The warrants and any shares issuable upon exercise may not beoffered or sold in the United States in the absence of an effectiveregistration statement or exemption from the registration requirements underthe Securities Act. An appropriate legend was placed on the warrants issued,and will be placed on the shares issuable upon exercise of the warrants, unlessregistered under the Securities Act prior to issuance.

(iii)                               From time to time, we issue stock options under our1998 Stock Option Plan and shares issuable upon exercise of these stockoptions.

With respect to common stock issued underparagraph (i) and (ii) above, we relied on Section 4(2) of theSecurities Act of 1933, as amended (the “Securities Act”) and/or Rule 506promulgated thereunder. No advertising or general solicitation was employed inoffering the securities. The securities were restricted pursuant to legendprinted on each certificate. The purchasers were all accredited investors,capable of analyzing the merits and risks of the investment, who acknowledgedin writing that they were acquiring the securities for investment and not witha view toward distribution or resale and understood the speculative nature ofthe investment.

We registered these securities on Form S-1.  This Registration Statement was deemedeffective November 13, 2006 by the United States Securities and ExchangeCommission.

 

23

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**ITEM 6. SELECTED FINANCIAL DATA**

The following table sets forth our selected consolidatedfinancial information as of and for the five years in the period endedDecember 31, 2006. The data for the five years are derived from ouraudited Consolidated Financial Statements, which appear elsewhere in thisdocument. The following selected consolidated financial data should be read inconjunction with the Consolidated Financial Statements and the notes thereto.

All financial information, exceptper share data, is expressed in thousands.
| ** **                                         | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Statement of Operations data:**                  |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenue                                            |       | $                                           | 224,654    |   | $ | 163,107 |   | $ | 136,259 |   | $ | 89,805 |   | $ | 51,178 |   |
| Earnings (loss) from  operations                   |       | 7,690                                       |       | (9,161 | ) | (32,845 | ) | (7,476 | ) | (2,486 | ) |
| Net earnings (loss)                                |       | $                                           | 1,755      |   | $ | 3,850 |   | $ | (31,963 | ) | $ | (7,325 | ) | $ | (2,216 | ) |
| Diluted earnings (loss)  per share                 |       | $                                           | 0.15       |   | $ | 0.41 |   | $ | (3.72 | ) | $ | (0.89 | ) | $ | (0.28 | ) |
| **Statement of Cash Flows data:**                  |       |                                        |       |   |   |   |   |   |   |   |   |
| Cash provided by  operations                       |       | $                                           | 20,019     |   | $ | 17,022 |   | $ | 600 |   | $ | 10,732 |   | $ | 7,873 |   |
| Cash (used in) provided  by investing   activities |       | (4,426                                      | )          | 8,640 |   | (10,604 | ) | (7,732 | ) | (4,907 | ) |
| Cash (used in) provided  by financing   activities |       | (14,102                                     | )          | 3,015 |   | 1,387 |   | 599 |   | 367 |   |
| Increase (decrease) in cash and cash   equivalents |       | $                                           | 937        |   | $ | 28,577 |   | $ | (8,562 | ) | $ | 3,008 |   | $ | 3,333 |   |
| Cash dividends per share                           |       | $                                           | 1.00       |   | — |   | — |   | — |   | — |   |

 

*Other operating data:*

As used in the following operating data and ourreconciliation, EBITDA means net earnings (loss) before income taxes plusinterest expense, depreciation and amortization expense, as well as impairmentof assets, special items (including the costs associated with the United StatesSecurities and Exchange Commission and the Department of Justice investigationsand writeoff of stock registration costs as a result of the withdrawal of theEduTrades, Inc. Registration Statement), the stock portion of the gift to the wifeof the former President, interest and nonoperating income, stock option andwarrant compensation expense, minority interest and equity earnings in relatedparties and (gain) from the sale of assets. We refer to “Adjusted EBITDA” tomean EBITDA adjusted for the net change in deferred revenue less the net changein deferred course expenses. Adjusted EBITDA is not a financial performancemeasurement under generally accepted accounting principles.

We use Adjusted EBITDA as a key measure in evaluating ouroperations and decision-making. We feel it is a useful measure indetermining our performance since it takes into account the change in deferredrevenue and deferred course expenses in combination with our operatingexpenses. We reference Adjusted EBITDA frequently since it providessupplemental information that facilitates internal comparisons to historicaloperating performance of prior periods and external comparisons to competitors’historical operating performance in our industry. We plan and forecast ourbusiness using Adjusted EBITDA, with comparisons of actual to planned andforecasted Adjusted EBITDA and we incentivize management on Adjusted EBITDA. Inaddition, we provide Adjusted EBITDA because we believe investors and securityanalysts find Adjusted EBITDA to be a useful measure for evaluating ourperformance.

The vast majority of our costs to acquire the studenthave been expended up to the point of registration, such as media, travel,facilities and instructor fees for the introductory workshops; these costs areexpensed when incurred. However, the tuition paid at registration is deferreduntil the course is attended by the student, the student has received thecourse content in an electronic format, or the contract expires, at which timethe revenue is deemed earned. Thus, reporting under generally acceptedaccounting principles in the United States of America (U.S. GAAP) createssignificant timing differences with respect to revenue and expenses, both inour Consolidated Statement of Cash Flows and Consolidated Statement ofOperations. As a result of these factors, our operating cash flows can varysignificantly from our results of operations for the same period. For thisreason we believe Adjusted EBITDA is an important non U.S. GAAP financialmeasure.

Adjusted EBITDA should not be considered as analternative to net earnings (loss), cash flows provided by operations,investing or financing activities or other financial statement data presentedin the Consolidated Financial Statements as 

24

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indicators of financial performance or liquidity. Items excluded fromAdjusted EBITDA are significant components in understanding our financialperformance. Because Adjusted EBITDA is not a measurement determined inaccordance with U.S. GAAP and is susceptible to varying calculations, AdjustedEBITDA as presented may not be comparable to other similar titled measures ofperformance from other companies.

All financial information isexpressed in thousands.
| ** **                                                                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings  (loss)                                                                |       | $                                           | 1,755      |   | $ | 3,850 |   | $ | (31,963 | ) | $ | (7,325 | ) | $ | (2,216 | ) |
| Impairment of  assets                                                               |       | 3,668                                       |       | — |   | — |   | — |   | — |   |
| Special items                                                                       |       | 2,330                                       |       | — |   | — |   | — |   | — |   |
| Other income  (expense)                                                             |       | 162                                         |       | (1,801 | ) | (892 | ) | (154 | ) | (81 | ) |
| Interest (income)  expense, net                                                     |       | (1,876                                      | )          | 28 |   | 499 |   | 3 |   | (86 | ) |
| Income tax  provision (benefit)                                                     |       | 7,678                                       |       | (6,798 | ) | — |   | — |   | — |   |
| Stock gift                                                                          |       | 937                                         |       | — |   | — |   | — |   | — |   |
| Stock option and  warrant compensation   expense                                    |       | 881                                         |       | — |   | — |   | — |   | — |   |
| Depreciation and  amortization                                                      |       | 1,774                                       |       | 1,856 |   | 1,610 |   | 950 |   | 598 |   |
| Minority  interest and equity earnings                                              |       | 45                                          |       | 2,138 |   | (182 | ) | — |   | (102 | ) |
| Gain on sale of  assets                                                             |       | (74                                         | )          | (6,579 | ) | (305 | ) | — |   | — |   |
|                                                                                |       |                                        |       |   |   |   |   |   |   |   |   |
| EBITDA                                                                              |       | 17,280                                      |       | (7,306 | ) | (31,233 | ) | (6,526 | ) | (1,887 | ) |
|                                                                                |       |                                        |       |   |   |   |   |   |   |   |   |
| Net change in  deferred revenue                                                     |       | (1,593                                      | )          | 33,288 |   | 27,828 |   | 19,468 |   | 11,581 |   |
| Net change in  deferred course costs                                                |       | (67                                         | )          | (2,602 | ) | (3,546 | ) | (3,339 | ) | (1,791 | ) |
| Adjusted EBITDA                                                                     |       | $                                           | 15,620     |   | $ | 23,380 |   | $ | (6,951 | ) | $ | 9,603 |   | $ | 7,903 |   |
|                                                                                |       |                                        |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA as a  percentage of   cash received from course and product   sales |       | 7.0                                         | %          | 11.9 | % | (4.2 | )% | 8.8 | % | 12.6 | % |

 

All financial information, exceptper share amounts, is expressed in thousands.
| ** **                                     | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash received  from course and product   sales |       | $                                           | 223,061    |   | $ | 196,395 |   | $ | 164,087 |   | $ | 109,273 |   | $ | 62,759 |   |
| Net change in  deferred revenue                |       | 1,593                                       |       | (33,288 | ) | (27,828 | ) | (19,468 | ) | (11,581 | ) |
| Revenue for financial  reporting   purposes    |       | $                                           | 224,654    |   | $ | 163,107 |   | $ | 136,259 |   | $ | 89,805 |   | $ | 51,178 |   |

 

**Consolidated Balance Sheets data:**
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                    | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                  |       | $                     | 95,120     |   | $ | 102,203 |   | $ | 60,028 |   | $ | 55,552 |   | $ | 28,272 |   |
| Long term debt                |       | 6,154                 |       | 3,374 |   | 12,312 |   | 10,953 |   | 1,650 |   |
| Stockholders’  deficit   |       | $                     | (45,062    | ) | $ | (40,486 | ) | $ | (51,560 | ) | $ | (19,930 | ) | $ | (12,865 | ) |
| Book value per  share deficit |       | $                     | (3.84      | ) | $ | (3.87 | ) | $ | (5.98 | ) | $ | (2.33 | ) | $ | (1.59 | ) |
| Shares outstanding            |       | 11,739                |       | 10,456 |   | 8,618 |   | 8,548 |   | 8,097 |   |

 

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**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

*The following discussion of ourconsolidated financial condition and results of operations for the periodsindicated should be read in conjunction with our consolidated financialstatements, related notes and the other financial data included elsewhere inthis document. The discussion contains forward-looking statementsinvolving risks, uncertainties and assumptions that could cause our results todiffer materially from expectations. Factors that might cause such differencesinclude those described under “Risk Factors”, “Special Note Regarding Forward-LookingStatements” and elsewhere in this document.*

**Executive Overview**

In the United States, the United Kingdom, Canada andCosta Rica, we offer postsecondary nonaccredited introductory workshops, primaryand advanced courses and training in two primary fields of study:

·                  Realestate education

·                  Financialmarkets education

Through our branded and private label curricula, ourcontent is expansive and our significant investment in these brands providesfor the opportunity to build long term value. Our brand portfolio includes:

·                  Forreal estate investment workshops and introductory courses:

—*                                   Russ Whitney*®’s *BuildingWealth*TM

—                                   *Teach Me Foreclosure*TM* & Real Estate Investing*

—                                   *Rich Dad*®* Education*

—                                   Private label brands:

·                  *M2 Advantage*®

·                  *Real Estate Success System*

·                  Forfinancial markets investment workshops and introductory courses:

—*                                   Teach Me to Trade*®

—                                   Private label brand:

·                  *Stock Success System*TM

·                  Ourumbrella brand for advanced courses:

—*                                   Wealth Intelligence Academy*®

The advanced courses of study under the *Wealth Intelligence Academy*® brandinclude:
|   | • | *Millionaire  UTM* real estate advanced training        |
|--------|--------|-------------------------------------------------------------|
|   | • | *Rich UTM*                                              |
|   | • | Wholesale  buying                                           |
|   | • | Foreclosure  training                                       |
|   | • | Lease  option                                               |
|   | • | Property  management and cash flow                          |
|   | • | Keys  to creative real estate financing                     |
|   | • | Asset  protection & tax relief                     |
|   | • | Mentor  field training                                      |
|   | • | Discount  notes and mortgages                               |
|   | • | Manufactured  mobile homes and recreational vehicle parks   |
|   | • | Rehabbing  for profit                                       |
|   | • | Tax  liens and deeds                                        |
|   | • | Commercial  real estate investing                           |
|   | • | Domestic  and international land investment and development |
|   | • | *Master TraderTM*                                       | —  practical trading techniques |
|   | • | *The Trading P.I.T.TM*                                  | —  hedging techniques |
|   | • | *The Advanced P.I.T.TM*                                 | —  spread strategies |

 

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|   | • | *H.I.T.S.TM*                   | —  single stock futures and ETFs                                                                                    |
|--------|--------|------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|
|   | • | *The Trading RoomTM*           | —  practical trading structures and routines                                                                        |
|   | • | *Advanced Covered Calls* | —   strategies to use options to improve cash flow and hedge risk |
|   | • | *Advanced Technical Analysis*      | —  strategies to manage trades in  different market conditions                                            |

 

We offer our students several ways to access oureducational content:

·                  Liveinstruction in classroom settings

·                  Onsitementoring

·                  Telephoniccoaching

·                  Electronicaccess

·                  Conferences

We enter into strategic allianceswith promoters that market our products and services to potential students.

We are aware of other macroeconomic trends includingchanges in the real estate markets, financial markets, overall employment,early retirement and consumer confidence that may impact overall demand.  We believe we can adapt our curriculum developmentand marketing message accordingly to changing trends. Moreover, we are alsocognizant that we compete in an area where the barriers to entry are low withrespect to content development; however, access to students and the fulfillmentof courses requires substantial cash outflow before cash inflow is realized inthe form of tuition.

Our international presence in the United Kingdom andCanada represents approximately 7.8% of revenue in 2006 which is slightlyhigher than the approximate 7.2% of revenue in 2005. During 2006, we completeda review of our entire international strategy. The review took place so wecould assess whether market conditions supported a further investment ofresources in the international marketplace and, conversely, if we shouldconsider exiting the international market.

The review consisted of:

·                  Assessingthe current state, outlook and trends for the postsecondary education marketwith an emphasis in real estate and financial markets education for theindividual investor

·                  Dimensionalizingthe market potential and our business model

·                  Supportingour brand positioning, our competitive strengths and overall business case towarrant investment outside North America, through:

—                                   Clarifying the positioning of the respectivebrands in our portfolio

—                                   Identifying core competencies

—                                   Articulating competitive strengths and weaknesses

—                                   Benchmarking operating metrics to industry normsand selected competitors

—                                   Evaluating our financial capabilities andopportunities

—                                   Reviewing other points of differentiation

·                  Articulatingour international five year strategic, development and economic plan

·                  Prioritizingour initiatives over the near term and developing a tactical plan

As a result of our review, we concluded that the United Kingdom andCanadian markets would support expansion of two of our brands, *Teach Me to Trade*® and *Rich Dad*®*Education*.  These brands will be brought to Canada andthe United Kingdom in the next eighteen months, with potential expansion to theEuropean continent in the next 18 to 24 months.

Over the past five years, revenue has grown at acompounded annual growth rate of 40.3%. Our operating expenses (including impairment of assets and specialitems) grew at a 40.0% compounded annual growth rate during the same period. OurAdjusted EBITDA for the same five year period grew at a 40.1% compounded annualgrowth rate.  Through continuedleveraging of our fixed costs, improving our overall marketing efficiency andcourse delivery, and prudently increasing our prices, we endeavor to growrevenue at a faster rate than the growth of operating expenses.

27

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Our operating results are expressed as a percentage ofrevenue below:
| ** **                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                       |       | 100.0                                       | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Operating  expenses:                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Direct course expenses                        |       | 49.8                                        |       | 58.1 |   | 67.3 |   | 57.8 |   | 50.5 |   |
| Advertising and sales expense                 |       | 28.6                                        |       | 30.6 |   | 36.4 |   | 33.5 |   | 27.2 |   |
| General and administrative expense            |       | 15.5                                        |       | 17.0 |   | 20.3 |   | 17.1 |   | 27.1 |   |
| Impairment of assets                          |       | 1.7                                         |       | — |   | — |   | — |   | — |   |
| Special items                                 |       | 1.0                                         |       | — |   | — |   | — |   | — |   |
|                                          |       | 96.6                                        |       | 105.7 |   | 124.1 |   | 108.3 |   | 104.9 |   |
| Earnings (loss)  from operations              |       | 3.4                                         |       | (5.7 | ) | (24.1 | ) | (8.3 | ) | (4.9 | ) |
| Other income:                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Other (loss) income                           |       | (0.1                                        | )          | 1.1 |   | 0.7 |   | 0.2 |   | 0.1 |   |
| Interest income (expense), net                |       | 0.8                                         |       | (0.0 | ) | (0.4 | ) | (0.0 | ) | 0.2 |   |
| Equity (loss) earnings from related   parties |       | (0.0                                        | )          | (0.1 | ) | 0.1 |   | — |   | 0.2 |   |
| Gain on sale of assets                        |       | 0.1                                         |       | 4.0 |   | 0.2 |   | — |   | — |   |
|                                          |       | 0.8                                         |       | 5.0 |   | 0.6 |   | 0.2 |   | 0.5 |   |
| Earnings (loss)  before income taxes          |       | 4.2                                         |       | (0.7 | ) | (23.5 | ) | (8.2 | ) | (4.3 | ) |
| Minority  interest                            |       | —                                      |       | (1.2 | ) | — |   | — |   | — |   |
| Income tax  (provision) benefit               |       | (3.4                                        | )          | 4.2 |   | — |   | — |   | — |   |
|                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                           |       | 0.8                                         | %          | 2.3 | % | (23.5 | )% | (8.2 | )% | (4.3 | )% |

 

Our cost structure is particularly sensitive toincreasing television advertising and production costs and travel relatedexpenses. However, a very meaningful part of our cost structure is variable innature, such as instructor, field representatives and outreach related costswhich are primarily a function of sales realized.

We obtain the majority of our students through freeintroductory workshops. These introductory workshops are established in variousmetropolitan areas in the United States, the United Kingdom and Canada. Priorto the actual workshop, we expend a significant amount of money in the form ofadvertising through various media channels. The following table represents theexpense categories and as a percentage of the total, respectively, thatcomprise advertising and sales expense for the three years in the periodended December 31, 2006 (in thousands):
| ** **                     | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| **Expense category**      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Television  expense            |       | $                                           | 37,754     |   | 58.8 | % | $ | 33,179 |   | 66.6 | % | $ | 31,659 |   | 63.7 | % |
| Direct mail  expense           |       | 6,636                                       |       | 10.3 |   | 5,041 |   | 10.1 |   | 6,938 |   | 14.0 |   |
| Newspaper  expense             |       | 2,492                                       |       | 3.9 |   | 3,345 |   | 6.7 |   | 3,030 |   | 6.1 |   |
| Internet expense               |       | 3,198                                       |       | 5.0 |   | 10 |   | 0.0 |   | 466 |   | 1.0 |   |
| Radio expense                  |       | 157                                         |       | 0.2 |   | — |   | — |   | 860 |   | 1.7 |   |
| Media spending                 |       | 50,237                                      |       | 78.2 |   | 41,575 |   | 83.4 |   | 42,953 |   | 86.5 |   |
| Outreach sales  commissions    |       | 13,931                                      |       | 21.8 |   | 8,264 |   | 16.6 |   | 6,711 |   | 13.5 |   |
| Advertising and sales  expense |       | $                                           | 64,168     |   | 100.0 | % | $ | 49,839 |   | 100.0 | % | $ | 49,664 |   | 100.0 | % |

 

Our advertising and sales expense representedapproximately 28.6% of our revenue in 2006. Overall advertising and salesexpense over the past five years increased at a 40.9% compound annual growthrate as compared to a 40.3% compound annual growth rate for revenue over thesame five year period.

Approximately 27.9% of those students attending theintroductory workshops purchase one or more of our courses. For advancedcourses, the student pays the tuition at the time of registering for the courseor program. As reflected in the following chart, cash sales from course andproduct sales differ from the revenue reported for financial statement purposes(in thousands):

28

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| ** **                                     | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash received  from course and product   sales |       | $                                           | 223,061    |   | $ | 196,395 |   | $ | 164,087 |   | $ | 109,273 |   | $ | 62,759 |   |
| Less: Net change  in deferred revenue          |       | 1,593                                       |       | (33,288 | ) | (27,828 | ) | (19,468 | ) | (11,581 | ) |
| Revenue for financial  reporting   purposes    |       | $                                           | 224,654    |   | $ | 163,107 |   | $ | 136,259 |   | $ | 89,805 |   | $ | 51,178 |   |

 

Due to the timing differences between cash collection andthe time at which our students actually take the course, we have historicallyrecorded a substantial amount of deferred revenue. Deferred revenue at the endof each year may result in reported revenues in subsequent years. In 2006,revenue was significantly improved by the recognition of $55.4 million relatedto course breakage.  As reflected in thetable below, our deferred revenue as a percentage of total revenue has rangedfrom 51.4% to 71.7% since 2002 (in thousands).
| ** **                                     | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deferred revenue                               |       | $                                           | 115,408    |   | $ | 117,001 |   | $ | 83,713 |   | $ | 55,885 |   | $ | 36,417 |   |
| Revenue for financial  reporting   purposes    |       | $                                           | 224,654    |   | $ | 163,107 |   | $ | 136,259 |   | $ | 89,805 |   | $ | 51,178 |   |
| Deferred revenue as a  percentage of   revenue |       | 51.4                                        | %          | 71.7 | % | 61.4 | % | 62.2 | % | 71.2 | % |

 

The vast majority of our costs to acquire the student areexpended up to the point of registration, such as media, travel, facilities andinstructor fees for the introductory workshops; these costs are expensed whenincurred. However, the tuition paid at registration is deferred until thecourse is attended or received in electronic format by the student, at whichtime the revenue is deemed earned. If the student does not attend the course,we recognize the revenue based upon the likelihood of the attendance by thestudent is remote (course breakage), which is based upon the historicalpercentage of students who never attended a course subsequent to expiration andthe highest number of days in which 95% of those students who attended a coursesubsequent to expiry.  Thus, reportingunder generally accepted accounting principles in the United States ofAmerica (U.S. GAAP) creates significanttiming differences with respect to revenue and expenses, both in the form ofcash flows and in the form of our Consolidated Statement of Operations. As aresult of these factors, our operating cash flows can vary significantly fromour results of operations for the same period. For this reason, we believeAdjusted EBITDA is an important non-GAAP operating metric.

We can continue to have differences between cash flowsand reported revenues in our Consolidated Statement of Operations as thestudents have yet to take the courses they have paid for. The overall expensesassociated with delivering the advanced courses are significantly lower thanthe expenses surrounding the introductory courses. We hire speakers, instructors,trainers and mentors on an independent contractor basis. These individuals arecompensated primarily on a commission basis or sometimes on a fixed fee basis.

***Financial markets educationsegment***

EduTrades, our financial markets education division,began operations in July 2002, with the acquisition of *Teach Me to Trade*®, with sales commencing in the fourth quarter of2002.

One-half of all U.S. households own stocks, eitherdirectly or through a mutual fund or retirement plan, according to a 2005 surveyby the Securities Industry Association, Federal Reserve Board and U.S. CensusBureau. This represents 56.9 million households in 2005, when compared to40.0 million ten years ago, and 15.9 million in 1983. Investment inthe stock market and in mutual funds continues to be significant. In 2005,equity fund inflows amounted to $147.6 billion, followed by $157.9 billionin 2006.

Approximately 67% of all equity investors are between theages of 35 and 64, with a median and mean age of 51 years of age, the peakearning and investing years, according to the Securities IndustryAssociation/Investment Company Institute survey. According to the U.S. CensusBureau and the same survey, of the 91.1 million individuals, orapproximately one-third of all Americans, who own equities:

·              Themedian household income is $65,000

·              Themedian financial household assets are $125,000

·              70%are married

·              56%are college graduates

·              70%are employed.

Since the time of the survey, investment in the stockmarket and mutual funds continues to be substantial, and there has beensignificant growth in investments in alternate financial instruments such asoptions, single stock futures and indexes. Trading in 

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option contracts reached record levels again in 2006. According to theChicago Board Options Exchange (“CBOE”), there were 674.7 million optioncontracts traded in 2006 compared to 468.2 million in 2005, a 44.1%increase. This trend has continued through the first two months of 2007, wheretrades in option contracts have increased 24% to 122.6 million contracts.  The volume of exchange traded funds on theCBOE increased by 64.5% in 2006 as compared to 2005.

Our financial markets educationsegment has become a growing part of our business, as reflected in thefollowing table:

 
| ** **                                                    | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| **As a percentage of total revenue** | ** ** | ** **                                  | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate  education (domestic and international)           |       | 49.9                                        | %          | 71.1 | % | 76.0 | % |
| Financial  markets education                                  | ** ** | 50.1                                        |       | 28.9 |   | 24.0 |   |
|                                                          | ** ** | 100.0                                       | %          | 100.0 | % | 100.0 | % |
|                                                               |            |                                             |            |  |  |  |  |  |

 

***Noncore investments***

We also have investments in various projects that arenoncore to our mission. These investments were opportunistic in nature andleverage the experience of our Chairman and Chief Executive Officer in realestate development. The investments we currently hold have not materiallyimpacted our liquidity.

As of December 31, 2006, our noncore investmentsconsisted of equity interests in real estate ventures in Costa Rica andSouthwest Florida.

*Costa Ricainvestment*

Our interests in Costa Ricainclude equity investments in three entities: Rancho Monterey, S.A, Montereydel Este, S.A., and Monterey del Mar, S.A. Our direct investment in these entities includes initial and workingcapital advances of $2.8 million, $2.1 million and $1.8 million, as ofDecember 31, 2006, 2005 and 2004, respectively.  Additional investments in these and other entitiesexist through indirect investments by related parties, including certainexecutive officers.

Our interest in these Costa Rican entities as of December31, 2006 includes:

·                  30% of RanchoMonterey, S.A., a Panamanian entity with ownership of approximately 394 acresof undeveloped land on the Pacific coast,

·                  RanchoMonterey, S.A. also owns 33% of Monterey Group, S.A., which owns approximatelytwo and one-half acres of beachfront land concession adjacent to a hotelproperty,

·                  8%of Monterey del Este, S.A., a Panamanian entity with ownership of approximately445 acres of Costa Rican undeveloped land contiguous to Rancho Monterey, S.A.,

·                  Montereydel Este S.A. also owns 33% of Monterey Group, S.A., which owns approximatelytwo and one-half acres of beachfront land concession adjacent to a hotelproperty,

·                  48%of Monterey del Mar, S.A., a Panamanian company, established for the purpose ofacquiring and developing a hotel property on the Pacific coast of Costa Rica,

·                  Montereydel Mar, S.A. is the trust beneficiary of a Costa Rican company, Mar y Tierradel Oesta, S.A., which owns a beachfront land concession.

For the years ended December 31, 2006, 2005 and2004, under the equity method of accounting, we reflected our share of the lossrelated to our direct equity interests in the amounts of less than $0.1 million,$0.2 million and nil, respectively.

Additionally, we hold a 100% interest in a 7,200 squarefoot conference center in Monterey, Costa Rica and the land on which it issituated. The historical cost and related accumulated depreciation arereflected in our Consolidated Balance Sheets under the caption “property andequipment.”  The net book value of theconference center was $0.8 million and $0.9 million as of December 31, 2006 and2005, respectively.

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Our Chairman and Chief Executive Officer, Co-Presidentand Chief Operating Officer and other current and former employees of ourCompany have direct or indirect investments in Costa Rica.  See Item 13- *CertainRelationships and Related Transactions*.  The following table summarizes the respectiveownership interests by us, certain executive officers and related parties withrespect to Costa Rica (as a percentage of total equity ownership) as ofDecember 31, 2006:
| **Entity**               | ** ** | ** ** | **Company** | ** ** | **Chairman  and  CEO** | ** ** | **Co-President   and COO** | ** ** | **Total** | ** ** |
|--------------------------|------------|------------|-------------|------------|------------------------|------------|--------------------------------------|------------|-----------|------------|
| Rancho Monterey,  S.A.   |       | 30         | %           | 11         | %                      | 1          | %                                    | 42         | %         |
| Monterey Del  Este, S.A. |       | 8          |        | 8          | %                      | —     |                                 | 16         | %         |
| Monterey Del Mar, S.A.   |       | 48         | %           | —     |                   | —     |                                 | 48         | %         |

 

In the second half of 2006, the Board of Directorsapproved increasing our ownership of Monterey del Mar, S.A.  The purpose is to gain a controlling interestin order to effect a sale of Monterey del Mar, S.A.

During the first quarter of 2007, our equity interest inMonterey del Mar, S.A. increased to approximately 51%.  We will consolidate the operations of theentity in 2007.  The Board also deemedthese operations as discontinued with a sale expected in the foreseeablefuture.  Accordingly, Monterey del Mar,S.A.’s operations should be accounted as discontinued operations during theupcoming year.

Moreover, there are two additional projects in Costa Rica,known as Monterey Green Acres, S.A. and Monterey Sun and Win, S.A., both CostaRican companies, which are next to our Costa Rica investments, but we do nothave any equity investment.  However, ourChairman and Chief Executive Officer, our General Manager, eBusiness, otherexisting and former employees, one of our external attorneys, independentcontractors who work for us, vendors and former students invested in these projects.

*SouthwestFlorida Investment*

In 2004, we entered into a joint venture under which wehold a 50% interest in Tranquility Bay of Southwest Florida, LLC whichowns 74 acres of land zoned for residential development in Southwest Florida.We do not intend to keep our interest as a long term holding and will divestthis investment at the appropriate time. The investment entity has no ongoingactivity other than minimal costs of carrying the land. Under the equity methodof accounting, we recorded our share of these costs, which were insignificant,in 2006, 2005 and 2004.

**Critical Accounting Policies**

*Revenue recognition policy*

We are engaged primarily in the business of providingreal estate and financial education to individual students through courses ofstudy as well as educational materials. We offer our students multiple coursepackages. Students pay for the courses in advance and we record the proceedsfrom the sale of courses as deferred revenue when it is received. Revenue isearned when the student attends the course, or the likelihood of attendance isdeemed remote.

The student is permitted to attend courses (in allavailable learning formats) throughout the life of the student’s contract. Weallow students to attend courses subsequent to expiration upon request. Thetuition is generally nonrefundable. A student may receive a refund, whererequired by law, within three days of the purchase by exercising a rightof rescission. In such cases, the corresponding amount of deferred revenue isrelieved with no impact on the Consolidated Statement of Operations.

We recognize revenue based on:

·                  whenthe course is attended by the student; or

·                  likelihoodof the attendance by the student is remote (course breakage), which is based onthe historical:

·                  percentageof students who never attended a course and those students who never attended acourse subsequent to expiration; and

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·                  highestnumber of days in which 95% of those students who attended our coursessubsequent to expiry.

We determine our course breakage rate based uponestimates developed from historical student attendance patterns. Based on ourhistorical information, we can determine the likelihood of an expired courseremaining unattended. Moreover, we determined that we do not have a legalobligation to remit the value of expired courses to relevant taxingjurisdictions.

To apply course breakage, wecalculate verifiable and objective supporting data as of each balance sheetdate.

At the end of the fourth quarter of 2006, we hadsufficient data to apply the course breakage calculation to deferred revenuesin our financial markets education and United Kingdom businesses.  Accordingly, we recorded course breakagerevenue for the quarter ended December 31, 2006, for courses sold as ofthe beginning of the first quarter of 2003 through the end of the fourthquarter of 2005, which have expired and remain unattended.  In the fourth quarter of 2006, coursebreakage during this timeframe amounted to $14.5 million and $7.3 million forthe financial markets education and United Kingdom businesses, respectively.

To the extent new businesses do not have three full yearsof data (subsequent to course expiration) we recognize revenue based uponcourse attendance.  Only at such timethat we have developed verifiable and objective data over a three year periodsubsequent to course expiration will we apply course breakage based on themethodology described above.

As a result of applying this policy, during the yearsended December 31, 2006, 2005 and 2004, we recognized $55.4 million,$16.2 million and $18.1 million, respectively, in revenue related tocourse breakage.

*Teleconferencing and subscriptionservices*

As required by Financial Accounting Standard Board’sEmerging Issues Task Force Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*and the SEC’sStaff Accounting Bulletin No. 104, our teleconferencing product andservice offering is an arrangement with multiple deliverables. The delivereditems should be considered a separate unit of accounting if all of thefollowing criteria are met:

·                  Thedelivered item(s) has value to the customer on a standalone basis. That item(s)has value on a standalone basis if it is sold separately by any vendor or thecustomer could resell the delivered item(s) on a standalone basis. In thecontext of a customer’s ability to resell the delivered item(s), the Task Forceobserved that this criterion does not require the existence of an observablemarket for the deliverable(s).

·                  Thereis objective and reliable evidence of the fair value of the undelivereditem(s).

·                  Ifthe arrangement includes a general right of return relative to the delivereditem, delivery or performance of the undelivered item(s) is considered probableand substantially in the control of the vendor.

We determined the criteria detailed above have been met:

·                  Theproduct and the service have value to the student on a standalone basis.

·                  Theproduct can be and is sold separately.

·                  Asdiscussed below, we feel there is objective and reliable evidence to determinethe value of the product.

·                  Lastly,there are no general rights of return for the teleconferencing offering.

We recognized as revenue the product portion of thedeliverable at point of purchase, and amortize the service component over thelife of the package.

From a balance sheet perspective, the liability which wedesignate as “deferred revenue,” will increase as cash receipts are collectedin advance and the classes to which they pertain have not yet taken place orthe students have not attended. When there are more courses attended, ascompared to the amount of new course sales, our deferred revenue will decreaseand therefore increase our earnings. Furthermore, since we receive cash inadvance of providing the courses, we need to retain sufficient cash to payfinal course costs.

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*Advertising and sales expense andprepaid advertising*

Advertising costs and direct sales expenses are expensedas incurred. Advertising paid in advance is recorded as prepaid until such timeas the advertisement is published.

*Deferred expenses*

Certain direct course expensesare deferred until such time the course is conducted and the related revenue isearned.

Historically, the amount of cash received from course andproduct sales is directly related to the amount of advertising and direct salesexpenses incurred. The cash received from advanced course sales can be deferredto over three years after the advertising and sales expenses are incurred. OurStatement of Operations can show increased losses, or reduced net earnings, inperiods in which course registration and cash receipts are growing at a fastrate, and conversely, show increased earnings, or reduced net losses, inperiods of declining course registrations and cash receipts.

**2006 compared to 2005**

**Revenue**

Ourrevenue for the year ended December 31, 2006 amounted to $224.7 million,an increase of 37.7% over $163.1 million for the year ended December 31,2005 (in thousands):

|                                                    | ** ** | **Years ended December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | **2006**                                    | ** ** | **2005**   | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Cash  received from course and product sales:*    | * *   | * *                                    | * *   | * *   | * *   | * * | * * |
| * *                                           | * *   | * *                                    | * *   | * *   | * *   | * * | * * |
| Basic training sessions                            |       | $                                           | 22,677     |       | $          | 25,017 |   | (9.4 | )% |
| Advanced courses                                   |       | 176,740                                     |       | 152,423    |       | 16.0 |   |
| Product sales                                      |       | 14,089                                      |       | 12,317     |       | 14.4 |   |
| Other                                              |       | 9,555                                       |       | 6,638      |       | 43.9 |   |
| Total cash  received from course and product sales |       | 223,061                                     |       | 196,395    |       | 13.6 |   |
| Net change in  deferred revenue                    |       | 1,593                                       |       | (33,288    | )          | N/M |   |
| Revenue for financial  reporting purposes          |       | $                                           | 224,654    |       | $          | 163,107 |   | 37.7 | % |

 

Ouradvanced courses represent 79.2% of cash received from course and product salesin 2006, an improvement of 1.6 percentage points over 2005.  The growth in advanced course sales viaoutreach programs more than offset the decline realized in basic training sessions.Outreach (telemarketing) programs cash received from course and product salesin 2006 increased 47.6% to $59.7 million when compared to $40.4 million in2005.  Outreach program cash receivedfrom course and product sales are included in advanced course sales. We decidedto reduce the tuition prices for the basic training sessions in 2005 to providethe opportunity for more students to benefit from our offerings and allow themto be exposed to our advanced courses. Our advanced course tuition pricingincreased mid-first quarter of 2005 by 10.2% weighted average on an annualizedbasis.

Thefollowing illustrates the number of educational events, the number of studentsand the average number of students per paid course for the comparative periods:

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|                                     | ** ** | **Years ended December 31,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2006**                                    | ** ** | **2005**   | ** ** | **Change** | ** ** |
| *Number  of courses*                | * *   | * *                                    | * *   | * *   | * *   | * * | * * |
| Free introductory workshops         |       | 5,205                                       |       | 4,744      |       | 9.7 | % |
| Basic training sessions             |       | 1,070                                       |       | 939        |       | 14 | % |
| Advanced live courses               |       | 611                                         |       | 651        |       | (6.1 | ) |
| Advanced electronic courses         |       | 166                                         |       | 162        |       | 2.5 |   |
|                                |       | 7,052                                       |       | 6,496      |       | 8.6 | % |
| *Number  of attending students*     | * *   | * *                                    | * *   | * *   | * *   | * * | * * |
| Basic training sessions             |       | 59,244                                      |       | 53,742     |       | 10.2 | % |
| Advanced live courses               |       | 16,216                                      |       | 13,837     |       | 17.2 |   |
| Advanced electronic courses         |       | 8,224                                       |       | 5,133      |       | 60.2 |   |
| Mentorships completed               |       | 3,000                                       |       | 2,510      |       | 19.5 |   |
|                                |       | 86,684                                      |       | 75,222     |       | 15.2 | % |
| *Average  students per paid course* | * *   | * *                                    | * *   | * *   | * *   | * * | * * |
| Basic training sessions             |       | 55.4                                        |       | 57.2       |       | (3.1 | )% |
| Advanced live  courses              |       | 26.5                                        |       | 21.3       |       | 24.4 |   |
|                                |       | 44.9                                        |       | 42.5       |       | 5.6 | % |

 

Ourfinancial markets education segment’s cash received from courses and productgrew to $112.6 million, a $36.1 million increase, or 47.2%, over the $76.5 millionreceived during 2005.  The domestic realestate education segment decreased $8.6 million, or 7.9%, to $100.1 millionversus 2005. Our international segments cash received from product and coursesales saw a $0.9 million decline, or 8.4%, to $10.3 million whencompared to 2005.

Weexperienced a 10.0% decrease in the number of overall registrations to our freeintroductory workshops in 2006 versus the same period in 2005.

On abrand level, domestic brands had a mixed performance in the year ended December31, 2006 over the same period in 2005. Leading the way was *Teach Me To Trade*® with a 65.7% increase in cash received fromcourse and product sales over the same period in 2005, while our most maturebrands, *Russ Whitney*®*’s BuildingWealth*TM and *CashFlow Generator*® declined 17.0% and 21.5%, respectively, overthe same timeframe reflecting in part, the macroeconomic implication of agrowing real estate industry. Cash received from our international brands forcourse and product sales declined 7.3% over the comparable period in 2005. OurUnited Kingdom business was the leading contributor to the decline.

Prospectivestudents registering for our free introductory workshops via our brandedwebsites improved 3.3 percentage points for the year ended December 31, 2006when compared to the comparable 2005 period. We introduced on-line advertisingin 2006.  This category sourced 1.9% ofthe prospective students in its first year. However, we saw a decline in response in our newspaper effort in theyear ended December 31, 2006 as compared to the same period in 2005. Thefollowing chart reflects the media source by which prospective studentsaccessed our free introductory workshops:

|                     | ** ** | **Years ended December 31,** | ** ** |
|---------------------|------------|---------------------------------------------|------------|
| ** **          | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
|                |       |                                        |       |   |   |
| Television          |       | 64.9                                        | %          | 69.7 | % |
| Direct mail         |       | 11.8                                        |       | 11.4 |   |
| Newspaper           |       | 2.6                                         |       | 3.8 |   |
| Website             |       | 18.4                                        |       | 15.1 |   |
| Online  advertising |       | 1.9                                         |       | — |   |
| Other               |       | 0.4                                         |       | — |   |
|                |       | 100.0                                       | %          | 100.0 | % |

 

Revenuerecognized from course breakage was $55.4 million in the year ended December31, 2006, compared to $16.2 million in the year ended December 31, 2005, anincrease of $39.2 million. The large increase is the result of the initial application of course breakage, in thefourth quarter of 2006, related to the period from the fourth quarter of 2003to the fourth quarter of 2005 in our financial markets education segment andUnited Kingdom business, which totaled $21.8 million  Revenue from course breakage was 24.7%and 10.0% of total revenue for the years ended December 31, 2006 and 2005,respectively.

Wehave expanded our options for course delivery towards our goal of reducing thenumber of expired contracts. 

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Wehave increased the number of courses offered on DVD and the opportunities to takecourses via the Internet and have expanded our location options for studentswithin the United States. We have also implemented outreach notifications byemail and the U.S. mail as courses near expiration.

**Operating expenses**

*Direct course expenses*

Directcourse expenses relate to our basic training sessions and advanced courses, andconsist of instructor fees, facility costs, salaries associated with our fieldrepresentatives and related travel expenses.

In theyear ended December 31, 2006, direct course expenses increased$17.2 million to $112.0 million, or an 18.3% increase from$94.8 million in the same period of 2005. As a percentage of revenue, direct course expenses improved 8.3percentage points (pp) from 58.1% in the year ended December 31, 2005 to 49.8%in the same period in 2006.  The declineas a percentage of revenue was aided by the significant increase in revenuerelated to course breakage when compared to 2005.  The components of direct course expenses as apercentage of revenue changed as follows:
| ** **                                            | ** ** | **Margin change  2006 vs. 2005** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                       | ** ** | **Increase (Decrease)**                    | ** ** |
| Decrease in event  expense as a percentage of revenue |       | (5.2                                            | )pp        |
| Decrease in commissions  as a percentage of revenue   |       | (2.3                                            | )          |
| Decrease in product  cost as a percentage of revenue  |       | (0.8                                            | )          |
|                                                  |       | (8.3                                            | )pp        |

 

*Advertising and sales expense*

Advertisingand sales expense as a category consists of two components:

·                                                                  Purchasedmedia to generate registrations to our free introductory workshops

·                                                                  Costsassociated with supporting student recruitment

Advertisingand sales expense for 2006 amounted to $64.2 million, an increase of 28.8%(or $14.4 million) compared to $49.8 million in 2005. Advertising andsales expense in the 2006 period was 28.6% of revenue, as compared to 30.6% ofrevenue for comparable period in 2005. The decline as a percentage of revenuewas supported by the significant increase in revenue related to course breakagewhen compared to 2005.  The followingchart illustrates this change of 2.0 percentage points (pp):
| ** **                                                                   | ** ** | **Margin change  2006 vs. 2005** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                                              | ** ** | **Increase (Decrease)**                    | ** ** |
| Decrease in  creative expense for new commercials as a percentage of revenue |       | (3.1                                            | )pp        |
| Increase in sales  mix from outreach (telemarketing) programs                |       | 1.1                                             |       |
|                                                                         |       | (2.0                                            | )pp        |

 

Ourmedia spending increased by 13.8% in the year ended December 31, 2006 over thesame period in 2005. We also shifted some of our media spending from televisionand newspaper to Internet advertising during the past year, as reflected in thefollowing media spending as a percentage of total media spending:

|                    | ** ** | **Years ended December 31,** | ** ** |
|--------------------|------------|---------------------------------------------|------------|
| ** **         | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
|               |       |                                        |       |   |   |
| Television         |       | 75.2                                        | %          | 79.8 | % |
| Direct mail        |       | 13.2                                        |       | 12.1 |   |
| Newspaper          |       | 5.0                                         |       | 8.0 |   |
| Website and  other |       | 6.6                                         |       | 0.1 |   |
|               |       | 100.0                                       | %          | 100.0 | % |

 

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Salescommissions increase was a result of an access mix shift to outbound sales,which saw a 47.6% increase in cash received from course and product sales overthe same period in 2005.   In 2006 and 2005, direct sales commissionsincreased 68.6% and 23.1%, respectively, over the year earlier comparableperiod. Our outreach programs revenue increased by 49.4% and 70.4% in 2006 and2005, respectively, over the prior year.

*General and administrative expenses*

Generaland administrative expenses primarily consist of compensation, benefits,insurance, facility expense and travel for the corporate staff.

Generaland administrative expenses were $34.8 million in the year ended December31, 2006, an increase of $7.1 million, or 25.9%, as compared to $27.7million in the year ended December 31, 2005. As a percentage of revenue,general and administrative expenses decreased from 17.0% of revenues in 2005 to15.5% of revenue in 2006 as result of leveraging higher cost againstsignificantly higher revenue base, assisted by the revenue associated withcourse breakage recognition.

General and administrative expenses for 2006 included:

·                                          $1.6million in expenses associated with the implementation of our customerrelationship management information system

·                                          $1.4million for a gift to the widow of the former President and Chief OperatingOfficer who passed away in 2002.  Thegift is valued at $0.9 million, consisting of 98,156 shares of our common stockplus the related income taxes

·                                          $2.9million in incremental salaries, benefits and other infrastructure spending

·                                          $0.9million in incremental professional fees

·                                          $0.9million in noncash stock option and warrant compensation expense.  Approximately $0.8 million of this expense isin connection with the implementation of SFAS No. 123R as of January 1, 2006;prior year’s general and administrative expenses did not include any stockoption expense

*Impairment of assets*

We recorded an assetimpairment of $3.7 million in 2006 on goodwill, property and equipment,inventory and intangible assets detailed as follows for the year ended December31, 2006 (in thousands):

| Impairment expense related  to goodwill               |   | $   | 2,000  |   |
|-------------------------------------------------------|--------|-----|--------|--------|
| Impairment  expense related to intangible assets      |   | 835 |   |
| Impairment  expense related to property and equipment |   | 756 |   |
| Impairment  expense related to inventory              |   | 77  |   |
|                                                  |   | $   | 3,668  |   |

 

We recognized a full impairment of the $2.0 million ingoodwill associated with *STAR Trader*® as a result of discontinuing the brand andanother $0.3 million in *STAR Trader*® relatedintangible assets.  We are alsorepositioning the *Cash Flow Generator*® brand,recognizing an impairment on the related intangible asset of $0.5 million andan additional $0.1 million in related inventory.  Additionally, we reduced the net book valueof our United Kingdom office and corporate airplane by $0.4 million and $0.3million, respectively, to reflect their net realizable values.  We intend to sell these assets in the secondquarter of 2007.  No impairment of assetswas recognized in 2005.

*Special items*

Special items incurred inthe year ended December 31, 2006 amounted to $2.3 million.  There were no special items in the year endedDecember 31, 2005.

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Special items included thefollowing:

·                  $0.8 million expense associated withthe liquidated damages provision in the registration rights agreement

·      $0.9million expense associated with the withdrawal of the EduTrades, Inc. RegistrationStatement on Form S-1

·                  $0.6 million in accrued professionalfees associated with the parallel proceedings by the United States Securitiesand Exchange Commission and the Department of Justice.

*Earnings (loss) from operations*

We hadearnings of $7.7 million from operations in the year ended December 31,2006, compared to a loss of $9.2 million from operations in the comparable2005 period. Our increase in revenue of 37.7% more than offset the 25.9%increase in operating expenses. The primary contributor to the improvement wasthe recognition of $55.4 million in course breakage revenue, which has aninsignificant direct corresponding expense in the current 2006 period.

*Other income*

Otherincome in 2006 was $1.7 million as compared to $8.2 million for the year endedDecember 31, 2005. In the 2005 period, we had a $6.6 million gain on sale ofassets compared to a $0.1 million gain in the 2006 period.

Interestincome, net, for the year ended December 31, 2006 increased by $1.9 million to$1.9 million as a result of the larger cash and cash equivalents balanceresulting from increased course registration receipts, proceeds from the stockoffering and related warrant exercise in the fourth quarter of 2005, and thirdquarter of 2006, respectively, the exercise of stock options and more effectivecash management and deployment of excess cash.

*Income tax (provision) benefit*

Werecognize deferred tax assets and liabilities, at enacted income tax rates,based on the temporary differences between the financial reporting basis andthe tax basis of our assets and liabilities. We include any effects of changes in income tax rates or tax laws in theprovision for income taxes in the period of enactment.  When it is more likely than not than not thata portion or all of a deferred tax asset will not be realized in the future, weprovide a corresponding valuation allowance against the deferred tax asset.

In2005, we determined that it was more likely than not that we would realize ourdeferred tax asset and we reversed our valuation allowance of $11.0 million;$9.9 million in the third quarter and $1.1 million in the fourth quarter.

Sincethat time, the following important developments have changed our judgmentregarding the likelihood that the deferred tax asset will be realized:

·                  Weare incurring significant expenses associated with parallel proceedings withthe United States Securities and Exchange Commission, Department of Justice andstate Attorneys General investigations. There is no clear visibility to theconclusion of these investigations or their respective outcomes.

—           The investigationsresulted in class action and derivative shareholder lawsuits, with the resultingadditional expense and uncertainty.

·                  Theimpairment of two of our brands, *STAR Trader®*and *Cash Flow Generator®* (in its currentform) has impacted our revenue and cash flows, again providing less visibilityinto the future.

As of December 31,2006, we are estimating that our taxable income will not exceed the amountnecessary to utilize our deferred tax assets. Therefore, we are increasing our valuation allowance from $12.3 millionto $18.7 million.

We estimate that we will be liable for approximately$0.4 million in state and non-U.S. taxes for the year ended December 31,2006.

*Net earnings*

Netearnings in the year ended December 31, 2006 amounted to $1.8 million,compared to a net earnings of $3.9 million for the year ended December 31, 2005.The decrease in earnings was $2.1 million, or 54.4%. The $3.7 millionimpairment of assets, $2.3 million in special items and the $11.0 millionreversal of the deferred tax asset established in 2005, partially offset by theincremental revenue due to course breakage, contributed to the decline in netearnings for 2006 as compared to 2005. Net earnings in 2005 included the reversal of a valuation reserve ontaxes of $11.0 million and a gain on the sale of an Orlando office building of$3.5 million after minority interest expense.

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**Liquidity and Capital Resources at December 31, 2006**

Ourcapital requirements consist primarily of working capital and capitalexpenditures. Historically, we have funded our working capital and capitalexpenditures using cash and cash equivalents on hand. As of December 31, 2006,cash, cash equivalents and restricted cash increased by $2.0 million to$40.7 million from December 31, 2005. Cash generation from operations, the sale of common stock through aprivate placement and exercise of stock options and warrants, offset by thecash dividend and capital expenditures, were the primary reasons for the yearover year improvement with respect to cash generation.

Cashprovided by operations in 2006 improved approximately 17.6% to $20.0 million or$3.0 million higher than the $17.0 million provided in the year endedDecember 31, 2005.  While 2006 netearnings were $2.1 million below 2005 net earnings of $3.9 million, currentearnings included $5.5 million in noncash charges.

Cashused in investing activities was $4.4 million in 2006, as compared to $8.6million provided by investing activities from the same period in 2005.  In the year ended December 31, 2006, we hadcapital expenditures, primarily in connection with the purchase of a corporateaircraft and related improvements amounting to $6.6 million.  We also invested $0.7 million in hardware andsoftware associated with our customer relationship management system.  Total capital expenditures totaled $7.6million and investments in related parties of $0.6 million. These capitalinvestments were partially offset by $3.8 million collected in principalpayments on a note receivable associated with an office building we sold in2005.

Wewill deploy excess capital to invest in property and equipment in futureperiods for growth, computer and software upgrades and geographic expansion. Wewill continue to pursue opportunistic, strategic acquisitions.   We are currently seeking financing for thepurchase of the aircraft and anticipate selling our original corporate aircraftwithin the next three months.

Cashused in financing activities amounted to $14.1 million in the year endedDecember 31, 2006 versus $3.0 million provided by financing activities in thesame year ended December 31, 2005. The primary reason for the change was $11.7million distributed as a special dividend to our holders of common stock.  In August 2006, our Board of Directorsdeclared a special dividend of $1.00 per share for shareholders of record onSeptember 15, 2006.  The dividend waspaid on October 2, 2006.  This dividendhas been treated as a return of capital for both accounting and tax purposes.  In addition, $5.1 million was distributed toour Chairman and Chief Executive Officer in January 2006 in connection with thesale of his common stock in December 2005. This amount was partiallyoffset by $4.2 million received from the exercise of stock options andwarrants.

Restrictedcash balances, consisting primarily of funds on deposit with credit cardprocessors, amounted to $6.5 million at December 31, 2006 and $5.4 millionat December 31, 2005. At December 31, 2006 and 2005, we used letters ofcredit to secure merchant accounts and certain state bonding requirements forthe amount of $1.1 million and $1.1 million, respectively, which aresupported by certificates of deposit which earn interest rates ranging from4.7% to 5.4%. The majority of our cash equivalents are invested in short term,liquid, investment grade commercial paper with yields ranging from 5.2% to5.3%.

Historically,we have been able to fund all of our operations primarily through existingworking capital.

As aresult of a significant deferred revenue balance, our working capital deficitwill remain for the foreseeable future. We intend to continue to use working capital for operating purposes. Wemay establish a credit facility to support our growth strategy. From time totime, we evaluate potential acquisitions of business products or technologiesthat complement our business. To the extent that resources are insufficient tofund future activities, we may need to raise additional funds. However,there can be no assurance that additional funding, if needed, will beavailable. If adequate funds are not available on acceptable terms, wemay be unable to expand our business, develop or enhance our products andservices, take advantage of future opportunities or respond to competitivepressures, any of which could have a material adverse effect on our business,operating results and financial condition.

Thefollowing reflects our commitments for debt and other commitments as ofDecember 31, 2006 (in thousands):

38

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|            | ** ** | **Debt** | ** ** | **Operating lease  commitments** | ** ** | **Total** | ** ** |
|------------|------------|----------|------------|---------------------------------------|------------|-----------|------------|
| 2007       |       | $        | 3,139      |                                  | $          | 1,271     |       | $ | 4,410 |   |
| 2008       |       | 108      |       | 820                                   |       | 928       |       |
| 2009       |       | 39       |       | 752                                   |       | 791       |       |
| 2010       |       | 41       |       | 571                                   |       | 612       |       |
| 2011       |       | 44       |       | 545                                   |       | 589       |       |
| Thereafter |       | 2,783    |       | 506                                   |       | 3,289     |       |
|       |       |     |       |                                  |       |      |       |
|       |       | $        | 6,154      |                                  | $          | 4,465     |       | $ | 10,619 |   |

 

Additionally,in December 2005, we entered into a commitment for a new customer relationshipmanagement (CRM) system. The total commitment of approximately$3.0 million includes installation, training and support services.   Implementation began in the first quarter of2006.   Through 2006, we have spent $1.6million in expense and $0.7 million in capital against this commitment.  Our annual commitments for the licensing andmaintenance of other software are approximately $0.4 million.  Moreover, we will continue to expend moniesas we complete the implementation and continue enhancements to our CRMapplication.

Webelieve our cash resources are sufficient to fund our operations, special itemsand growth plans in 2007.

**Impact of inflation**

Inflationaryfactors such as increases in the cost of labor directly affect our operations.Most of our leases provide for cost-of-living adjustments and require us to paytaxes, insurance and maintenance expenses, all of which are subject toinflation. Additionally, our future lease costs for new facilitiesmay include potentially escalating costs of real estate and construction.There is no assurance that we will be able to pass on increased costs to ourcustomers.

Depreciationexpense is based on historical cost of fixed assets, and is thereforepotentially less than it would be if it were based on current replacement cost.While property and equipment acquired in prior years will ultimately have to bereplaced at higher prices, it is expected that replacement will be a gradualprocess over many years.

**2005 compared to 2004**

**Revenue**

Our revenue for the year ended December 31, 2005amounted to $163.1 million, an increase of 19.7% over $136.3 million,in 2004. The increase was driven by expanded advance course offerings andattendees per event, offset by a decrease in the revenue generated fromintroductory workshops, as reflected in the following chart (in thousands):

|                                                    | ** ** | **Years ended December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Cash  received from course and product sales:*    | * *   | * *                                    | * *   | * *   | * *   | * * | * * |
| Basic training sessions                            |       | $                                           | 25,017     |       | $          | 34,202 |   | (26.9 | )% |
| Advanced courses                                   |       | 152,423                                     |       | 115,578    |       | 31.9 |   |
| Products sales                                     |       | 12,317                                      |       | 8,828      |       | 39.5 |   |
| Other                                              |       | 6,638                                       |       | 5,479      |       | 21.2 |   |
| Total cash  received from course and product sales |       | 196,395                                     |       | 164,087    |       | 19.7 |   |
| Less: Net change  in deferred revenue              |       | (33,288                                     | )          | (27,828    | )          | (19.6 | ) |
| Revenue for financial  reporting purposes          |       | $                                           | 163,107    |       | $          | 136,259 |   | 19.7 | % |

 

Cash received from advanced course sales, whichrepresents 77.6% of the total in 2005, is an increase of 7.2 percentage pointsover the same period in 2004.   Outreachprograms, which are included in advanced course sales, increased 70.4% in 2005to $40.4 million.

39

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The following illustrates the number of educationalevents, the number of students and the average number of students per paidcourse for the comparative periods:

|                                     | ** ** | **Years ended  December 31,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2005**                                | ** ** | **2004**   | ** ** | **Change** | ** ** |
| *Number of courses*                 | * *   | * *                                | * *   | * *   | * *   | * * | * * |
| Free  introductory workshops        |       | 4,744                                   |       | 4,826      |       | (1.7 | )% |
| Basic training  sessions            |       | 939                                     |       | 915        |       | 2.6 |   |
| Advanced live  courses              |       | 651                                     |       | 633        |       | 2.8 |   |
| Advanced  electronic courses        |       | 162                                     |       | 25         |       | 548.0 |   |
|                                |       | 6,496                                   |       | 6,399      |       | 1.5 | % |
| *Number of students*                | * *   | * *                                | * *   | * *   | * *   | * * | * * |
| Basic training sessions             |       | 53,742                                  |       | 30,280     |       | 77.5 |   |
| Advanced live  courses              |       | 13,837                                  |       | 12,351     |       | 12.0 |   |
| Advanced  electronic courses        |       | 5,133                                   |       | 597        |       | 759.8 |   |
| Mentorships  completed              |       | 2,510                                   |       | 1,811      |       | 38.6 |   |
|                                |       | 75,222                                  |       | 45,039     |       | 67.0 | % |
| *Average students per paid  course* | * *   | * *                                | * *   | * *   | * *   | * * | * * |
| Basic training                      |       | 57.2                                    |       | 33.1       |       | 72.8 | % |
| Advanced live courses               |       | 21.3                                    |       | 19.7       |       | 9.2 |   |
|                                |       | 42.5                                    |       | 27.5       |       | 54.5 | % |

 

We decided to reduce the tuition prices at our basictraining sessions to provide the opportunity for more students to benefit fromour offerings and be exposed to our advanced courses. Our blended averagetuition level per student for a basic training session declined 63.9%, whilethe number of students taking the basic training sessions increased 77.5%.

Our weighted average tuition for advanced courses fellslightly by 3.8% reflecting a shift in course mix, while the number of studentsenrolled increased by 8.4%.

Our financial markets education segment’s cash receivedfrom courses and product sales grew 72.3% over 2004, to $78.3 million,while the domestic real estate division increased 9.1% to $108.1 million.International declined 32.1% in 2005 to $10.1 million.

On a brand level, all domestic brands had strongperformance over 2004. Leading the way was *STARTrader**®* with a 214%increase in cash received from course and product sales over 2004, followed by *Teach Me To Trade*® with a 38.8% increase, while our most maturebrands, *Russ Whitney*®*’s*  *BuildingWealth*TM grew at15.5% and *Cash Flow Generator*® at 10.8%,rounding out our major brands.

Revenue recognized from course breakage was$16.2 million in 2005, compared to $18.1 million in 2004, a decreaseof $1.9 million. Revenue from course breakage was 10.0% and 13.3% of totalrevenue for 2005 and 2004, respectively.

**Operating expenses**

Certain expenses were misclassified in 2004. Similarexpense items are now classified within the same Statement of Operationsstatement line item for all periods presented. Reclassifications were requiredin prior period line item expense categories to provide comparability to thecurrent period’s presentation. The need for reclassifications is a result ofthe lack of a sufficient amount of qualified personnel in the accounting and reportingfunction. As qualified people were brought into the organization, considerationwas given to the presentation of the particular line items. It was determinedthe reclassification would better demonstrate the activities of our business.

“Efficiencies” as used in Management’s Discussion andAnalysis refer to a reduction in costs as a percentage of revenue resultingfrom cost control measures implemented in late 2004 that were realized in 2005,leveraging of revenue increases without corresponding increases in costs, anincrease in the average number of students per course, our ability to delivermore courses electronically and general economies of scale resulting fromsubstantial sales growth. Regarding future efficiency gains, they are notexpected to be as significant due to the impact of the cost control measures in2005 which are largely nonrecurring in nature.

40

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*Direct course expenses*

Direct course expenses relate to our free introductorybasic and advanced courses and consist of instructor fees, commissions,facility costs, salaries associated with our field travel team coordinators andrelated travel expenses.

In 2005, direct course expenses increased $3.0 million to$94.8 million, or 3.3% from $91.8 million in 2004. As a percentage of revenue,direct course expenses decreased from 67.3% of revenue in 2004 to 58.1% in2005. The components of this 9.2 percentage point (pp) reduction include:

 

|                                           | ** ** | **Margin change  2005 vs. 2004** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                | ** ** | **Increase (Decrease)**                    | ** ** |
| Efficiency gains  in course delivery      |       | 5.0                                             | pp         |
| Reduced  effective sales commissions rate |       | 2.3                                             |       |
| Event  administration                     |       | 2.9                                             |       |
| Other direct  course expenses             |       | (1.0                                            | )          |
| Improved direct course  expense margins   |       | 9.2                                             | pp         |

 

The effective sales commission rate is indicative of theincrease in the average number of students attending our three day sessions andfree introductory workshops.  Theimprovement in course delivery and event management is the result of costcontrol measures implemented in the fourth quarter of 2004 that were realizedthroughout 2005 along with our ability to leverage revenue increases withoutcorresponding increases in costs.

*Advertising and sales expense*

Advertising expense consists of purchased media and salesexpenses consist of sales commissions to our outreach (telemarketing) salesforce supporting our student recruitment.

Advertising and sales expense for 2005 amounted to$49.8 million, an increase of 0.4% or $0.1 million compared to$49.7 million in 2004. Advertising and sales expense in 2005 was 30.6% ofrevenue, as compared to 36.4% of revenue for 2004. The following chartillustrates the 5.8 percentage point margin improvement:

 

|                                                  | ** ** | **Margin change  2005 vs. 2004** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                       | ** ** | **Increase (Decrease)**                    | ** ** |
| Improved response from television |       | 2.8                                             | pp         |
| Improved response  from direct mail              |       | 2.0                                             |       |
| Other media  efficiencies                        |       | 1.2                                             |       |
| Increase in  sales commissions rates             |       | (0.2                                            | )          |
|                                             |       | 5.8                                             | pp         |

 

Approximately 80% of all advertising is throughtelevision commercials and infomercials, with the balance consisting of directmail and newspaper advertisement.

41

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Our media spending in television increased 6.1 percentagepoints in 2005 when compared to the same period in 2004. The following tableillustrates our media spending mix.

 

|             | ** ** | **Years ended December 31,** | ** ** |
|-------------|------------|---------------------------------------------|------------|
| ** **  | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Television  |       | 79.8                                        | %          | 73.7 | % |
| Direct mail |       | 12.1                                        |       | 16.2 |   |
| Newspaper   |       | 8.1                                         |       | 7.1 |   |
| Other       |       | —                                      |       | 3.0 |   |
|        |       | 100.0                                       | %          | 100.0 | % |

 

The number of prospective students registering for ourevents increased 15.6% over 2004 and yet our advertising expenditures in 2005on a dollar basis was essentially flat compared to 2004. Many improvements withrespect to media purchases and scheduling were realized in 2005. We alsobenefited from our cost per television placement, which decreased by 4.0% in2005 compared to 2004.

While continued improvement is anticipated for thefuture, efficiency gains are not expected to be realized at the same levelsrealized in 2005, due in part to the nonrecurring nature of both cost controlbenefits and changes to our media purchasing and scheduling practices that wererealized in 2005.

*General and administrative expenses*

General and administrative expenses primarily consist ofcompensation, benefits, insurance, facility expenses, and travel for thecorporate staff.

General and administrative expenses were$27.7 million in 2005 and 2004. As a percentage of revenue, general andadministrative expenses decreased from 20.3% of revenues in 2004, to 17.0% in2005, due primarily to cost control measures initiated in the fourth quarter of2004 and realized throughout 2005, and our ability to leverage the increase inrevenue without a corresponding increase in overhead.

Primary contributors to the 3.3 percentage points (pp)reduction in general and administrative costs include:

 

|                                                         | ** ** | **Margin change  2005 vs. 2004  Increase (Decrease)** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| Reduced  headcount                                      |       | 1.2                                                                       | pp         |
| Lowered  professional fees                              |       | 0.4                                                                       |       |
| Reduced other  general and administrative expenses, net |       | 1.7                                                                       |       |
|                                                    |       | 3.3                                                                       | pp         |

 

We expect to continue benefiting from overhead leverage,however not at the same levels realized in 2005 due in part to the nonrecurringnature of the cost control benefits realized in 2005. Moreover, we continue toinvest in our infrastructure to support the continued growth. Staff increasesof approximately 75 employees worldwide, additional research anddevelopment of new education courses and support necessary to further expandour geographical penetration within the United States will all requireincreased resources in 2006.

*Earnings (loss) from operations*

We incurred a loss from operations of $9.2 millionin 2005, compared to a loss from operations of $32.8 million in 2004. Ourincrease in revenues combined with the marketing efficiencies, reduced salescosts and reduced general and administrative expenses described above were theprimary contributing factors to this year over year improvement. Loss fromoperations in 2005 was 5.7% of revenues as compared to a loss from operationsof 24.1% of revenues in 2004.

42

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*Other income (expense)*

Other income (expense) was $8.2 million in 2005, a$7.3 million increase over the $0.9 million for 2004, primarily dueto an increase in gain on sale of assets of $6.6 million. The increase ingain on sale of assets was primarily due to a pretax gain of $5.6 million($3.5 million after minority interest expense) realized on the sale of anoffice building in Orlando, Florida.

Other nonoperating income increased by $0.9 millionto $1.8 million. Other income for 2005 includes $1.2 million ininsurance proceeds from a business interruption claim arising from the impactof Hurricane Charley in 2004.

Interest expense (net of interest income) decreased from$0.5 million in 2004 to nil in 2005 as interest income resulting from theincrease in cash and cash equivalents balance offset interest expense from thereduction in long term debt.

Equity loss for investments in related parties in CostaRica amounted to $0.2 million, compared to $0.2 million in equityearnings in 2004.

*Income tax benefit*

We recognize deferred tax assets and liabilities, atenacted income tax rates, based on the temporary differences between thefinancial reporting basis and the tax basis of our asset and liabilities. Weinclude any effects of changes in income tax rates or tax laws in the provisionfor income taxes in the period of enactment. When it is more likely than notthat a portion or all of a deferred tax asset will not be realized in thefuture, we provide a corresponding valuation allowance against the deferred taxasset. In 2005, we determined that it was more likely than not that we wouldrealize our deferred tax assets and we reversed our valuation allowance of $11.0 millionwhich resulted in a net tax benefit of $6.8 million being recorded in ourConsolidated Statement of Operations.

Significant management judgment is required indetermining our provision for income taxes, our deferred tax assets andliabilities and any valuation allowance recorded against our net deferred taxassets. We believe, based on the assumptions contained in our economic plan andthe current trends of the business, that it is more likely than not that thedeferred tax asset will be realized in the future.

Management does not feel an additional tax asset has beencreated as a result of the restatement. Additionally, the restatement does notaffect any previously filed tax returns.

*Net earnings (loss)*

Net earnings in 2005 amounted to $3.9 million, a$35.9 million improvement over 2004’s $32.0 million net loss.Improved revenue growth, operating and overhead cost controls, sale of assets,gain on sale of noncore investments, along with the recognition of a deferredtax asset contributed to the improved 2005 results.

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**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

Market riskgenerally represents the risk that losses may occur in the values of financialinstruments as a result of movements in interest rates, foreign currencyexchange rates and commodity prices. We do not have commodity price marketrisk. We are exposed to market risk from changes in foreign currency exchangerates and interest rates which could impact our results of operations andfinancial condition. We manage our exposure to these market risks through ourregular operating and financing activities.

        *Foreign currency exchange rate risk—*We may face foreign currencyexchange risk because of our planned growth of our United Kingdom and Canadiansubsidiaries and our plans to expand into other European markets. Thefluctuations in the foreign exchange rate between the U.S. and foreigncurrencies will result in fluctuations in our annual and quarterly results.Management does not expect that it will employ the use of foreign currencyderivative financial instruments that would allow the reduction in our exposureto exchange rate movements.

        *Interest rate risk—*From time to time we temporarily investour excess cash and restricted cash in interest-bearing securities issued byhigh-quality issuers. Our Management monitors risk exposure to monies investedin securities of these financial institutions. Due to the short time theinvestments are outstanding and their general liquidity, these instruments areclassified as cash equivalents in the Consolidated Balance Sheets and do notrepresent a material interest rate risk to us.

 

44

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**ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA**

** **

**Index toConsolidated Financial Statements**
| **Whitney  Information Network, Inc.**                                                                                             |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                    |   |
| Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                                      | 46     |
| Consolidated  Statement of Operations and Comprehensive Earnings (Loss) for the years  ended December 31, 2006, 2005 and 2004 | 47     |
| Consolidated Statement of Cash Flows for  the years ended December 31, 2006, 2005 and 2004                                    | 48     |
| Consolidated Statement of Changes in Stockholders’  Deficit for the years ended December 31, 2006, 2005 and 2004              | 50     |
| Notes to Consolidated Financial Statements                                                                                              | 51     |
| Report of Independent Registered Public Accounting  Firm                                                                                | 72     |

 

45

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**WHITNEYINFORMATION NETWORK, INC. AND SUBSIDIARIES**

**ConsolidatedBalance Sheets**

**(in thousands,except share data)**
| ** **                                                                                                                                                                  | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                  |       |                        |       |                        |       |
| Current assets:                                                                                                                                                             |       |                        |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                  |       | $                           | 34,181     |                        | $          | 33,244 |   |
| Restricted cash                                                                                                                                                             |       | 6,510                       |       | 5,406                       |       |
| Accounts  receivable, net                                                                                                                                                   |       | 3,373                       |       | 3,789                       |       |
| Notes receivable,  current portion                                                                                                                                          |       | 84                          |       | 1,785                       |       |
| Deferred course  expenses, current portion                                                                                                                                  |       | 14,396                      |       | 14,401                      |       |
| Prepaid  advertising and other prepaid expenses                                                                                                                             |       | 2,519                       |       | 2,841                       |       |
| Inventory                                                                                                                                                                   |       | 1,061                       |       | 1,087                       |       |
| Deferred  registration costs                                                                                                                                                |       | —                      |       | 315                         |       |
| Assets held for  sale                                                                                                                                                       |       | 4,726                       |       | —                      |       |
| Total current assets                                                                                                                                                        |       | 66,850                      |       | 62,868                      |       |
| Notes  receivable, net of current portion                                                                                                                                   |       | 7,087                       |       | 9,158                       |       |
| Property and  equipment, net                                                                                                                                                |       | 11,757                      |       | 10,082                      |       |
| Investment and  development costs in real estate                                                                                                                            |       | 5,060                       |       | 4,819                       |       |
| Intangible  assets, net                                                                                                                                                     |       | 4,129                       |       | 5,754                       |       |
| Goodwill                                                                                                                                                                    |       | —                      |       | 2,000                       |       |
| Deferred income  tax asset                                                                                                                                                  |       | —                      |       | 7,287                       |       |
| Deferred course  expenses, net of current portion                                                                                                                           |       | 171                         |       | 99                          |       |
| Other assets                                                                                                                                                                |       | 66                          |       | 136                         |       |
|                                                                                                                                                                        |       | $                           | 95,120     |                        | $          | 102,203 |   |
| **Liabilities  and Stockholders’ Deficit**                                                                                                                             |       |                        |       |                        |       |
| Current liabilities:                                                                                                                                                        |       |                        |       |                        |       |
| Accounts payable                                                                                                                                                            |       | $                           | 4,744      |                        | $          | 3,691 |   |
| Notes payable                                                                                                                                                               |       | 149                         |       | —                      |       |
| Income taxes  payable                                                                                                                                                       |       | 126                         |       | 356                         |       |
| Accrued course  expenses                                                                                                                                                    |       | 1,250                       |       | 1,841                       |       |
| Other accrued  expenses                                                                                                                                                     |       | 11,957                      |       | 7,377                       |       |
| Due to  stockholders from sale of common stock                                                                                                                              |       | —                      |       | 5,110                       |       |
| Long term debt,  current portion                                                                                                                                            |       | 3,139                       |       | 462                         |       |
| Deferred revenue                                                                                                                                                            |       | 114,922                     |       | 116,777                     |       |
| Total current  liabilities                                                                                                                                                  |       | 136,287                     |       | 135,614                     |       |
| Long term debt, net of  current portion                                                                                                                                     |       | 3,015                       |       | 2,912                       |       |
| Deferred rental  incentives                                                                                                                                                 |       | 394                         |       | —                      |       |
| Deferred revenue, net  of current portion                                                                                                                                   |       | 486                         |       | 224                         |       |
| Total liabilities                                                                                                                                                           |       | 140,182                     |       | 138,750                     |       |
| Minority interest                                                                                                                                                           |       | —                      |       | 3,939                       |       |
| Commitments and  contingencies                                                                                                                                              |       |                        |       |                        |       |
| Stockholders’ deficit:                                                                                                                                                 |       |                        |       |                        |       |
| Preferred stock,  no par value, 10,000,000 shares authorized, no shares   issued and outstanding                                                                            |       | —                      |       | —                      |       |
| Common stock, no  par value, 25,000,000 shares authorized,   11,738,587 and 10,455,910 shares issued and outstanding, as of   December 31, 2006 and 2005, respectively |       | 4,132                       |       | 10,593                      |       |
| Paid-in  capital                                                                                                                                                            |       | 1,089                       |       | 449                         |       |
| Foreign currency  translation adjustment                                                                                                                                    |       | (1,160                      | )          | (650                        | )          |
| Accumulated  deficit                                                                                                                                                        |       | (49,123                     | )          | (50,878                     | )          |
| Total stockholders’  deficit                                                                                                                                           |       | (45,062                     | )          | (40,486                     | )          |
|                                                                                                                                                                        |       | $                           | 95,120     |                        | $          | 102,203 |   |

 

See notes to Consolidated Financial Statements.

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**WHITNEYINFORMATION NETWORK, INC. AND SUBSIDIARIES**

**ConsolidatedStatement of Operations and Comprehensive Earnings (Loss)**

**(in thousands,except per share data)**
| ** **                                   | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                      |       | $                                           | 224,654    |   | $ | 163,107 |   | $ | 136,259 |   |
| Operating  expenses:                         |       |                                        |       |   |   |   |   |
| Direct course expenses                       |       | 111,962                                     |       | 94,765 |   | 91,763 |   |
| Advertising and sales expense                |       | 64,168                                      |       | 49,839 |   | 49,664 |   |
| General and administrative expenses          |       | 34,836                                      |       | 27,664 |   | 27,676 |   |
| Impairment of assets                         |       | 3,668                                       |       | — |   | — |   |
| Special items                                |       | 2,330                                       |       | — |   | — |   |
|                                         |       | 216,964                                     |       | 172,268 |   | 169,103 |   |
| Earnings (loss)  from operations             |       | 7,690                                       |       | (9,161 | ) | (32,844 | ) |
|                                         |       |                                        |       |   |   |   |   |
| Other income:                                |       |                                        |       |   |   |   |   |
| Other (expense) income                       |       | (162                                        | )          | 1,800 |   | 893 |   |
| Interest income (expense), net               |       | 1,876                                       |       | (28 | ) | (499 | ) |
| Equity (loss) earnings from related parties  |       | (45                                         | )          | (176 | ) | 159 |   |
| Gain on sale of assets                       |       | 74                                          |       | 6,579 |   | 305 |   |
|                                         |       | 1,743                                       |       | 8,175 |   | 858 |   |
|                                         |       |                                        |       |   |   |   |   |
| Earnings (loss)  before income taxes         |       | 9,433                                       |       | (986 | ) | (31,986 | ) |
| Minority interest                            |       | —                                      |       | (1,962 | ) | 23 |   |
| Income tax (provision) benefit               |       | (7,678                                      | )          | 6,798 |   | — |   |
| Net earnings  (loss)                         |       | 1,755                                       |       | 3,850 |   | (31,963 | ) |
| Effect of foreign exchange rates             |       | (510                                        | )          | (100 | ) | 55 |   |
| Comprehensive  earnings (loss)               |       | $                                           | 1,245      |   | $ | 3,750 |   | $ | (31,908 | ) |
| Earnings (loss)  per share:                  |       |                                        |       |   |   |   |   |
| Diluted                                      |       | $                                           | 0.15       |   | $ | 0.41 |   | $ | (3.72 | ) |
| Basic                                        |       | $                                           | 0.16       |   | $ | 0.43 |   | $ | (3.72 | ) |
| Weighted average  common shares outstanding: |       |                                        |       |   |   |   |   |
| Diluted                                      |       | 11,620                                      |       | 9,360 |   | 8,589 |   |
| Basic                                        |       | 11,162                                      |       | 8,859 |   | 8,589 |   |

 

See notes to ConsolidatedFinancial Statements.

 

47

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**WHITNEY INFORMATION NETWORK, INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

**(in thousands)**
| ** **                                                                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating activities:                                                                         |       |                                        |       |   |   |   |   |
| Net earnings (loss)                                                                           |       | $                                           | 1,755      |   | $ | 3,850 |   | $ | (31,963 | ) |
| Adjustments to  reconcile net earnings (loss) to net cash provided by   operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and  amortization                                                                |       | 1,774                                       |       | 1,856 |   | 1,610 |   |
| Impairment of  assets                                                                         |       | 3,668                                       |       | — |   | — |   |
| Stock option and  warrant compensation                                                        |       | 881                                         |       | — |   | — |   |
| Stock gift                                                                                    |       | 937                                         |       | — |   | — |   |
| Gain on sale of  assets                                                                       |       | (48                                         | )          | (6,579 | ) | (305 | ) |
| Minority  interest                                                                            |       | 45                                          |       | 1,962 |   | (23 | ) |
| Changes in operating  assets and liabilities:                                                 |       |                                        |       |   |   |   |   |
| Restricted cash                                                                               |       | (1,104                                      | )          | (3,225 | ) | (389 | ) |
| Accounts  receivable, net                                                                     |       | 737                                         |       | (3,341 | ) | 867 |   |
| Prepaid advertising  and other                                                                |       | 322                                         |       | (864 | ) | 353 |   |
| Inventory                                                                                     |       | (51                                         | )          | 303 |   | (677 | ) |
| Deferred tax  asset, net of deferred tax liability                                            |       | 7,287                                       |       | (7,287 | ) | — |   |
| Deferred course  expenses                                                                     |       | (67                                         | )          | (2,602 | ) | (3,546 | ) |
| Other assets                                                                                  |       | 70                                          |       | (19 | ) | (96 | ) |
| Accounts payable                                                                              |       | 1,102                                       |       | (3,722 | ) | 4,195 |   |
| Accrued course  expenses                                                                      |       | (591                                        | )          | (333 | ) | 528 |   |
| Deferred revenue                                                                              |       | (1,593                                      | )          | 33,288 |   | 27,828 |   |
| Other accrued  expenses                                                                       |       | 5,125                                       |       | 3,379 |   | 2,218 |   |
| Income taxes  payable                                                                         |       | (230                                        | )          | 356 |   | — |   |
| Net change in  operating working capital                                                      |       | 11,007                                      |       | 15,933 |   | 31,281 |   |
| Cash provided by  operations                                                                  |       | 20,019                                      |       | 17,022 |   | 600 |   |
| Investing activities:                                                                         |       |                                        |       |   |   |   |   |
| Purchase of  property and equipment                                                           |       | (7,574                                      | )          | (701 | ) | (9,682 | ) |
| Purchase of  goodwill and intangible assets                                                   |       | —                                      |       | (333 | ) | (250 | ) |
| Purchase of  equity interest in investment properties                                         |       | —                                      |       | — |   | (2,701 | ) |
| Proceeds from  notes receivable                                                               |       | 3,772                                       |       | — |   | — |   |
| Proceeds from  sale of investment properties                                                  |       | 28                                          |       | 9,777 |   | 827 |   |
| Investments in  and advances to related parties, net                                          |       | (608                                        | )          | (103 | ) | 1,202 |   |
| Distribution of  minority interest                                                            |       | (44                                         | )          | — |   | — |   |
| Cash (used in) provided  by investing activities                                              |       | (4,426                                      | )          | 8,640 |   | (10,604 | ) |
| Financing activities:                                                                         |       |                                        |       |   |   |   |   |
| Proceeds from  sale of common stock                                                           |       | —                                      |       | 7,155 |   | — |   |
| Proceeds from  (paid to) stockholders from sale of common stock                               |       | (5,110                                      | )          | 5,110 |   | — |   |
| Proceeds from  issuance of long term debt                                                     |       | —                                      |       | 103 |   | 6,363 |   |
| Principal  payments on long term debt                                                         |       | (1,075                                      | )          | (9,041 | ) | (291 | ) |
| Principal  payments on note payable to officer                                                |       | —                                      |       | — |   | (4,713 | ) |
| Proceeds from  exercise of stock options and warrants                                         |       | 4,186                                       |       | 3 |   | 28 |   |
| Dividends paid  to shareholders                                                               |       | (11,711                                     | )          | — |   | — |   |
| Costs associated  with registering common stock                                               |       | (392                                        | )          | (315 | ) | — |   |
| Cash (used in) provided  by financing activities                                              |       | (14,102                                     | )          | 3,015 |   | 1,387 |   |
| Effect of foreign  currency translation                                                       |       | (554                                        | )          | (100 | ) | 55 |   |
| Increase (decrease) in  cash and cash equivalents                                             |       | 937                                         |       | 28,577 |   | (8,562 | ) |
| Cash and cash  equivalents, beginning of year                                                 |       | 33,244                                      |       | 4,667 |   | 13,229 |   |
| Cash and cash equivalents, end of year                                                        |       | $                                           | 34,181     |   | $ | 33,244 |   | $ | 4,667 |   |

 

See notes to ConsolidatedFinancial Statements.

48

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**Supplemental cash flow information:**

Cash received for interest income was $2.1 million and$0.3 million for the years ended December 31, 2006 and 2005,respectively.  Cash interest expense was$0.5 million, $0.2 million and $0.5 million for the years endedDecember 31, 2006, 2005 and 2004, respectively.

Capital expenditures of $2.7 million in 2004 werefinanced through borrowings and have been included as purchases of property andequipment and proceeds of long term debt on the Statement of Cash Flows. Thesetransactions had been presented as a supplemental disclosure of noncashactivity in prior years.

**Supplemental disclosure of noncash activity:**

Long term debt of $3.6 million was added in March 2006 inconnection with our acquisition of the remaining 50% interest in SCB Building,LLC.   A portion of the considerationreceived on the sale of the SCB Building in 2005, as discussed in Note 4 -*Mergers and acquisitions*,includes $11.0 million in notes receivable out of $20.3 million intotal proceeds.

During the first quarter of 2005, 85,470 shares of commonstock valued at $0.2 million were issued along with cash of$0.3 million for the final payment of the *STARTrader*® brand purchase agreement, with the total of$0.5 million being recorded as goodwill.  In 2006, $2.0 million in goodwill in associated with the *STAR Trader*® acquisition was deemed impaired.

Approximately $0.3 million of the property and equipmentpurchased during 2006 was accrued in accounts payable at December 31, 2006 andhad not been paid.

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**WHITNEYINFORMATION NETWORK, INC. AND SUBSIDIARIES**

**ConsolidatedStatement of Changes in Stockholders’ Deficit**

**(in thousands)**

 
| ** **                                                      | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Foreign**     | ** ** | ** **             | ** ** | ** **  | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|-----------------|------------|------------------------|------------|-------------|------------|
| ** **                                                      | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | **currency**    | ** ** | ** **             | ** ** | **Total**   | ** ** |
| ** **                                                      | ** ** | **Common Stock** | ** ** | **paid-in** | ** ** | **translation** | ** ** | **Accumulated** | ** ** | **stockholders’** | ** ** |
| ** **                                                      | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**     | ** ** | **adjustment**  | ** ** | **deficit**            | ** ** | **deficit** | ** ** |
| Balance at  December 31, 2003                              |       | 8,548                 |       | $           | 2,991      |            | $          | 449             |       | $                      | (605       | )           | $          | (22,765 | ) | $ | (19,930 | ) |
| Issuance of stock for the stock purchased of  SpeakTek, Inc.    |       | 56                    |       | 250         |       | —          |       | —          |       | —                 |       | 250         |       |
| Issuance of stock for stock options exercised                   |       | 15                    |       | 28          |       | —          |       | —          |       | —                 |       | 28          |       |
| Foreign currency translation adjustment                         |       | —                |       | —      |       | —          |       | 55              |       | —                 |       | 55          |       |
| Net loss                                                        |       | —                |       | —      |       | —          |       | —          |       | (31,963                | )          | (31,963     | )          |
| Balance at  December 31, 2004                              |       | 8,619                 |       | 3,269       |       | 449             |       | (550            | )          | (54,728                | )          | (51,560     | )          |
| Issuance of stock for the stock purchased of  SpeakTek, Inc.    |       | 85                    |       | 166         |       | —          |       | —          |       | —                 |       | 166         |       |
| Issuance of stock for stock options exercised                   |       | 2                     |       | 3           |       | —          |       | —          |       | —                 |       | 3           |       |
| Private placement of securities, net of offering  costs of $720 |       | 1,750                 |       | 7,155       |       | —          |       | —          |       | —                 |       | 7,155       |       |
| Foreign currency translation adjustment                         |       | —                |       | —      |       | —          |       | (100            | )          |                   |       | (100        | )          |
| Net earnings                                                    |       | —                |       | —      |       | —          |       | —          |       | 3,850                  |       | 3,850       |       |
| Balance at  December 31, 2005                              |       | 10,456                |       | 10,593      |       | 449             |       | (650            | )          | (50,878                | )          | (40,486     | )          |
| Issuance of cash dividend                                       |       |                  |       | (11,192     | )          | (536            | )          | —          |       | —                 |       | (11,728     | )          |
| Issuance of stock for stock options and warrants  exercised     |       | 1,185                 |       | 4,186       |       | —          |       | —          |       | —                 |       | 4,186       |       |
| Stock gift                                                      |       | 98                    |       | 937         |       | —          |       | —          |       | —                 |       | 937         |       |
| Stock issuance costs                                            |       | —                |       | (392        | )          | —          |       | —          |       | —                 |       | (392        | )          |
| Stock option and warrant compensation expense                   |       | —                |       | —      |       | 881             |       | —          |       | —                 |       | 881         |       |
| Acquisition and warrant related stock expense                   |       | —                |       | —      |       | 295             |       | —          |       | —                 |       | 295         |       |
| Foreign currency translation adjustment                         |       | —                |       | —      |       | —          |       | (510            | )          | —                 |       | (510        | )          |
| Net earnings                                                    |       | —                |       | —      |       | —          |       | —          |       | 1,755                  |       | 1,755       |       |
| Balance at  December 31, 2006                              |       | 11,739                |       | $           | 4,132      |            | $          | 1,089           |       | $                      | (1,160     | )           | $          | (49,123 | ) | $ | (45,062 | ) |

 

See notes to ConsolidatedFinancial Statements.

 

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**WHITNEYINFORMATION NETWORK, INC. AND SUBSIDIARIES**

**Notes toConsolidated Financial Statements**

***Note 1 - Descriptionof Business and Summary of Significant Accounting Policies***

*Organization and history*

Whitney Information Network, Inc. and Subsidiaries(collectively referred to as the “Company” “we,” “us” or “WIN”) providespostsecondary education and training courses for students throughout the UnitedStates, the United Kingdom and Canada, interested in learning about real estateand financial markets.

We incorporated in Colorado in 1996 under the name GimmelEnterprises, Inc. In 1998, we acquired all of the outstanding common stockof Whitney Education Group, Inc. a Florida company organized in 1992, andchanged our name to WIN Systems International, Inc. In 1999, we changedour name to Whitney Information Network, Inc.

*Principles of consolidation*

Our Consolidated Financial Statements include theaccounts and balances of Whitney Information Network, Inc. and its whollyowned and majority owned subsidiaries.

*Significant accounting policies*

The vast majority of our costs to acquire the studenthave been expended up to the point of registration, such as media, travel,facilities and instructor fees for the introductory workshops.  These costs are expensed when incurred.  However, the tuition paid at registration isdeferred until the course is attended by the student, in any of the availablelearning formats, or likelihood of attendance by the student is remote (coursebreakage) at which time the revenue is deemed earned.

Thus, reporting under generally accepted accountingprinciples in the United States of America creates significant timingdifferences with respect to revenue and expenses, both in our cash flow and inour operating results. Cash flow is impacted because we pay for a significantportion of our expenses associated with our courses before the courses areattended and the revenue can be recognized. Our operating results are impacted as well because we recognize the bulkof our course expenses when incurred, and defer all revenue until students takethe course or receive the product offered.

Speaker fee commission payments earned for generatingrevenue are deferred until such time as the revenue is earned. Advertisingcosts, training room rentals and direct sales expenses are expensed asincurred. Advertising paid in advance is recorded as prepaid until such time asthe advertisement is published.

*Revenue recognition policy*

We are engaged primarily in the business of providingreal estate and financial markets education to individual students throughcourses of study as well as educational materials. We offer our studentsmultiple course packages. Students pay for the courses in advance and we recordthe proceeds from the sale of courses as deferred revenue as received. Revenueis earned when the students attend the courses.

The student is permitted to attend courses (in allavailable learning formats) throughout the life of the student contract. Weallow students to attend courses subsequent to expiration upon request. Thetuition is generally nonrefundable. A student may receive a refund within threedays of the purchase by exercising a right of rescission. In such cases, thecorresponding amount of deferred revenue is relieved with no impact on the ConsolidatedStatement of Operations.

We recognize revenue based on:

·                  whenthe course is attended by the student; or

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·                  likelihood ofthe attendance by the student is remote (course breakage), which is based onthe historical:

·      percentage of students who never attendeda course and those students who never attended a course subsequent toexpiration; and

·      highest number of days in which 95% of those students whoattended our courses subsequent to expiry.

We determine our course breakage rate based upon estimatesdeveloped from historical student attendance patterns. Based on our historicalinformation, we can determine the likelihood of an expired course remainingunattended. Moreover, we determined that we do not have a legal obligation toremit the value of expired courses to relevant taxing jurisdictions.

To apply course breakage, wecalculate verifiable and objective supporting data as of each balance sheetdate.

To the extent new businesses do not have three full yearsof data (subsequent to course expiration), we recognize revenue based on courseattendance. Only at such time that we have developed verifiable and objectivedata over a three year period subsequent to course expiration will we applycourse breakage based on the methodology described above.

With respect to our financial markets education segmentand the United Kingdom business, we had sufficient data to apply coursebreakage calculations in the fourth quarter of 2006.  Accordingly, we recorded course breakage as contemplatedabove for the quarter ended December 31, 2006, for the courses sold as ofthe beginning of the first quarter of 2003 through the end of the fourthquarter of 2005 which were expired and remained unattended.  The course breakage recognized in the fourthquarter of 2006 amounted to $14.5 million and $7.3 million, for the financialeducation segment and the United Kingdom business, respectively.

During the years ended December 31, 2006, 2005 and2004 we recognized $55.4 million, $16.2 million and$18.1 million, respectively, in revenue related to course breakage.

*Restatement*

As reflected in our previously filed Form 10-K/A onNovember 13, 2006, our Consolidated Financial Statements and other financialinformation were previously restated for the years ended December 31,2005, 2004, 2003, and 2002 and for each of the quarters in the periods ended2005 and 2004.  Certain of our materialcontrol weaknesses resulted in inaccurate financial reporting and restatementsto our previously filed Consolidated Financial Statements from 2001 through2005.  The previously restatedConsolidated Financial Statements reflect:

·                  amodification associated with a change in revenue recognition policy andrestatement of revenue from expired courses; and

·                  a revision tothe revenue recognition policy with respect to our teleconferencing product andservice offering and subscription services.

*Teleconferencing and subscriptionservices*

As required by Financial Accounting Standard Board’sEmerging Issues Task Force Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*and the SEC’s Staff Accounting BulletinNo. 104 (SAB No. 104), our teleconferencing product andservice offering is an arrangement with multiple deliverables. The delivereditems should be considered a separate unit of accounting if all of thefollowing criteria are met:

·                  Thedelivered item(s) has value to the customer on a standalone basis. That item(s)has value on a standalone basis if it is sold separately by any vendor or thecustomer could resell the delivered item(s) on a standalone basis. In thecontext of a customer’s ability to resell the delivered item(s), the Task Forceobserved that this criterion does not require the existence of an observablemarket for that deliverable(s).

·                  Thereis objective and reliable evidence of the fair value of the undelivereditem(s).

·                  Ifthe arrangement includes a general right of return relative to the delivereditem, delivery or performance of the undelivered item(s) is considered probableand substantially in the control of the vendor.

We determined the criteria detailed above have been met:

·                  Theproduct and the service have value to the student on a standalone basis.

·                  Theproduct can be and is sold separately.

52

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·                  Wefeel there is objective and reliable evidence to determine the fair value ofthe undelivered item(s).

·                  Lastly,there are no general rights of return for the teleconferencing offering.

We recognize, as revenue, the product portion of thedeliverable, at point of purchase, and amortize the service component over thelife of the package.

*Strategic alliances*

We account for our strategic alliance arrangements inaccordance with the FASB’s Emerging Issues Task Force Issue No. 99-19, *Reporting Revenue Gross as a Principal versus Net asan Agent*. In the cases where we are deemed the principal, thefollowing conditions are present:

·                  Weare obligated to fulfill the education delivery to the end customer

·                  Wehave discretion in the course development and its delivery

·                  Wecollect cash or credit sales at point of sale

The cash received at strategic alliance partner events isrecorded at the full contract amount (gross), and payments to our strategicalliance partners are recorded as direct course expense. The accountingtreatment for the revenues and payments to our strategic alliance partners isthe same as our own brands. With respect to those payments that relate tofuture course deliveries, they are deferred, and recorded as revenue andexpenses when the course is attended by the student or the likelihood ofattendance is deemed remote. Those that relate to product sales are recognizedupon the delivery of the product, which is typically at the point of sale.

*Deferred course expenses*

We defer commissions and fees paid to our speakers untilsuch time the revenue is earned. Our speakers, who are all independentcontractors, earn commissions on the cash receipts received at our educationalevents and are paid approximately 45 days after the educational event. Thedeferred course expenses are tracked individually by student and are recognizedin the Consolidated Statement of Operations as the student attends the course,the same time the associated revenues are recognized.

We capitalize these commissions and fees paid to ourspeakers consistent with Statement of Financial Accounting Standard No. 91*Accounting for Nonrefundable Fees and CostsAssociated with Originating or Acquiring Loans and Initial Direct Costs ofLeases - an amendment of FASB Statements No. 13, 60, and 65 and arescission of FASB Statement No. 17*, Technical BulletinNo. 90-1 *Accounting for SeparatelyPriced Extended Warranty and Product Maintenance Contracts* and theSEC’s Staff Accounting Bulletin No. 104.

*Cash, cash equivalents and restrictedcash*

We consider all highly liquid instruments purchased withan original maturity of three months or less to be cash equivalents. Wecontinually monitor our investment positions and the credit quality of thefinancial institutions with which we invest. Restricted cash reflects amounts retained by credit card merchants as areserve for returns on credit card transactions and deposit balances requiredunder letters of credit. We consider restricted cash as a current asset ascredit card merchants can typically hold such reserve funds only up to oneyear, and our letters of credit are for annual terms.

*Concentrations of credit risk*

Financial instruments, which potentially subject us toconcentration of credit risk, consist principally of cash and short-term cashinvestments and accounts receivable. We place temporary cash investments withwhat management believes are high-credit, quality financial institutions. As ofthe balance sheet date, and periodically throughout the year, we havemaintained balances in various operating accounts in excess of federallyinsured limits. We periodically perform credit analysis and monitor thefinancial condition of its customers in order to minimize credit risk.

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*Accounts receivable*

Accounts receivable consist of trade receivables from thesale of educational products and services for which a contract has beenexecuted, payments have not been received, and the related revenue has beendeferred. An adjustment is recorded to write off any amounts deemed to beunrealizable and uncollectible.

*Inventory*

Inventory consists primarily of books, videos andtraining materials and is stated at the lower of cost or market, determinedusing the first-in, first-out (“FIFO”) method.

*Fair value of financial instruments*

The carrying amounts of financial instruments includingcash and cash equivalents, short-term investments, receivables, deferredseminar expense, accounts payable, accrued expenses, deferred educationalrevenues, and notes payable approximated fair value as of the balance sheetdate because of the relatively short maturity of these instruments. The fairvalue of long term notes payable approximates fair value based on currentmarket rates available for similar debt instruments.

*Advertising, sales expense and prepaidadvertising*

We expense advertising and sales costs as incurred.Advertising paid for in advance is recorded as prepaid until such time as theadvertisement is published.

*Property and equipment*

Property and equipment is stated at cost. Depreciation isprovided utilizing the straight-line method over the estimated useful lives ofowned assets as follows:

 

| Buildings                         |   | 40 years     |
|-----------------------------------|--------|--------------|
| Furniture  fixtures and equipment |   | 7 years      |
| Other assets                      |   | 5 years |
| Purchased  software               |   | 3 years      |

 

*Intangible assets and goodwill*

Intangible assets include customer lists and trademarksand are recorded at cost. Customer lists and trademarks are being amortizedover their estimated useful lives of three and 15 years, respectively. Goodwillis not amortized. At December 31, 2006 Management performed impairmenttesting in accordance with Statement of Financial Accounting Standard (“SFAS”)No. 142, *Goodwill and Other IntangibleAssets* and SFAS No. 144, *Accountingfor the Impairment or Disposal of Long Lived Assets* for allintangible assets and goodwill.  Werecorded an impairment expense in the amount of $3.7 million for the year endedDecember 31, 2006 (see discussion in Note**2*— Impairment of assets and special items*).

*Investments in related parties*

 We have relatedparty investments related to our holdings in Costa Rica.  Ourinterests in Costa Rica include equity investments in three entities: RanchoMonterey, S.A, Monterey del Este, S.A., and Monterey del Mar, S.A.  Our direct investment in these entitiesincludes initial and working capital advances of $2.8 million, $2.1 million and$1.8 million, as of December 31, 2006, 2005 and 2004, respectively,and are included in “Investment and development costs in real estate” in ourConsolidated Balance Sheets. We have additional interest in these entitiesthrough indirect investments by related parties.

Our interest in these Costa Rican entities as of December31, 2006 includes: 

·                  30%of Rancho Monterey, S.A., a Panamanian entity with ownership of approximately 394acres of undeveloped land on the Pacific coast,

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·                  RanchoMonterey, S.A. also owns 33% of Monterey Group, S.A. which owns approximatelytwo and one-half acres of beachfront land concession adjacent to a hotelproperty,

·                  8%of Monterey del Este, S.A., a Panamanian entity organized to developapproximately 445 acres of Costa Rican undeveloped land contiguous to ourinvestment in Rancho Monterey, S.A.,

·                  Montereydel Este, S.A. also owns 33% of Monterey Group, S.A. which owns approximatelytwo and one-half acres of beachfront land concession adjacent to a hotel property,

·                  48%of Monterey del Mar, S.A., a Panamanian company established for the purpose ofacquiring and developing properties on the Pacific coast of Costa Rica,

·                  Montereydel Mar, S.A. is the trust beneficiary of a Costa Rican company, Mar y Tierradel Oesta, S.A., which owns a beachfront land concession and hotel property.

For the years ended December 31, 2006, 2005 and2004, under the equity method of accounting, we reflected our share of the lossrelated to our direct equity interests in the amounts of less than $0.1 million,$0.2 million and nil, respectively.

Additionally, we hold a 100%interest in a 7,200 square foot conference center in Monterey, Costa Rica andthe land on which it is situated. The historical cost and related accumulateddepreciation are reflected in our Consolidated Balance Sheets under the caption“property and equipment.”  The net bookvalue of the conference center was $0.8 million and $0.9 million as of December31, 2006 and 2005, respectively.

Our Chairman and Chief ExecutiveOfficer, Co-President and Chief Operating Officer and other current and formeremployees of our Company have direct or indirect investments in Costa Rica. OurGeneral Counsel is also a trustee of Costa Rica Consulting, LLC which owns a10% share of Rancho Monterey, S.A. SeeItem 13- *Certain Relationships and Related Transactions*.  The following table summarizes the respectiveownership interests by us, certain executive officers and related parties withrespect to Costa Rica (as a percentage of equity ownership) as ofDecember 31, 2006:

 
| **Entity**              | ** ** | ** ** | **Company** | ** ** | **Chairman and CEO** | ** ** | **Co-President  and COO** | ** ** | **Total** | ** ** |
|-------------------------|------------|------------|-------------|------------|----------------------|------------|--------------------------------|------------|-----------|------------|
| Rancho Monterey,  S.A.  |       | 30         | %           | 11         | %                    | 1          | %                              | 42         | %         |
| Monterey Del Este, S.A. |       | 8          |        | 8          |                 | —     |                           | 16         |      |
| Monterey Del Mar, S.A.  |       | 48         |        | —     |                 | —     |                           | 48         |      |

 

Moreover, there are twoadditional projects in Costa Rica, known as Monterey Green Acres, S.A. andMonterey Sun and Win, S.A., both Costa Rican companies, which are nearby ourCosta Rica investments but in which we do not have any equity investment.  However, our Chairman and Chief Executive Officer, our General Manager,eBusiness, other existing and former employees, one of our external attorneys,contractors who work for us, vendors and former students invested in thesecompanies.

In the second half of 2006, theBoard of Directors approved increasing our ownership of Monterey del Mar,S.A.  The rational is to gain acontrolling interest in order to effect a sale of Monterey Del Mar, S.A.

During the first quarter of 2007,our equity interest in Monterey del Mar, S.A. increased to approximately 51%.  We will consolidate the operations of theentity in 2007.  The Board also deemedthese operations as discontinued with a sale expected in the foreseeablefuture.  Accordingly, Monterey del Mar,S.A.’s operations should be accounted as discontinued operations during theupcoming year.

*Investment in real estate jointventures*

In 2003, we acquired a 50% equity interest in SCBBuilding, LLC (“SCB”), whose main asset is an office building in Orlando,Florida. The other 50% member had a $2.0 million minority interest in SCB,which was contributed in the form of a $4.0 million building subject to a$2.0 million mortgage. Subsequent improvements of approximately$9.6 million were made to the building and were financed primarily by longterm debt. As the guarantor of the debt of SCB, the financial statements andresults from operations are consolidated in the accompanying ConsolidatedFinancial Statements with a provision for minority interest of the other 50%owner. In March 2006, we acquired the remaining 50% of SCB Building LLCthrough the issuance of $3.6 million of long term debt.

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In November 2005, we sold the office building for apretax gain of $5.6 million, before minority interest, or a pretax$3.5 million after minority interest. The debt on the building was paid infull and SCB issued a note receivable, secured by the building, totaling$11.0 million as part of the $20.3 million selling price.

In 2004, we entered into a joint venture with anunrelated party. Our contribution to the joint venture of $2.7 millionrepresents a 50% interest in Tranquility Bay of Southwest Florida LLC (“Tranquility”),which owns 74 acres of land for residential development in Lee County, Florida.Tranquility has no ongoing activity other than the costs of holding the land.We capitalized our share of these costs which for 2006, 2005 and 2004 wereinsignificant.  We include this asset inour Consolidated Balance Sheet as “Investments and development costs in realestate.”

*Long-lived assets*

We review property and equipment, intangible assets andgoodwill for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability ismeasured by the comparison of its carrying amount with the future net cashflows the asset is expected to generate. We look primarily to the undiscountedfuture cash flows in the assessment of whether or not long-lived assets havebeen impaired. If such assets are considered to be impaired, the impairedamount is measured as the amount by which the carrying amount of the assetexceeds the present value of the future net cash flows expected to be generatedby the respective long lived assets.

*Use of estimates*

The preparation of financial statements, in conformitywith accounting principles generally accepted in the United States of America,requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, disclosures of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

*Income taxes*

We recognize deferred tax liabilities and assets based onthe differences between the tax basis of assets and liabilities and theirreported amounts in the financial statements that will result in taxable ordeductible amounts in future years. Temporary differences result primarily fromthe recognition of deferred expenses for tax purposes. A valuation allowance isestablished, when necessary, to reduce deferred tax assets to the amountexpected to be realized.

*Translation of foreign currency*

We account for foreign currency translation in accordancewith SFAS No. 52, *Foreign CurrencyTranslation*. As such, the financial position and results ofoperations of our foreign subsidiaries are measured using local currency as thefunctional currency. Revenues and expenses of the subsidiaries have beentranslated into U.S. dollars at average exchange rates prevailing during theperiod. Assets and liabilities have been translated at the rates of exchange asof December 31, 2006 and 2005, respectively.

*Earnings (loss) per share*

We apply the provisions of SFAS No. 128*, Earnings Per Share*. All dilutivepotential common shares in 2006 and 2005 were included in the diluted earningsper share calculation. All dilutive potential common shares in 2004 had ananti-dilutive effect on diluted per share amounts and therefore were excludedin determining net loss per share. At December 31, 2006, we had 1,253,500 stockoptions and 890,719 warrants outstanding *(*see Note 9*- Stock options and warrants)*. A total of 1,342,802potentially dilutive securities could be dilutive to future earnings.

*Stock options and stock-basedcompensation*

Our 1998 Stock Option Plan provides for the granting ofstock options to key employees. Vesting under the 1998 Plan is asfollows: 25% of the options vest on the grant date, an additional 25% vests onthe completion of the first year of service, another 25% vests on thecompletion of the second year of service, and 100% of the shares vest at theend of the third year of service. All options expire ten years from the date ofgrant.

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Effective January 1, 2006, we adopted the Financial Accounting StandardBoard’s Statement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment* (“SFAS No. 123R”),which requires us to measure the cost of employee services received in exchangefor all equity awards granted including stock options based on the fair marketvalue of the award as of the grant date. SFAS No. 123R supersedes Statement ofFinancial Accounting Standards No. 123, *Accountingfor Stock-Based Compensation* (“SFAS No. 123”) and AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB No. 25”). We adopted SFAS No.123R using the modified prospective application method of adoption whichrequires us to record compensation cost related to unvested stock awards as ofDecember 31, 2005, by recognizing the unamortized grant date fair value ofthese awards over the remaining service periods of those awards with no changein historical reported earnings. Awards granted after December 31, 2005 arevalued at fair value in accordance with the provisions of SFAS No. 123R and recognizedon the same basis as the vesting period. We estimated forfeiture rates for 2006based on historical experience.

Priorto 2006, we accounted for stock-based compensation in accordance with APB No.25 using the intrinsic value method, which did not require that compensationcost be recognized for our stock options provided the option exercise price wasestablished at least at 100% of the common stock fair market value on the dateof grant. Under APB No. 25, we were required to record expense over the vestingperiod for the value of options granted. Prior to 2006, we provided pro formadisclosure amounts in accordance with Statement of Financial AccountingStandards No. 148, *Accounting forStock-Based Compensation - Transition and Disclosure*(“SFAS No. 148”), as if the fairvalue method defined by SFAS No. 123 had been applied to its stock-basedcompensation. Our net earnings and net earnings per share for the twelve monthsended December 31, 2005 would have been reduced if compensation cost related tostock options had been recorded in the Consolidated Financial Statements basedon fair value at the grant dates.

Theimpact of adoption of SFAS No. 123R is that future share based paymentawards will be recorded as compensation expense over their requisite serviceperiod, and such expense is expected to be material to future earnings. Had weadopted SFAS No. 123R in prior periods, the impact of that standard wouldhave approximated the impact of SFAS No. 123R as described in thedisclosure of pro forma net earnings (loss) per share above.

*Reclassifications*

Certain reclassifications have been made in the 2005 and2004 Consolidated Financial Statements to conform to the 2006 presentation.

*Recently issued accounting standards*

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued Financial Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in incometaxes recognized in accordance with SFAS No. 109, *Accounting for Income Taxes*. This Interpretationrequires that we recognize in our Consolidated Financial Statements, the impactof a tax position, if that position is more likely than not of being sustainedon audit, based on the technical merits of the position.  FIN No. 48provides guidance on recognizing, measuring, presenting and disclosinguncertain tax positions that a company has taken or expects to take on a taxreturn. Our effective date for adopting FIN No. 48 is as of January 1, 2007,with the cumulative effect of the change in accounting principle recorded as anadjustment to opening accumulated deficit.  We are currently evaluatingthe impact of FIN No. 48 on our Consolidated Financial Statements.

InSeptember 2006, the SEC released Staff Accounting Bulletin No. 108, *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements* (“SAB No. 108”),which provides the SEC staff’s views regarding the process of quantifyingfinancial statement misstatements, including assessing both the carryover andreversing effects of prior year misstatements on the current year’s financialstatements.  SAB No. 108 is effective forfiscal years ending after November 15, 2006. The adoption of SAB No. 108 had no impact on our Consolidated FinancialStatements.

Also in September2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework formeasuring fair value and requires enhanced disclosures about fair valuemeasurements.  SFAS No. 157 is effectivefor fiscal years beginning after November 15, 2007.  We are currently assessing the impact of theadoption of SFAS No. 157 on our Consolidated Financial Statements.

TheFASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 06-03, *How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus*

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*NetPresentation)* (“EITF No. 06-03”) in June 2006. EITF No. 06-03provides that the presentation of taxes assessed by a governmental authoritythat is directly imposed on a revenue-producing transaction between a sellerand a customer on either a gross basis (included in revenues and costs) or on anet basis (excluded from revenues) is an accounting policy decision that shouldbe disclosed.  The Task Force observedthat because the tentative conclusion in this Issue requires only thepresentation of additional disclosures, we would not be required to reevaluateits existing policies related to taxes assessed by a governmental authoritythat are directly imposed on a revenue-producing transaction between a sellerand a customer. The provisions of EITF No. 06-03 become effective as of January1, 2007. We are currently examining the impact of adopting EITF No. 06-03 onour Consolidated Financial Statements.

OnDecember 21, 2006, the FASB issued EITF 00-19-2, *Accountingfor**Registration Payment Agreements*,to determine the accounting for registration rights agreements. The FASB decidedto separately recognize and measure, for the issuer and holder, registrationpayment arrangements using a model consistent with the accrual of losscontingencies under FASB Statement No. 5, *Accounting forContingencies*, regardless of legal form. This is consistent with ouraccounting treatment with respect to the liquidated damages provision of theregistration rights agreement.  See Note 2— *Impairment of Assets and Special Items* —Liquidated damages provision in registration rights agreement.

InFebruary 2007, SFAS No. 159, *The Fair Value Opinion ofFinancial Assets and Financial Liabilities,*was issued.  SFAS No. 159 provided for companies with anoption to report financial assets and liabilities at fair value and establishedpresentation and disclosure requirements designed to facilitating comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities.  SFASNo. 159 will be effective for us beginning January 1, 2008 and we are currentlyevaluating the potential effect.

***Note 2 -  Impairment of assets and special items***

*Impairments of goodwill, otherintangible assets, property and equipment*

We performedimpairment testing of our property and equipment in accordance with SFAS No. 144*Accounting for the Impairment or Disposal ofLong-lived Assets* and of our intangible assets in accordance with SFAS No. 142 *Goodwill and Intangible Assets*.

We concluded in2006 that the *STAR Trader*® brandin our financial markets education segment and the *Cash FlowGenerator*® brand in our real estate education segment wereimpaired. During 2006, both brands generated negative cash flow and suffereddeteriorating positions with limited prospects of turning around. We haveceased or suspended marketing of these brands and concluded both were permanentlyimpaired. As further evidence of our determination that the fair value of theintangible assets is zero, we analyzed forecasted future undiscounted cashflows and determined the assets were without value. This resulted in a $2.8million goodwill and intangible asset impairment charge - $2.3 million for the *STAR Trader*® brandand $0.5 million for the *Cash Flow Generator*® brand— along with an impairment charge for related inventory.

During the fourthquarter of 2006, the Board approved our sale of our land and office building inthe United Kingdom. These assets are included in our International segment. Welocated a buyer for the property and agreed to terms in December 2006.Accordingly, we recorded an impairment loss of $0.4 million in connection withour United Kingdom office building to reduce the property to its estimated netrealizable value as of December 31, 2006. We expect to sell the land andbuilding in the United Kingdom in 2007.

During the fourthquarter of 2006, the Board approved the sale of our airplane. This asset isincluded in our corporate segment. Using several bids from prospective buyers,we recorded an impairment loss of $0.3 million to reduce the book value of theairplane to its estimated net realizable value as of December 31, 2006. Sale ofthis airplane is expected to occur in the second quarter of 2007.

The following table shows the the impairmentexpense by asset type for 2006 (in thousands):

| Impairment expense related  to goodwill               |   | $      | 2,000  |   |
|-------------------------------------------------------|--------|--------|--------|--------|
| Impairment  expense related to intangible assets      |   | 835    |   |
| Impairment  expense related to property and equipment |   | 756    |   |
| Impairment  expense related to inventory              |   | 77     |   |
|                                                  |   |   |   |
| Total                                                 |   | $      | 3,668  |   |

 

There were no impairments recorded for 2005 and 2004.

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*Special items*

Special items incurred inthe year ended December 31, 2006 amounted to $2.3 million.  

Special items included thefollowing:

·                  $0.8 million expense associated withthe liquidated damages provision in the registration rights agreement

·                  $0.9 million writeoff in connectionwith the withdrawal of the EduTrades, Inc. registration statement

·                  $0.7 million in accrued professionalfees associated with the parallel proceedings by the United States Securitiesand Exchange Commission and the Department of Justice.

*Liquidated damages provision inregistration rights agreement*

OnDecember 13, 2005, 3,000,000 shares of common stock and 1,950,000 sharesof common stock underlying common stock purchase warrants were sold in aprivate placement. We sold 1,750,000 shares of common stock and issued commonstock purchase warrants for 875,000 common shares. Our placement agent received300,000 unit warrants exercisable for the equivalent of 450,000 shares ofcommon stock. Concurrently, our Chairman and Chief Executive Officer sold1,250,000 shares of common stock and issued common stock purchase warrants for625,000 common shares.

In connection with the Offering (see Note 3 — *Offering*), we entered into a registration rights agreementwhich provided that the we use our “best efforts” to file a RegistrationStatement for the resale of these shares to be declared effective by April 11,2006 and required us to maintain the effectiveness of the RegistrationStatement for a one year period subsequent to the effective date. Theregistration rights agreement required the payment of liquidated damages to theinvestors of approximately $4,500 per day (which represents about 1% per monthof the proceeds) until the Registration Statement is declared effective or effectivenessis maintained. The Registration Statement was declared effective on November13, 2006 and has remained effective since then. Liquidated damages through November 13, 2006 were $1.0 million.  We had previously accrued $0.2 million in theyear ended December 31, 2005, resulting in a $0.8 million expense for the yearended December 31, 2006.

***Note 3 - Offering***

In December 2005, 3,000,000 shares of common stock and common stockpurchase warrants representing 1,950,000 shares of common stock were sold. Wesold 1,750,000 shares of common stock and issued warrants for875,000 shares. Our Chairman and Chief Executive Officer sold 1,250,000shares and warrants for 625,000 shares. In both cases, each warrant allowsone share to be purchased for $4.50. We received $7.9 million inproceeds and netted approximately $6.8 million after cash expenses, butbefore 450,000 warrants issued to the placement agent and $1.0 million inliquidated damages we paid pursuant to the registration rights agreement.

The common stock and warrantswere issued as a $13.5 million private placement in which 3,000,000 unitsof our securities were issued to a group of 17 nonaffiliated accreditedinvestors. In addition, a unit warrant was issued to our placement agentexercisable to purchase 300,000 shares of common stock at $4.50 per share150,000 shares of common stock at $6.00 per share. Including the units to ourplacement agent, we are registering a total 3,000,000 shares of commonstock, plus 1,950,000 units underlying common stock purchase warrants. Wecollected $5.6 million of proceeds on behalf of our Chairman and ChiefExecutive Officer, who was a selling shareholder in the offering. AtDecember 31, 2005, we recorded a liability to our Chairman and ChiefExecutive Officer of $5.1 million, net of $0.5 million in offeringcosts, on the accompanying Consolidated Balance Sheets, which was paid in thefirst quarter of 2006.

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***Note 4 - Mergersand acquisitions***

In March 2006, we issued long term debt of$3.6 million to acquire the remaining 50% of its consolidated subsidiarySCB Building, LLC. The difference of $0.3 million between the long termdebt and the net book value of minority interest of $3.9 million has beenrecorded as additional paid-in capital.

In February 2005, we issued 85,470 shares of common stockvalued at $0.2 million plus cash of $0.3 million for assets recordedas goodwill for the final payment of the *STARTrader**® *brand purchase agreement.  In 2006, $2.0 million in goodwill in connectionwith the *STAR Trader*® brand acquisition was deemed impaired.

In September 2004, we entered into a six-month agreementwith Discount Buyers Association of America (“DBAA”) to assume operationalcontrol over its business and postsecondary education products. Simultaneously,we were granted an option to purchase all of the assets of DBAA. We paid$0.5 million to DBAA for control of the business operations. We have allowedthe option to expire and charged $0.5 million to expense for the yearended December 31, 2004.

In June 2004, we issued warrants to purchase 200,000shares of our no par value common stock in exchange for professional servicesprovided to us. The warrants expire in June 2008, and are exercisable at thefollowing prices: 100,000 shares at $5.25 per share; and 100,000 shares at$8.00 per share

***Note 5 - Relatedparty transactions***

We lease approximately 2,200 square feet of training facilities at 1611East Cape Coral Parkway (“1611 Cape Coral Parkway”), approximately 9,000 squarefeet of space at 1625 East Cape Coral Parkway (“1625 Cape Coral Parkway”) whichis used for offices and shipping, and 4,802 square feet at 1630 Southeast 47thTerrace which we use as a training facility, all in Cape Coral, Florida fromCape Promenade Trust which is for the benefit of our Chairman and ChiefExecutive Officer and Ingrid Whitney. The leases are for three years and beganon March 1, 2003, March 1, 2003 and June 1, 2004 respectively. The monthlyrentals are $1,943, $13,125 and $7,238 respectively. We are on a month-to-monthbasis with respect to the 1611 Cape Coral Parkway lease that expired in March2006. We extended the lease with respect to 1625 East Cape Coral Parkwaythrough June 30, 2009.

From 2002 to the present, our Chairman and ChiefExecutive Officer benefited from our students’ purchase of residential lots andthe construction of homes on lots they acquire in the Cape Coral, Florida areabecause the students purchased these lots from Gulfstream Development Corp.(“Gulfstream”), from other lot owners and, in the past, from our Chairman andChief Executive Officer. The students were presented this opportunity at one ofour advanced real estate courses by realtors representing Gulfstream. OurChairman and Chief Executive Officer owns 25% of and receives compensation fromGulfstream. We had no involvement in the students’ decision to purchase lots orin their dealings with the realtor or Gulfstream. Gulfstream often constructshomes on lots owned by our students. Through an informal arrangement withGulfstream, we receive a referral fee of $1,000 for every Gulfstream home builtfor our students, amounting to $0.3 million and $0.3 million for the yearsended December 31, 2006 and 2005, respectively.

Wehave investments in three entities in which our Chairman and Chief ExecutiveOfficer and our Co-President and Chief Operating Officer have minorityownership interests. The entities are Rancho Monterey, S.A., Monterey del Este,S.A. and Monterey del Mar, S.A. Our Chairman Chief Executive Officer indirectlyowns approximately 11% of Rancho Monterey, S.A. and 8% of Monterey del Este,S.A. Our Co-President and Chief Operating Officer indirectly owns approximately1.4% of Rancho Monterey, S.A.

OurChairman and Chief Executive Officer, three of our employees and two previousemployees have an investment in shares of Monterey Green Acres, S.A. which ownsapproximately 1,500 acres in Monterey, Costa Rica. We have no interest in thisinvestment and will not share in any proceeds from the intended sale of theentity’s shares and related property.  Aletter of intent to purchase Monterey Green Acres, S.A. has been signed by aninterested buyer who is an independent contractor for us.

Our Chairmanand Chief Executive Officer, Ingrid Whitney, certain employees, independentcontractors, vendors  and former students own partial interests inCA One Investors, LLC, a limited liability company which owns through MontereySun and Win, S.A., a Costa Rican company, 48 acres of land in Esterrillos delEste, Costa Rica.  We have no interest inthis investment and will not share in any proceeds from the sale of its assets.  Our Co-President and Chief Operating Officeris a manager of CA One Investors, LLC.

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Rancho Holdings, S.A. holds a 20% interest in RanchoMonterey, S.A. and an 8% interest in Monterey del Este, S.A.  Our Chairman and Chief Executive Officer isan indirect owner of Rancho Holdings, S.A.  A principal of Gulfstream Development Corp. isalso an indirect owner of Rancho Holdings, S.A.

OurChairman and Chief Executive Officer and Ingrid Whitney, our Co-President andChief Operating Officer and his wife, former employees, associates andindependent contractors own Costa Rica Consulting, LLC (CRC). Our GeneralCounsel is a trustee of CRC.  CRC owns a10% share of Rancho Monterey, S.A.

OurChairman and Chief Executive Officer, our Co-President and Chief OperationsOfficer and an employee of ours are officers of and investors in AlicoInvestors I, LLC, a limited liability company that has sold or is sellingmembership interests to our students and others.  Our Vice President, Marketing, one of our externalattorneys, some of our independent contractors and students are also investors.A member of our Board of Directors was initially part of this limited liabilitycompany but withdrew.  Alico Investors I,LLC subsequently refunded his investment and he is no longer associated withthis project. We do not receive any remuneration from this limited liabilitycompany.

***Note 6 - Propertyand equipment***

Property and equipment consist of the following (inthousands):

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Land                            |       | $                     | 1,678      |   | $ | 1,728 |   |
| Buildings                       |       | 4,673                 |       | 4,778 |   |
| Airplanes                       |       | 7,867                 |       | 2,114 |   |
| Software                        |       | 1,606                 |       | 1,114 |   |
| Equipment                       |       | 1,424                 |       | 1,253 |   |
| Furniture and  fixtures         |       | 792                   |       | 772 |   |
| Leasehold  improvements         |       | 2,050                 |       | 1,474 |   |
|                            |       | 20,090                |       | 13,233 |   |
| Less:  accumulated depreciation |       | (3,607                | )          | (3,151 | ) |
|                            |       | 16,483                |       | — |   |
| Less: Assets  held for sale     |       | (4,726                | )          | — |   |
|                            |       | $                     | 11,757     |   | $ | 10,082 |   |

 
| ** **           | ** ** | **Years ended December 31,** | ** ** |
|----------------------|------------|---------------------------------------------|------------|
| ** **           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **           | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Depreciation expense |       | $                                           | 984        |   | $ | 1,034 |   | $ | 964 |   |
|                      |            |                                             |            |  |  |  |  |  |  |  |

 

Assets held forsale at December 31, 2006 consisted of the following (in thousands):

 

| Land and building of  European headquarters |   | $     | 3,347  |   |
|---------------------------------------------|--------|-------|--------|--------|
| Corporate airplane                          |   | 1,379 |   |
|                                        |   | $     | 4,726  |   |

 

See Note 2 — *Impairment of assets andspecial items* regarding the impairment charge of $0.8 million in2006 related to property and equipment.

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***Note 7 -Intangible assets***

Intangible assets consist of the following (inthousands):
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Customer lists                  |       | $                     | 5,593      |   | $ | 5,943 |   |
| Trademarks                      |       | 300                   |       | 1,050 |   |
| Other  intangibles              |       | 250                   |       | 795 |   |
|                            |       | 6,143                 |       | 7,788 |   |
| Less:  accumulated amortization |       | (2,014                | )          | (2,034 | ) |
|                            |       | $                     | 4,129      |   | $ | 5,754 |   |

 
| ** **           | ** ** | **Years ended December 31,** | ** ** |
|----------------------|------------|----------------------------------------|------------|
| ** **           | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **           | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amortization expense |       | $                                      | 790        |   | $ | 822 |   | $ | 646 |   |
|                      |            |                                        |            |  |  |  |  |  |  |  |

 

Goodwill of $2.0 million was deemed impaired at December31, 2006 (see Note 2 - *Impairment of assets andspecial items)*.

Future amortization expense of intangibles is as follows(in thousands):
| **Years ending December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                        |       | $          | 555        |       |
| 2008                                        |       | 555        |       |
| 2009                                        |       | 555        |       |
| 2010                                        |       | 555        |       |
| 2011                                        |       | 555        |       |
| Thereafter                                  |       | 1,354      |       |
|                                        |       | $          | 4,129      |       |

 

***Note 8 - Long term debt***

Long term debt consists of (in thousands):
| ** **                                                                                                                                                                                                                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                                                                                                                       | ** ** | ** **            | ** ** | ** ** | ** ** |
| Notes payable to  individuals for the purchase of equity interest in SCB Building LLC.  Principal and interest payment beginning in April 2006 at an interest rate of  6.25%. The note matures in April 2016.                                                               |       | $                     | 2,976      |   | — |   |
| Mortgage payable  to a bank. Principal plus interest at 5.7% due monthly until August 2014 and  is collateralized by real estate located in the United Kingdom.                                                                                                                  |       | 1,976                 |       | 1,962 |   |
| Note payable to  a finance company. Monthly principal and interest through December 2018.  Interest at the LIBOR rate plus 3.4% and is collateralized by an airplane.  The note is personally guaranteed (up to $0.2 million) by our Chairman  and Chief Executive Officer. |       | 983                   |       | 1,035 |   |
| Note payable to  an individual for purchase of equity interest in Rancho Monterey, S.A  Principal and interest payments beginning in July 2003 at an interest rate of  5%. The note matures in June 2008 and is collateralized by our stock.                                     |       | 213                   |       | 345 |   |
| Other  installment notes payable                                                                                                                                                                                                                                                 |       | 6                     |       | 32 |   |
|                                                                                                                                                                                                                                                                             |       | 6,154                 |       | 3,374 |   |
| Less: current  portion                                                                                                                                                                                                                                                           |       | (3,139                | )          | (462 | ) |
|                                                                                                                                                                                                                                                                             |       | $                     | 3,015      |   | $ | 2,912 |   |
|                                                                                                                                                                                                                                                                                  |            |                       |            |  |  |  |  |

 

The followingreflects our commitments for debt and other commitments as of December 31, 2006(in thousands):

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| ** ** | ** ** | **Notes payable** | ** ** | **Real estate   mortgages** | ** ** | **Other  installment  notes** | ** ** | **Total Debt** | ** ** | **Operating lease  commitments** | ** ** | **Total  Commitments** | ** ** |
|------------|------------|------------------------|------------|---------------------------------------|------------|-------------------------------|------------|---------------------|------------|---------------------------------------|------------|------------------------|------------|
| 2007       |       | $                      | 174        |                                  | $          | 2,959                         |       | $                   | 6          |                                  | $          | 3,139                  |       | $ | 1,271 |   | $ | 4,410 |   |
| 2008       |       | 108                    |       | —                                |       | —                        |       | 108                 |       | 820                                   |       | 928                    |       |
| 2009       |       | 39                     |       | —                                |       | —                        |       | 39                  |       | 752                                   |       | 791                    |       |
| 2010       |       | 41                     |       | —                                |       | —                        |       | 41                  |       | 571                                   |       | 612                    |       |
| 2011       |       | 44                     |       | —                                |       | —                        |       | 44                  |       | 545                                   |       | 589                    |       |
| Thereafter |       | 2,783                  |       | —                                |       | —                        |       | 2,783               |       | 506                                   |       | 3,289                  |       |
|       |       |                   |       |                                  |       |                          |       |                |       |                                  |       |                   |       |
|       |       | $                      | 3,189      |                                  | $          | 2,959                         |       | $                   | 6          |                                  | $          | 6,154                  |       | $ | 4,465 |   | $ | 10,619 |   |

 

***Note 9 - Stock optionsand warrants***

*Stock-based compensation plans*

Our 1998 Stock Option Plan provides for the granting ofstock options to key employees. Vesting under the 1998 Plan is asfollows: 25% of the options vest on the grant date, an additional 25% vests onthe completion of the first year of service, another 25% vests on thecompletion of the second year of service, and 100% of the shares vest at theend of the third year of service. All options expire ten years from the date ofgrant.

Effective January 1, 2006, we adopted the Financial Accounting StandardBoard’s Statement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment* (“SFAS No. 123R”),which requires us to measure the cost of employee services received in exchangefor all equity awards granted including stock options based on the fair marketvalue of the award as of the grant date. SFAS No. 123R supersedes Statement ofFinancial Accounting Standards No. 123, *Accountingfor Stock-Based Compensation* (SFAS No. “123”) and AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB No. 25”). We adopted SFAS No.123R using the modified prospective application method of adoption whichrequires us to record compensation cost related to unvested stock awards as ofDecember 31, 2005, by recognizing the unamortized grant date fair value ofthese awards over the remaining service periods of those awards with no changein historical reported earnings. Awards granted after December 31, 2005 arevalued at fair value in accordance with the provisions of SFAS No. 123R andrecognized on the same basis as the vesting period. We estimated forfeiturerates for the 2006 based on historical experience.

Prior to 2006, we accounted for stock-based compensation in accordancewith APB No. 25 using the intrinsic value method, which did not require thatcompensation cost be recognized for our stock options provided the optionexercise price was established at 100% of the common stock fair market value onthe date of grant. Under APB No. 25, we were required to record expense overthe vesting period for the value of options granted. Prior to 2006, the Companyprovided pro forma disclosure amounts in accordance with Statement of FinancialAccounting Standards No. 148, *Accounting forStock-Based Compensation - Transition and Disclosure*(“SFAS No. 148”), as if the fairvalue method defined by SFAS No. 123 had been applied to its stock-basedcompensation. Our net earnings and net earnings per share for the twelve monthsended December 31, 2005 would have been reduced if compensation cost related tostock options had been recorded in the Consolidated Financial Statements basedon fair value at the grant dates.

The estimated fair value of the option grants was calculated using aBlack Scholes Merton option pricing model (Black Scholes model). The followingsummarizes the assumptions used in the Black Scholes model:
| Risk free interest rate           |   | 4.36% - 4.6 | 4%     |
|--------------------------------------------------|--------|-------------|--------|
| Weighted average volatility                      |   | 71.5        | %      |
| Dividend yield                                   |   | 0.0         | %      |
| Expected term                                    |   | 5.75 Years  |   |
| Weighted average fair market value at grant date |   | $5.48       |   |

 

The Black Scholesmodel incorporates assumptions to value stock based awards. The risk free rateof interest for periods within the contractual life of the option is based on azero-coupon U.S. government instrument over the contractual term of the equityinstrument. Expected volatility is based on the historical volatility of ourstock.

63

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Our estimation ofexpected term is based on the guidelines in SAB No.107 which allows companieswhose stock options meet specific criteria to be considered “plain-vanilla”options, thereby allowing the simplified method of estimating expected term tobe applied.  Our stock option awards meetthe criteria to use the simplified method of calculating expected term. For ourcompany, this calculation was performed using the average of the mid-points foreach vesting tranche. This methodology is not materially different from ourhistorical data on exercise timing.

As a result of adopting SFAS No. 123R, the impact to the ConsolidatedFinancial Statements on net earnings for the twelve months ended December 31,2006 is $0.8 million or $0.07 per basic share and $0.07 per diluted share,lower than if we had continued to account for stock based compensation underAPB No. 25. Pro forma net earnings (loss), as if the fair value based methodhad been applied to all awards prior to the adoption of SFAS No. 123R, are as follows(in thousands, except for per share amounts):
| ** **                                                                                    | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                                                                    | ** ** | ** **                                 | ** ** |   |   |
| Net earnings (loss)  — as reported                                                       |       | $                                          | 3,850      |   | $ | (31,963 | ) |
| Add: Stock based  compensation programs recorded as expense, net   of related tax effect |       | —                                     |       | — |   |
| Deduct: Total  stock based employee compensation expense, net of related   tax effect         |       | (1,535                                     | )          | 1,374 |   |
| Pro forma net  earnings (loss)                                                                |       | $                                          | 2,315      |   | $ | (33,337 | ) |
| Earnings per  share:                                                                          |       |                                       |       |   |   |
|                                                                                          |       |                                       |       |   |   |
| Diluted — as reported                                                                    |       | $                                          | 0.41       |   | N.A. |   |
| Diluted — pro forma                                                                      |       | $                                          | 0.25       |   | N.A. |   |
|                                                                                          |       |                                       |       |   |   |
| Basic — as reported                                                                      |       | $                                          | 0.43       |   | $ | (3.72 | ) |
| Basic — pro  forma                                                                       |       | $                                          | 0.26       |   | $ | (3.88 | ) |

 

|                                                   | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|---------------------------------------------------|------------|-----------|------------|------------|------------|
| Risk free  interest rate                          |       | 4.39      | %          | 4.24       | %          |
| Weighted average  volatility                      |       | 77.9      | %          | 57.0       | %          |
| Dividend yield                                    |       | 0.0       |       | 0.0        |       |
| Expected term                                     |       | 7.0 Years |       | 10.0 Years |       |
| Weighted average fair  market value at grant date |       | $         | 3.56       |       | $          | 2.72 |   |
|                                                   |            |           |            |            |            |  |  |

 

The following table summarizes the components of our stock-basedcompensation programs recorded as expense (in thousands):

 

|                                                     | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock-based  compensation expense:                  |       |                                        |       |   |   |   |   |
| Pretax  compensation expense                        |       | $                                           | 794        |   | $ | — |   | $ | — |   |
| Income tax  benefit                                 |       | —                                      |       | — |   | — |   |
| Stock option expense, net of the related tax effect |       | $                                           | 794        |   | $ | — |   | $ | — |   |

 

As ofDecember 31, 2006, $1.0 million of total unrecognized compensation cost relatedto stock options is expected to be recognized over a weighted average period ofapproximately three years.

The following table presents the activity for optionsoutstanding (in thousands, except per share data):
| ** **                                | ** ** | **Number  of options** | ** ** | **Weighted  average  exercise  price** | ** ** | **Weighted  average  remaining  contractual  life (years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding as  of December 31, 2005 |       | 1,985                       |       | $                                      | 3.56       |                                                             |       |                            |       |   |
| Granted                                   |       | 35                          |       | 8.33                                   |       |                                                             |       |                            |       |
| Forfeited                                 |       | (71                         | )          | (3.28                                  | )          |                                                             |       |                            |       |
| Exercised                                 |       | (696                        | )          | (2.16                                  | )          |                                                             |       |                            |       |
| Outstanding as  of December 31, 2006 |       | 1,253                       |       | $                                      | 4.49       |                                                             | 7.1        |                            | $          | 1,317 |   |
| Exercisable as of  December 31, 2006 |       | 860                         |       | $                                      | 3.35       |                                                             | 6.5        |                            | $          | 1,117 |   |

 

During 2006, stock options for 25,000 shares were grantedto a named executive officer, and stock options for 10,000 shares were grantedto members of the Board of Directors.

64

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Theaggregate intrinsic value of options exercised during the year ended December31, 2006 was $4.4 million. Exercise of options during the years of 2006 and2005 resulted in cash receipts of $1.5 million and nil, respectively.

The following table presents the composition of optionsoutstanding and exercisable (options in thousands):
| **Range of exercise prices** | ** ** | **Options  outstanding** | ** ** | **Price(a)** | ** ** | **Options  exercisable** | ** ** | **Price(a)** | ** ** | **Life(a)** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|--------------|------------|--------------------------|------------|--------------|------------|-------------|------------|
| $1.81                                       |       | 28                       |       | $            | 1.81       |                     | 28         |         | $          | 1.81        |       | 5.3 |   |
| 1.88                                        |       | 42                       |       | 1.88         |       | 42                       |       | 1.88         |       | 2.7         |       |
| 2.00                                        |       | 172                      |       | 2.00         |       | 172                      |       | 2.00         |       | 3.6         |       |
| 2.55                                        |       | 23                       |       | 2.55         |       | 8                        |       | 2.55         |       | 8.5         |       |
| 3.70                                        |       | 93                       |       | 3.70         |       | 93                       |       | 3.70         |       | 6.2         |       |
| 3.90                                        |       | 25                       |       | 3.90         |       | 23                       |       | 3.90         |       | 7.0         |       |
| 4.10                                        |       | 10                       |       | 4.10         |       | 10                       |       | 4.10         |       | 6.3         |       |
| 4.50                                        |       | 266                      |       | 4.50         |       | 197                      |       | 4.50         |       | 7.1         |       |
| 6.75                                        |       | 559                      |       | 6.75         |       | 279                      |       | 6.75         |       | 8.8         |       |
| 7.60                                        |       | 25                       |       | 7.60         |       | 6                        |       | 7.60         |       | 9.1         |       |
| 9.50                                        |       | 5                        |       | 9.50         |       | 1                        |       | 9.50         |       | 9.1         |       |
| 10.80                                       |       | 5                        |       | 10.80        |       | 1                        |       | 10.80        |       | 9.0         |       |
| $1.81 to $10.80                             |       | 1,253                    |       | $            | 3.56       |                     | 860        |         | $          | 4.47        |       | 7.1 |   |

----

(a)                                  Price and Life reflect the weighted averageexercise price and weighted average remaining contractual life, respectively.

*Warrants*

The following table presents the composition of warrantsoutstanding at December 31, 2006 (in thousands, except per remaining lifedata):

| Exercise prices | ** ** | **Number of  Warrants** | ** ** | **Remaining  life in years** | ** ** |
|----------------------|------------|-------------------------|------------|----------------------------------------|------------|
| $4.60                |       | 41                      |       | 3.8                                    |       |
| 5.25                 |       | 100                     |       | 2.4                                    |       |
| 6.00                 |       | 649                     |       | 3.0                                    |       |
| 8.00                 |       | 100                     |       | 3.0                                    |       |
| $4.60-$8.00          |       | 890                     |       | 2.9                                    |       |

 

The following table illustratesthe activity for warrants outstanding (in thousands except exercise pricedata);

|                                           | ** ** | **Number of  warrants** | ** ** | **Weighted  average  exercise price** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| Outstanding as  of December 31, 2003 |       | —                       |       | —                                     |       |
| Granted                                   |       | 200                          |       | $                                          | 6.63       |   |
| Forfeited                                 |       | —                       |       | —                                     |       |
| Exercised                                 |       | —                       |       | —                                     |       |
| Outstanding as  of December 31, 2004 |       | 200                          |       | $                                          | 6.63       |   |
| Granted                                   |       | 1,137                        |       | 6.00                                       |       |
| Forfeited                                 |       | —                       |       | —                                     |       |
| Exercised                                 |       | —                       |       | —                                     |       |
| Outstanding as  of December 31, 2005 |       | 1,337                        |       | $                                          | 6.12       |   |
| Granted                                   |       | 41                           |       | 4.60                                       |       |
| Forfeited                                 |       | —                       |       | —                                     |       |
| Exercised                                 |       | (488                         | )          | 6.00                                       |       |
| Outstanding as of  December 31, 2006 |       | 890                          |       | $                                          | 6.07       |   |

 

In 2006, we issued 41,667 warrants at an exercise priceof $4.60.  In 2005, we sold1,750,000 shares of common stock and issued warrants for 875,000 shares.Our Chairman and Chief Executive Officer sold 1,250,000 shares of commonstock and 

65

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warrants for 625,000 shares. In addition, in 2005, we issued a unitwarrant to our placement agent exercisable to purchase 300,000 units at $4.50per share (a unit is comprised of one share of stock plus a warrant for one-halfshare). See Note 3 - *Offering*.

Exerciseof warrants during the year ended December 31, 2006 resulted in net cashreceipts of $2.7 million.

***Note 10 -Employee benefit plan***

We have a 401(k) employee savings plan for eligibleemployees, which provide for a matching contribution from us, determined eachyear at our discretion. Our contributions, charged to earnings for the yearsended December 31, 2006, 2005, and 2004, were $0.2 million,$0.2 million, and $0.1 million, respectively.

***Note 11 - Incometaxes***

We recognizedeferred tax assets and liabilities, at enacted income tax rates, based on thetemporary differences between the financial reporting basis and the tax basisof our assets and liabilities.  Weinclude any effects of changes in income tax rates or tax laws in the provisionfor income taxes in the period of enactment. When it is more likely than not that a portion or all of a deferred taxasset will not be realized in the future, we provide a corresponding valuationallowance against the deferred tax asset.

In 2005, wedetermined that it was more likely than not that we would realize our deferredtax asset and we reversed our valuation allowance of $11.0 million; $9.9million in the third quarter of 2005 and $1.1 million in the fourth quarter of2005.

Since that time,the following important developments have changed our judgment regarding thelikelihood that the deferred tax asset will be realized:

·                  Weare incurring significant expenses associated with various Untied StatesSecurities and Exchange Commission and Department of Justice, class actionlawsuits and state Attorneys General investigations. There is no clearvisibility to the conclusion of these investigations or their outcome, and thepotential resulting additional expense and uncertainty.

·                  Theimpairment of two brands, *STAR Trader**®* and *Cash Flow Generator*® has impacted our revenue and cash flows, reducingvisibility into the future.

As of December 31,2006, we are estimating that our taxable income will not exceed the amountnecessary to utilize our deferred tax assets. Therefore, we are increasing our valuation allowance from $12.3 millionto $13.6 million.  We have approximately$28.7 million of net operating loss carryforward which will expire in 2026.  We also have an Alternative Minimum Tax Creditof $0.2 million that will carryforward.

We estimate that we will be liable for approximately$0.4 million in state and non-U.S. taxes for the year ended December 31,2006.

Our income tax provision (benefit) is as follows (inthousands):
| ** **                            | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                            | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings (loss) before  taxes:        |       |                                        |       |   |   |   |   |
| U.S.                                  |       | $                                           | 5,219      |   | $ | 35 |   | $ | (23,922 | ) |
| Non-U.S.                              |       | 4,214                                       |       | (1,021 | ) | (8,064 | ) |
| Total earnings  before income taxes   |       | $                                           | 9,433      |   | $ | (986 | ) | $ | (31,986 | ) |
| Provision for  taxes:                 |       |                                        |       |   |   |   |   |
| Current:                              |       |                                        |       |   |   |   |   |
| Federal                               |       | $                                           | (39        | ) | $ | 160 |   | — |   |
| State                                 |       | 113                                         |       | 101 |   | — |   |
| Non-U.S.                              |       | 317                                         |       | 228 |   | — |   |
|                                  |       | 391                                         |       | 489 |   | — |   |
| Deferred:                             |       |                                        |       |   |   |   |   |
| Federal                               |       | 7,262                                       |       | (1,046 | ) | (8,526 | ) |
| State                                 |       | 590                                         |       | (122 | ) | (999 | ) |
| Non-U.S.                              |       | (1,846                                      | )          | (406 | ) | (1,388 | ) |
|                                  |       | 6,006                                       |       | (1,574 | ) | (10,913 | ) |
| Change in  valuation allowance        |       | 1,281                                       |       | (5,713 | ) | 10,913 |   |
| Total income tax  provision (benefit) |       | $                                           | 7,678      |   | $ | (6,798 | ) | $ | — |   |
| Effective income tax  rate            |       | 81.4                                        | %          | (689.2 | )% | — | % |

 

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The difference between the tax provision at the statutory federal incometax rate and the tax provision attributable to income before income taxes wasas follows:

|                                           | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(in percentages)**                   | ** ** |
| ** **                                | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statutory  federal income tax rate        |       | 35.0                                        | %          | 35.0 | % | 35.0 | % |
| Valuation  allowance                      |       | 13.6                                        |       | (728.6 | ) | (42.5 | ) |
| Goodwill  impairment                      |       | 10.0                                        |       | — |   | — |   |
| Incentive stock options                   |       | 2.7                                         |       | — |   | — |   |
| State income net  of federal benefit      |       | 7.5                                         |       | 4.0 |   | 3.1 |   |
| Non-U.S.  income taxed at different rates |       | 7.4                                         |       | 0.4 |   | 4.4 |   |
| Other                                     |       | 5.2                                         |       | — |   | — |   |
| Effective income tax  rate                |       | 81.4                                        | %          | (689.2 | )% | — | % |

 

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amount of assets and liabilities forfinancial reporting purposes and the amounts for income tax purposes.Significant components of our deferred tax assets and liabilities were asfollows:

|                                             | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deferred  tax assets:**                   |       |                  |       |   |   |   |   |
| Net operating  losses, federal              |       | $                     | 10,054     |   | $ | 9,595 |   | $ | 12,120 |   |
| Net operating  losses, state                |       | 862                   |       | 790 |   | 1,104 |   |
| Net operating losses,  non-U.S.             |       | 1,877                 |       | 31 |   | 764 |   |
| Depreciation                                |       | —                |       | 44 |   | — |   |
| Allowance for  bad debt                     |       | 218                   |       | — |   | — |   |
| Intangible  amortization                    |       | 857                   |       | 421 |   | 537 |   |
| Deferred revenue  asset                     |       | 5,276                 |       | 14,241 |   | 8,220 |   |
| Tax credits —  Alternative Minimum Tax |       | 161                   |       | — |   | — |   |
| Other                                       |       | 355                   |       | — |   | — |   |
| Valuation  allowance                        |       | (13,603               | )          | (12,322 | ) | (18,035 | ) |
| **Total  deferred tax assets**              |       | $                     | 6,057      |   | $ | 12,800 |   | $ | 4,710 |   |
| **Deferred  tax liabilities:**              |       |                  |       |   |   |   |   |
| Deferred course  expenses                   |       | $                     | 5,046      |   | $ | 5,513 |   | $ | 4,236 |   |
| Gain on sale                                |       | 517                   |       | — |   | — |   |
| Depreciation                                |       | 494                   |       | — |   | 474 |   |
| **Total  deferred tax liabilities**         |       | $                     | 6,057      |   | $ | 5,513 |   | $ | 4,710 |   |
| Reported as:                                |       |                  |       |   |   |   |   |
| Current deferred tax assets                 |       | $                     | 5,848      |   | $ | — |   | $ | — |   |
| Noncurrent deferred tax assets              |       | 209                   |       | 12,800 |   | 4,710 |   |
| Current deferred tax liabilities            |       | (6,057                | )          | (5,513 | ) | (4,710 | ) |
| **Net deferred taxes**                      |       | $                     | —     |   | $ | 7,287 |   | $ | — |   |

 

***Note 12 -Earnings (loss) per share***

Basic earnings per share are calculated using theweighted average number of common shares outstanding. Diluted earnings pershare reflect the potential dilution that could occur from common sharesissuable through stock options and warrants, including 0.5 million, niland nil options that were dilutive for the years ended December 31, 2006,2005 and 2004.

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respectively. There are a total of 1,253,500 stock options, 890,719warrants to purchase common stock outstanding as of December 31, 2006 anda combined 450,000 unit placement warrants issued to our placement agent inconnection with our December 2005 offering. The following table sets forth thecomputation for basic and diluted earnings per share (in thousands, except forper share data):

All financial information, except per share amounts, isexpressed in thousands:
| ** **                                                                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator for  diluted earnings (loss) per   common share                        |       | $                                           | 1,755      |   | $ | 3,850 |   | $ | (31,963 | ) |
| Denominator for  basic earnings per share -   weighted average shares            |       | 11,162                                      |       | 8,859 |   | 8,589 |   |
| Effect of  dilutive securities - options and   warrants                          |       | 458                                         |       | 501 |   | — |   |
| Denominator for  diluted earnings per share -   adjusted weighted average shares |       | 11,620                                      |       | 9,360 |   | 8,589 |   |
| Diluted earnings (loss)  per common share                                        |       | $                                           | 0.15       |   | $ | 0.41 |   | $ | (3.72 | ) |

 

Where the inclusion of potentialcommon shares is antidilutive, such shares are excluded from the computation.

***Note 13 - Revenue***

The following table illustrates the impact of deferringrevenue by reconciling gross cash receipts to recorded revenue for the yearsended December 31, 2006, 2005 and 2004 (in thousands):
| ** **                                         | ** ** | **Years ended December 31,** | ** ** | **Change over** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|----------------------|------------|
| ** **                                         | ** ** | **2006**                                    | ** ** | **2005**             | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Cash  received from course and product sales:*    |       |                                        |       |                 |       |   |   |   |   |   |   |
| Basic training sessions                            |       | $                                           | 22,677     |                 | $          | 25,017 |   | $ | 34,202 |   | (9.4 | )% | (33.7 | )% |
| Advanced courses                                   |       | 117,071                                     |       | 112,008              |       | 91,855 |   | 4.5 |   | 27.5 |   |
| Outreach programs                                  |       | 59,669                                      |       | 40,415               |       | 23,723 |   | 47.6 |   | 151.5 |   |
| Products sales                                     |       | 14,089                                      |       | 12,317               |       | 8,828 |   | 14.4 |   | 59.6 |   |
| Other                                              |       | 9,555                                       |       | 6,638                |       | 5,479 |   | 43.9 |   | 74.4 |   |
| Total cash  received from course and product sales |       | 223,061                                     |       | 196,395              |       | 164,087 |   | 13.6 |   | 35.9 |   |
| Less: Net change  in deferred revenue              |       | 1,593                                       |       | (33,288              | )          | (27,828 | ) | N/M |   | N/M |   |
| Revenue for  financial reporting purposes          |       | $                                           | 224,654    |                 | $          | 163,107 |   | $ | 136,259 |   | 37.7 | % | 64.9 | % |

 

***Note 14 -Business segment information***

We operate primarily in three business segments: Realestate education, Financial markets education and International. Our revenuesare generated through the sale of real estate and financial market educationcourses, programs and products. Operating results for the segments reportedbelow are evaluated regularly by Executive Management.

Segment operating results evaluate earnings beforecorporate and unallocated shared expenses, gains on sale of assets, netinterest income, equity earnings from related parties, income taxes andminority interest.

The following segment results reflect the allocation ofcertain costs, including shared administrative costs, based on metrics designedto correlate with the consumption of such services. These allocations areagreed-upon amounts between the businesses and may differ from amounts thatwould be negotiated in arm’s length transactions (in thousands):

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| ** **                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------|------------|---------------------------------------------|------------|
| **Segment revenues**    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate  education       |       | $                                           | 94,543     |   | $ | 104,160 |   | $ | 87,237 |   |
| Financial  markets education |       | 112,493                                     |       | 47,183 |   | 32,644 |   |
| International                |       | 17,618                                      |       | 11,764 |   | 16,378 |   |
|                         |       | $                                           | 224,654    |   | $ | 163,107 |   | $ | 136,259 |   |

 
| ** **                         | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| **Segment gross profit** | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate  education             |       | $                                           | 11,138     |   | $ | 24,935 |   | $ | 7,449 |   |
| Financial  markets education       |       | 28,866                                      |       | (7,785 | ) | (10,204 | ) |
| International                      |       | 8,519                                       |       | 1,353 |   | (2,413 | ) |
|                               |       | $                                           | 48,523     |   | $ | 18,503 |   | $ | (5,168 | ) |

 
| ** **                                               | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|
| **Depreciation and amortization expense** | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate  education                                   |       | $                                           | 1,095      |   | $ | 1,053 |   | $ | 977 |   |
| Financial  markets education                             |       | 431                                         |       | 442 |   | 404 |   |
| International                                            |       | 90                                          |       | 105 |   | 88 |   |
| Corporate                                                |       | 158                                         |       | 255 |   | 141 |   |
|                                                     |       | $                                           | 1,774      |   | $ | 1,855 |   | $ | 1,610 |   |

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| **Segment identifiable assets** | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate  education                    |       | $                     | 17,252     |   | $ | 14,804 |   | $ | 17,742 |   |
| Financial  markets education              |       | 9,638                 |       | 11,674 |   | 7 |   |
| International                             |       | 4,647                 |       | 5,519 |   | 6,167 |   |
| Corporate                                 |       | 63,583                |       | 70,206 |   | 36,112 |   |
|                                      |       | $                     | 95,120     |   | $ | 102,203 |   | $ | 60,028 |   |

 

***Note 15 -Summarized quarterly results (unaudited)***

The following table presents unaudited operating resultsfor each quarter within the two most recent years. We believe that allnecessary adjustments consisting only of normal recurring adjustments have beenincluded in the amounts stated below to present fairly the following quarterlyresults when read in conjunction with the Consolidated Financial Statements.Results of operations for any particular quarter are not necessarily indicativeof results of operations for a full year (in thousands, except for per sharedata).
| ** **                               | ** **   | **First  quarter** | ** **   | **Second  quarter** | ** **   | **Third  quarter** | ** **   | **Fourth  quarter** | ** **   | **Full Year** | ** **   |
|------------------------------------------|--------------|--------------------|--------------|---------------------|--------------|--------------------|--------------|---------------------|--------------|--------------------|--------------|
| ** **                               | ** **   | ** **         | ** **   | ** **          | ** **   | ** **         | ** **   | ** **          | ** **   | ** **         | ** **   |
| **2006  (a) (b)**                        |         |               |         |                |         |               |         |                |         |               |         |
| Revenue                                  |         | $                  | 44,889       |                | $            | 47,525             |         | $                   | 52,340       |               | $            | 79,900 |   | $ | 224,654 |   |
| Gross profit                             |         | 4,232              |         | 3,842               |         | 7,134              |         | 33,315              |         | 48,523             |         |
| Earnings (loss)  from operations         |         | (4.371             | )            | (4,835              | )            | (1,842             | )            | 18,738              |         | 7,690              |         |
| Net earnings  (loss)                     |         | $                  | (3,848       | )                   | $            | (4,546             | )            | $                   | (1,260       | )                  | $            | 11,409 |   | $ | 1,755 |   |
| Per share  amounts:                      |         |               |         |                |         |               |         |                |         |               |         |
| Diluted earnings (loss) per share**(b)** |         | $                  | (0.36        | )                   | $            | (0.42              | )            | $                   | (0.11        | )                  | $            | 0.94 |   | $ | 0.15 |   |
| Basic earnings (loss) per share**(b)**   |         | $                  | (0.36        | )                   | $            | (0.42              | )            | $                   | (0.11        | )                  | $            | 0.97 |   | $ | 0.16 |   |
| ** **                               | *** *** | *** ***       | *** *** | *** ***        | *** *** | *** ***       | *** *** | *** ***        | *** *** | *** ***       | *** *** |

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| **2005 (a)  (c) (d) (e)**                |   |   |   |   |   |   |   |   |   |   |   |
|------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Revenue                                  |   | $      | 38,434 |   | $      | 40,898 |   | $      | 44,050 |   | $      | 39,725 |   | $ | 163,107 |   |
| Gross profit                             |   | 6,704  |   | 3,215  |   | 3,623  |   | 4,961  |   | 18,503 |   |
| Earnings (loss)  from operations         |   | 414    |   | (2,482 | )      | (2,403 | )      | (4,690 | )      | (9,161 | )      |
| Net earnings  (loss)                     |   | $      | 811    |   | $      | (2,120 | )      | $      | 5,252  |   | $      | (93 | ) | $ | 3,850 |   |
| Per share  amounts:                      |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share**(b)** |   | $      | 0.08   |   | $      | (0.24  | )      | $      | 0.56   |   | $      | (0.01 | ) | $ | 0.41 |   |
| Basic earnings  (loss) per share**(b)**  |   | $      | 0.09   |   | $      | (0.24  | )      | $      | 0.60   |   | $      | (0.01 | ) | $ | 0.43 |   |

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(a)                                  Earnings (loss) per share are computedindependently for each quarter and the full year based upon respective averageshares outstanding. Therefore, the sum of the quarterly net earnings per shareamounts may not equal the annual amounts reported.

(b)                                 The fourth quarter of 2006 reflected $21.8 millionin revenue associated with the initial applications of course breakage in our financialmarkets education segment and United Kingdom business, $3.7 million inimpairment charges and $2.3 million in special charges and $7.3 million in thereversal of the net deferred tax asset.

(c)                                  In the first and second quarters of 2005 wereceived approximately $0.3 million and $0.9 million respectively, ofan insurance claim that resulted from the interruption of our business causedby Hurricane Charley in 2004.

(d)                                 In the third quarter of 2005, we recorded adeferred tax asset, net of deferred tax liability, of $6.7 million.

(e)                                  In the fourth quarter of 2005, we recorded$3.0 million in bonus expense and realized a $5.6 million gain beforeminority interest on the sale of the SCB office building.

***Note 16 -Commitments and contingencies***

*Software commitment*

InDecember 2005, we entered into a commitment for approximately $3.0 millionfor new software which includes licensing, training and maintenance.Implementation began in the first quarter of 2007. Through the end of 2006, werecorded $1.6 million in expense and $0.7 million in capital against thiscommitment.  Our annual commitments forthe licensing and maintenance of other software are approximately $0.4 million.

*Operating leases*

We lease office space for administrative and trainingrequirements. These leases expire from May 2007 to January 2013 (in thousands).

|                                      | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental expense for  operating leases |       | $                                           | 855        |   | $ | 823 |   | $ | 425 |   |
|                                      |            |                                             |            |  |  |  |  |  |  |  |

 

Future minimum rental payments under the non-cancelableleases included above are as follows (in thousands):

| Years ending December 31, | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                     |       | $          | 1,271      |       |
| 2008                                     |       | 820        |       |
| 2009                                     |       | 752        |       |
| 2010                                     |       | 571        |       |
| 2011                                     |       | 545        |       |
| Thereafter                               |       | 506        |       |
|                                     |       | $          | 4,465      |       |

 

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*Other Contingencies*

On November 14, 2006, we were notified by the UnitedStates Securities and Exchange Commission (SEC) that the Commission isconducting a formal, nonpublic investigation to determine whether we compliedwith securities laws in connection with (i) the efficacy or trading success ofour stock market education programs, and, (ii) our acquisition of certain othercompanies. The SEC has requested documents and information from us in thecourse of their investigation.

On December 11, 2006, we received a subpoena from theUnited States Attorney in the Eastern District of Virginia requesting documentsand information in connection with an investigation relating to our marketingactivities from January 1, 2002 to the present. We were notified that a grandjury investigation related to this matter has commenced. We intend to cooperatefully with this investigation. Our Board of Directors established a SpecialCommittee of independent directors to conduct an internal investigation of theseactivities. The Committee has engaged the law firm of Wilmer Cutler PickeringHale and Dorr to assist with this investigation.

On January 11,2007, Whitney Canada, Inc., a wholly owned subsidiary, and Whitney InformationNetwork, Inc. received notice of an Amended Motion for Authorization toInstitute a Class Action in the Province of Québec, Canada. A class action wasrequested for all persons who have made various real estate investments, at thealleged inducement, or through, Marc Jémus, François Roy, Robert Primeau and/ortheir companies, and/or B2B Trust, and/or Whitney Canada, Inc., and/or WhitneyInformation Network, Inc. and/or Jean Lafrenière.

On January 30, 2007, we were served a complaint byRodney Durham on behalf of himself and all others similarly situated v. WhitneyInformation Network, Inc., Russell A. Whitney and Nicholas S. Maturo, filed onDecember 28, 2006 in the United States District Court in the Middle District ofFlorida accusing us of securities violations. The complaint seeks damages for violations of federal securities laws onbehalf of all investors who acquired our stock from November 18, 2003 throughand including December 15, 2006.

On March 8, 2007,we were served a complaint styled Robert Ghosio, Jr. on behalf of nominal defendantWhitney Information Network, Inc. v. Russell A. Whitney, Nicholas S. Maturo,Frederick A. Cardin, Chester P. Schwartz, Ronald S. Simon and WhitneyInformation Network, Inc., filed in the United States District Court in theMiddle District of Florida.  This actionis a derivative complaint alleging that the named defendants violated certainfiduciary and securities laws.

On March 22, 2007, a complaint was received by our whollyowned subsidiary, Whitney Education Group, Inc. The case is Glenn Acciard, et.al. vs. Russell Whitney, individually, John Kane, individually and WhitneyEducation Group, Inc. et. al., Case No. 07-CA-002190 in the Circuit Court ofthe Fifth Judicial Court in and for Lee County, Florida alleging that theCompany and 18 other defendants not associated with the Company, including twoof our executive officers, breached certain of their fiduciary duties to thenamed plaintiffs, all of whom were our alleged students. The allegations in thecomplaint include claims of constructive and common law fraud and otherviolations.

***Note 17 - Subsequent Events***

During thefirst quarter of 2007, our equity interest in Montery del Mar, S.A. increasedto approximately 51%.  From this pointforward, we will consolidate the results of this entity in our ConsolidatedFinancial Statements.  In addition, webelieve we will sell Monterey del Mar, S.A. in the foreseeable future.Accordingly, our Board of Directors has deemed this business as discontinuedoperation.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Boardof Directors and Stockholders

WhitneyInformation Network, Inc. and Subsidiaries

Cape Coral, Florida

We have audited the accompanying Consolidated BalanceSheets of Whitney Information Network, Inc. and Subsidiaries as of December 31,2006 and 2005, and the related Consolidated Statements of Operations andComprehensive Earnings (Loss), Stockholders’ Deficit and Cash Flows for each ofthe three years in the period ended December 31, 2006. These ConsolidatedFinancial Statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these Consolidated FinancialStatements based on our audits.

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the Consolidated Financial Statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the Consolidated Financial Statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall ConsolidatedFinancial Statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the Consolidated Financial Statementsreferred to above present fairly, in all material respects, the financialposition of Whitney Information Network, Inc. and Subsidiaries as ofDecember 31, 2006 and 2005, and the results of their operations and theircash flows for each of the three years in the period ended December 31,2006 in conformity with accounting principles generally accepted in the UnitedStates of America.

As described in Notes 1 and 9 to the ConsolidatedFinancial Statements, the Company has changed its method of accounting forstock-based compensation by adopting SFAS No.123R *Share-BasedPayment*effective January 1, 2006*.*

 
|   | /s/ EHRHARDT KEEFE STEINER & HOTTMAN PC |   |
|--------|---------------------------------------------|--------|
|   | Ehrhardt Keefe Steiner  & Hottman PC    |   |

 

March 30, 2007

Denver, Colorado

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**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

None.

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**ITEM 9A. CONTROLS AND PROCEDURES**

Evaluationof Disclosure Controls and Procedures

a)                       We maintain disclosure controls andprocedures designed to provide reasonable assurance that information requiredto be disclosed in our reports under the United States Securities and ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourChairman and Chief Executive Officer and our Co-President and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure. Our management, with the participation and oversight of ourChairman and Chief Executive Officer and our Co-President and Chief FinancialOfficer, evaluated the design and effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.

On the basis of theirfindings, our Chairman and Chief Executive Officer and our Co-President andChief Financial Officer have concluded that our disclosure controls andprocedures were not effective, as of the end of the period covered by thisreport.   In conducting this evaluation,we identified material weaknesses in our internal controls that could causemisstatements in our Consolidated Financial Statements. These material weaknessesinclude:

·                  Lackof knowledgeable personnel in accounting and financial reporting areas, a lackof formalized processes and procedures over key areas in the accounting andreporting functions, and inadequate supervision and review over the financial reportingfunction. These deficiencies are particularly significant in the followingareas:

·                  Foreigncurrency translation calculations

·                  Incometax provision calculation

b)                      Several material weaknesses wereidentified and reported in our 2005 Form 10-K. We initiated corrective actions atthat time to address internal control deficiencies and have remediated many ofthe weaknesses reported last year.  Wewill continue to evaluate the effectiveness of our disclosure controls andinternal controls and procedures on an ongoing basis, taking corrective actionas appropriate. In 2006, we hired an experienced Chief Financial Officer (nowCo-President and Chief Financial Officer). In addition, we hired or appointed anew Chief Information Officer, a Vice President, Operations Finance, a VicePresident, Strategy and Business Development, a Vice President, Finance, aDirector, Financial Systems, a Director, Sarbanes-Oxley Compliance andImplementation, a Manager, Information Technology Sarbanes-OxleyCompliance and Implementation, two Senior Financial Analysts, and two SeniorBusiness Development Analysts. We are actively recruiting for several newpositions that have been approved by the Board of Directors in the areas offinancial reporting, financial planning and analysis and financial systems. Wewill continue to upgrade our personnel and our financial reporting systems toimprove our internal controls.

Althoughthe above mentioned steps are beginning to correct the noted deficiencies, wecannot be certain that our efforts to improve our internal controls will besuccessful or that we will be able to maintain adequate controls over ourfinancial processes and reporting in the future. We may be hampered in thisregard by our current level of staffing or our current accounting system. Anyfailure to develop or maintain effective controls, or difficulties encounteredin the effective improvement of our internal controls, could harm our operatingresults, cause us to fail to meet our reporting obligations, result in misstatementsin our Consolidated Financial Statements or cause investors to lose confidencein our reported financial information, which would likely have a negativeeffect on the trading price of our common stock.

Inaddition, the efforts to improve our internal controls could require us toexpand significant time and management resources or make other substantialchanges. If our internal controls are deemed to be inadequate, or if otherunforeseen events occur, our external auditors could resign, leading to a delayin the preparation of our financial statements and an increase in our auditfees. If we were required to obtain new external auditors, those auditors couldrequire a lengthy period to become familiar with our operations. The process ofretaining new external auditors could also limit our access to the capitalmarkets for an extended period of time.

Basedon current SEC guidance related to the Sarbanes-Oxley Act for nonacceleratedfilers, we will comply with the requirements of Section 404(a) of Sarbanes-Oxleyfor our fiscal year ending December 31, 2007.

**ITEM 9B. OTHERINFORMATION**

Not applicable.

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**PART III**

**ITEM10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

Informationconcerning each of our executives and directors is set forth below:

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                                                      |
|----------------------|------------|---------|------------|-------------------------------------------------------------------|
| Russell A.  Whitney  |       | 51      |       | Chairman of the Board of Directors and Chief  Executive Officer   |
| Alfred R. Novas      |       | 43      |       | Co-President and Chief Financial Officer                          |
| Ronald S. Simon      |       | 63      |       | Co-President and Chief Operating Officer, Secretary  and Director |
| John F. Kane         |       | 53      |       | Executive Vice President, Operations                              |
| Marie B. Code        |       | 39      |       | General Counsel                                                   |
| Frederick A.  Cardin |       | 60      |       | Director                                                          |
| Chester P.  Schwartz |       | 61      |       | Director                                                          |

 

Directors holdoffice for a period of one year from their election at the annual meeting ofstockholders or until their successors is duly elected and qualified. Officersare elected by, and serve at the discretion of, the Board of Directors.

               *Russell A. Whitney, Chairman of the Board ofDirectors and Chief Executive Officer.*  Mr. Whitney is ourfounder and has been our Chief Executive Officer and its predecessors since1987. Mr. Whitney is also an active real estate investor for his ownaccount and has written and published several books on wealth building topics.

*AlfredR. Novas, Co-President and Chief Financial Officer.* Mr. Novas was elected by the Board of Directors to his current position in2007.  He joined us in 2006 as ChiefFinancial Officer from Novas and Associates where he led a strategic andfinancial planning consulting practice since 2002. From 2001 to 2002,Mr. Novas was President and Chief Executive Officer of Childtime LearningCenters, Inc. Prior to this, Mr. Novas held senior financial andexecutive positions with Burger King Corporation, The Pillsbury Company andPizza Hut, Inc., a former division of PepsiCo, Inc. Mr. Novasstarted his career with Touche Ross & Co. (now Deloitte &Touche LLP), has a Bachelor of Business Administration degree from theUniversity of Notre Dame and a Masters of Accounting from St. ThomasUniversity.

*RonaldS. Simon, Co-President and Chief Operating Officer, Secretary and Director.* Mr. Simon was elected to his current position by the Board of Directors in2007.  He is a Certified PublicAccountant and had been our Acting Chief Financial Officer from 2004 through2006 and a member of our Board of Directors since 1998. Mr. Simon was aself-employed certified public accountant from 1987 until he joined us as ourChief Financial Officer in 1998. In 2002, he was appointed our Executive VicePresident. Mr. Simon holds a Bachelor of Science degree in accounting fromthe University of Illinois.

               *John F. Kane, Executive Vice President, Operations.* Mr. Kane was appointed to his current position in 2006. He was previouslythe Executive Vice President, Real Estate Education and has been with theCompany since 1993.  Mr. Kanestudied journalism at Bradley University.

*Marie B. Code, General Counsel.*  Ms. Code has been our GeneralCounsel since 2002.  Previously, Ms. Codewas General Counsel for the Solid Waste Management Authority for the Commonwealthof Puerto Rico.  She also was an attorneyfor McDonald’s Corporation at its Caribbean and Central America office.  She holds a Juris Doctorate degree from Lewis& Clark Law School, and is licensed to practice law in the States ofFlorida and Oregon and the Commonwealth of Puerto Rico.

*FrederickA. Cardin, Director.*  Dr. Cardin has been adirector since 2003. Since 1996, he has been managing director of HarvardGrowth Strategies, a consulting firm which advises clients on businessstrategies, financing and marketing. From 1974 to 1981, he was a member, andsubsequently a partner and a director, of the Cambridge Research Institute, astrategic planning consulting firm in Cambridge, Massachusetts. From 1970 to1971 he held a faculty appointment in international finance at the HarvardBusiness School. Dr. Cardin earned his Masters of Business Administrationwith distinction and his Doctorate in Finance from the Harvard Graduate Schoolof Business Administration. He earned a Bachelor’s degree in economics summacum laude from Tufts University.

*ChesterP. Schwartz, Director.*  Mr. Schwartz has been adirector since 2003. Since 1970 he has been engaged in the private practice oflaw in Denver, Colorado, specializing in real estate and commercial law. Heearned a Bachelor of Science degree in business administration and accountingand a Juris Doctor degree from the University of Colorado.

**Committeesof the Board of Directors**

*AuditCommittee*

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Our Board ofDirectors has established a standing Audit Committee that consists of two independentdirectors. The current members of the Audit Committee are Messrs. Schwartzand Cardin. Mr. Schwartz is the Audit Committee Chairman. The Board ofDirectors has determined that both of these directors are “independent” asdefined and as required by the Securities and Exchange Commission. The Board ofDirectors has also determined that each of these directors is financiallyliterate and that Mr. Schwartz further qualifies as an “audit committeefinancial expert” as such term is defined in the applicable rules of the UnitedStates Securities and Exchange Commission.

The AuditCommittee assists the Board in fulfilling its responsibility to provideoversight with respect to our Consolidated Financial Statements, reports andother disclosures provided to stockholders, the system of internal controls andthe audit process. Its duties include reviewing the adequacy of our internalaccounting and financial controls, reviewing the scope and results of the auditplans of our independent and internal auditors, reviewing the objectivity,effectiveness and resources of the internal audit function, and assessing ourfinancial reporting activities and accounting standards and principles. TheAudit Committee also selects and engages our independent auditors and approvestheir fees.   In 2006, the AuditCommittee met seven times.

The AuditCommittee has considered whether the provision of non-audit services performedby our independent auditors is compatible with maintaining that firm’sindependence.

*CompensationCommittee*

OurCompensation Committee is comprised of Messrs. Cardin and Schwartz, bothof whom are independent directors. Mr. Cardin is our CompensationCommittee Chairman. The Compensation Committee consists entirely of independentDirectors of the Board who also are outside directors for purposes of Section162(m) of the Internal Revenue Code and nonemployee directors for purposes ofSection 16 of the Securities Exchange Act of 1934. Each member must be free ofany relationship that, in the judgment of the Board from time to time, wouldinterfere with the exercise of his or her independent judgment.

Weadopted a Compensation Committee charter that states its purpose is to:

(a)          overseethe policies of the Company relating to compensation of the Company’s namedexecutive officers and make recommendations to the Board with respect to suchpolicies;

(b)         producea report on executive compensation for inclusion in the Company’s proxystatement, in accordance with applicable rules and regulations; and

(c)          oversee the developmentand implementation of succession plans for the Chief Executive Officer (“CEO”)and other named executive officers.

In addition to the purposes of the CompensationCommittee set forth above, the primary responsibilities of the Committee shallbe to:

(a)          ensurethat the Company’s executive compensation programs are designed to enable it torecruit, retain and motivate a large group of talented and diverse domestic andinternational executives;

(b)         ensurethat Company’s executive compensation programs are appropriately competitive,support organization objectives and shareholder interests, and ensure a pay forperformance linkage;

(c)          reviewand report to the Board for its consideration any cash incentive compensationplans, option plans, or other equity based plans that provide for payment inthe Company’s stock or are based on the value of the Company’s stock, subjectto any approvals required by the shareholders of the Company;

(d)         overseethe design and administration of all employee benefit plans and programs of theCompany, its subsidiaries and divisions, including the authority to adopt,amend and terminate such plans and programs (unless approval by the Board orshareholders of the Company is required by law);

(e)          reviewand approve annual corporate goals and objectives relevant to the CEO’scompensation; evaluate the CEO’s performance in light of those goals andobjectives; and recommend for approval by the independent members of the Board,the CEO’s compensation level based on this evaluation;

(f)            meetannually with the CEO to discuss corporate goals and performance results;

(g)         evaluateand recommend for Board approval, on an annual basis, the individual elementsof total compensation for the executive officers (Section 16 officers), otherthan the CEO;

(h)         makeall approvals necessary under Section 16, Section 162 (m) and other regulatoryprovisions;

(i)             oversee preparationof succession plan presentations to the Board, including plans in the event ofan emergency or retirement of the CEO. The Committee Chairman works with theCEO in preparation of the succession plan

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                    presentations. The Committeeundertakes such follow-up steps with respect to succession planning as may bedelegated by the Board from time to time;

(j)             reviewand discuss with management the Compensation Discussion and Analysis, and,based on such review and discussion, recommend to the Board that theCompensation Discussion and Analysis be included in the Proxy Statement afterconcurrence with the Company’s Disclosure Committee;

(k)          undertakesuch other responsibilities or tasks as the Board may delegate or assign to theCommittee from time to time;

(l)             annuallyassess and report to the Board on the performance and effectiveness of theCommittee;

(m)       review this Charter on anannual basis, update it as appropriate, and submit it for the approval of theBoard when updated.

The Compensation Committee met three times in 2006.

*Governance andNominating Committee*

Our Governance and Nominating Committee consists ofMessrs. Cardin and Schwartz. Mr. Cardin is our Governance andNominating Committee Chairman. The Committee consists entirely of independentDirectors. Each member must be free of any relationship that, in the judgmentof the Board from time to time, would interfere with the exercise of his or herindependent judgment.

The purpose of theGovernance and Nominating Committee, as articulated in the adopted Governanceand Nominating Committee Charter, is to:

(a)          identify and recommendto the Board for election and/or appointment of qualified candidates formembership on the Board and the committees of the Board;

(b)         develop and recommend tothe Board corporate governance principles and the Worldwide Code of Conductapplicable to the Company and monitor compliance with all such principles andpolicies;

(c)          propose a slate ofcandidates for election as Directors at each Annual Meeting; and

(d)         develop and monitorsuccession plans for the members of the Board, the members of the Committees ofthe Board, and the Chair of the Committees of the Board.

In addition to thepurposes set forth above, the primary responsibilities of the Committee shallbe to:

(a)          assess the independenceof members of the Board;

(b)         review conflicts ofinterest of Directors, senior executives and consider waivers or other actionrelated thereto;

(c)          review and periodicallymake recommendations to the Board concerning the composition, size, structureand activities of the Board and the committees of the Board;

(d)         oversee the evaluation ofthe Board and its Committees;

(e)          annually assess andreport to the Board on the performance and effectiveness of the Board, theCommittee and the other committees of the Board, and other issues of corporategovernance;

(f)            annually review andreport to the Board with respect to Director compensation and benefits;

(g)         report to shareholders inthe Company’s annual Proxy Statement about the director nomination process as requiredby the Securities and Exchange Commission rules;

(h)         annually reviewsuccession plans for the members of the Board, the members of the Committees ofthe Board, and the Chair of the Committees of the Board;

(i)             review this Charteron an annual basis and update it as appropriate, and submit it for the approvalof the Board when updated; and

(j)             undertake such otherresponsibilities or tasks as the Board may delegate or assign to the Committeefrom time to time.

*Codeof Ethics and Conduct*

Our Board ofDirectors has adopted a Code of Conduct and a Code of Business Conduct andEthics that embody our commitment to conduct business with the highest ethicalstandards.

The Code ofConduct provides principles and standards by which directors, officers, and employeeswill conduct themselves.  To the extentpossible, the Code of Conduct has been made available to all independentcontractors and key

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vendors involved with ourCompany.

In addition to theCode of Conduct, our directors, executive officers, and senior financialofficers of our Company are also subject to the Code of Business Conduct andEthics and are expected to adhere to the principles and procedures setforth.  We filed a copy of our Code ofBusiness Conduct and Ethics with the United States Securities and ExchangeCommission.  Both the Code of Conduct andthe Code of Business Conduct and Ethics are posted on the Corporate Governancesection of our Web site.

Inaccordance with the*Sarbanes-Oxley Act of2002*, we have adopted procedures to facilitate the submission, on aconfidential and anonymous basis, of complaints, reports and concerns by anyperson regarding (1) accounting, internal accounting controls or auditingmatters, (2) actual or potential violations of laws, rules or regulations,and (3) other suspected wrongdoing, including in connection with our Codeof Conduct.

*Section 16(a) beneficial ownership reporting compliance*

In 2006, the following directors and officers (currentand former) subject to Section 16 of the Exchange Act failed to fileForm 4 on a timely basis:

|                      | ** ** | **Number of late filings** |
|----------------------|------------|----------------------------|
| Russell A.  Whitney  |       | 2                          |
| Ronald A. Simon      |       | 1                          |
| John F. Kane         |       | 1                          |
| Nicholas S.  Maturo  |       | 1                          |
| Frederick A.  Cardin |       | 1                          |
| Chester P.  Schwartz |       | 1                          |

 

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**ITEM 11.  EXECUTIVE COMPENSATION**

Information oncompensation of our directors and executive officers is contained in our ProxyStatement for our 2007 Annual Meeting of Shareholders under the captions “*Compensation Disclosure and Analysis*”  “*Summary Compensation Table*,”“*Grants of Plan-Based Awards*,” “*Outstanding Equity Awards at the end of 2006*,” “*Option Exercises and Stock Vested in 2006*,” and “*Director Compensation*,”respectively, and is incorporated herein by reference.

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**ITEM 12.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND RELATED STOCKHOLDER MATTERS**

The following table sets forth the common stockownership of each person known by us to be the beneficial owner of five percentor more of our common stock, as of March 30, 2007, by each of our officers anddirectors and by all officers and directors as a group.  Each person holds record and beneficialownership and has sole voting and investment power with respect to the sharesof common stock shown.  The address ofall of Executive Officers and Directors is in our care at 1612 East Cape CoralParkway, Cape Coral, Florida 33904.
| Name of Owner                                | ** ** | **Number of shares(1)** | ** ** | **Percent of class** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|
| Russell A. Whitney(2)                                  |       | 5,240,309                         |       | 44.6                           | %          |
| Alfred R. Novas(3)                                     |       | 57,500                            |       | *                              |       |
| Ronald S. Simon(2)(4)                                  |       | 428,175                           |       | 3.6                            |       |
| John F. Kane(5)                                        |       | 300,833                           |       | 2.6                            |       |
| Marie B. Code(6)                                       |       | 12,780                            |       | *                              |       |
| Frederick A. Cardin(7)                                 |       | 18,750                            |       | *                              |       |
| Chester P. Schwartz(8)                                 |       | 21,788                            |       | *                              |       |
| All officers and directors as a group (seven  persons) |       | 6,080,135                         |       | 51.8                           |       |
| Prides Capital Fund I, LP(10)                          |       | 1,650,000                         |       | 14.1                           |       |
| Kevin A. Richardson II                                 |       |                              |       |                           |       |
| Prides Capital Fund I, LP                              |       |                              |       |                           |       |
| c/o Prides Capital LLC                                 |       |                              |       |                           |       |
| 200 High Street, Suite 700                             |       |                              |       |                           |       |
| Boston, MA  02110                                 |       |                              |       |                           |       |
| Springhouse Capital, LP(10)                            |       | 1,033,600                         |       | 8.8                            |       |
| Brian Gaines                                           |       |                              |       |                           |       |
| Springhouse Capital, LP                                |       |                              |       |                           |       |
| 535 Madison Avenue, 30th Floor                         |       |                              |       |                           |       |
| New York, NY   10022                              |       |                              |       |                           |       |
| Heartland Value Fund(9)(10)                            |       | 649,456                           |       | 5.5                            |       |
| William J. Nasgovitz                                   |       |                              |       |                           |       |
| Heartland Value Fund                                   |       |                              |       |                           |       |
| c/o Heartland Advisors, Inc.                           |       |                              |       |                           |       |
| 789 North Water Street                                 |       |                              |       |                           |       |
| Milwaukee, WI  53202                              |       |                              |       |                           |       |

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*       Less than1%

(1)    Inaccordance with SEC rules, this column includes shares that may be acquiredpursuant to stock options and common stock purchase warrants that are or willbecome exercisable within 60 days.

(2)    Includes13,909 shares of common stock and 133,450 stock options held by Mr. Whitney andmembers of his family.  All of Mr.Whitney’s shares of common stock are held in International Securities 3, LLC, alimited liability company owned by Mr. Whitney and Ingrid Whitney and managedby Mr. Simon.

(3)    Comprisedof 57,500 stock options.

(4)    Includes293,000 stock options.

(5)    Includesof 75,000 stock options.

(6)    Includes12,500 stock options.

(7)    Comprisedof 18,750 stock options.

(8)    Includes 7,500stock options.

(9)    Includes300,000 common stock purchase warrants.

(10)  Based onthe Schedule 13G filed with the SEC.

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**ITEM 13.  CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

We lease approximately2,200 square feet of training facilities at 1611 East Cape Coral Parkway (“1611Cape Coral Parkway”), approximately 9,000 square feet of space at 1625 EastCape Coral Parkway (“1625 Cape Coral Parkway”) which is used for offices andshipping, and 4,802 square feet at 1630 Southeast 47th Terrace which we use asa training facility, all in Cape Coral, Florida from Cape Promenade Trust whichis for the benefit of our Chairman and Chief Executive Officer and IngridWhitney. The leases are for three years and began on March 1, 2003, March 1,2003 and June 1, 2004 respectively. The monthly rentals are $1,943, $13,125 and$7,238 respectively. We are on a month-to-month basis with respect to the 1611Cape Coral Parkway lease that expired in March 2006. We extended the lease withrespect to 1625 East Cape Coral Parkway through June 30, 2009.

From 2002 to the present, our Chairman and ChiefExecutive Officer benefited from our students’ purchase of residential lots andthe construction of homes on lots they acquire in the Cape Coral, Florida areabecause the students purchased these lots from Gulfstream Development Corp.(“Gulfstream”), from other lot owners and, in the past, from our Chairman andChief Executive Officer. The students were presented this opportunity at one ofour advanced real estate courses by realtors representing Gulfstream. OurChairman and Chief Executive Officer owns 25% of and receives compensation fromGulfstream. We had no involvement in the students’ decision to purchase lots orin their dealings with the realtor or Gulfstream. Gulfstream often constructshomes on lots owned by our students. Through an informal arrangement withGulfstream, we receive a referral fee of $1,000 for every Gulfstream home builtfor our students, amounting to $0.3 million and $0.3 million for the yearsended December 31, 2006 and 2005, respectively.

Wehave investments in three entities in which our Chairman and Chief Executive Officerand our Co-President and Chief Operating Officer have minority ownershipinterests. The entities are Rancho Monterey, S.A., Monterey del Este, S.A. andMonterey del Mar, S.A., which is described in more detail under NoncoreInvestments in Management’s Discussion and Analysis of Financial Condition andResults of Operation.  Our Chairman ChiefExecutive Officer indirectly owns approximately 11% of Rancho Monterey, S.A.and 8% of Monterey del Este, S.A. Our Co-President and Chief Operating Officer indirectlyowns approximately 1.4% of Rancho Monterey, S.A.

OurChairman and Chief Executive Officer, three of our employees, and two previousemployees have an investment in shares of Monterey Green Acres, S.A. which ownsapproximately 1,500 acres in Monterey, Costa Rica. We have no interest in thisinvestment and will not share in any proceeds from the intended sale of theentity’s shares and related property.  Aletter of intent to purchase Monterey Green Acres, S.A. has been signed by an interestedbuyer who is an independent contractor for us.

Our ChairmanChief Executive Officer, Ingrid Whitney, certain employees, independentcontractors, vendors  and former students own partial interests inCA One Investors, LLC, a limited liability company which owns through MontereySun and Win, S.A., a Costa Rican company, 48 acres of land in Esterrillos delEste, Coast Rica.  We have no interest inthis investment and will not share in any proceeds from the sale of its assets.  Our Co-President and Chief Operating Officeris a member of CA One Investors, LLC.

Rancho Holdings, S.A. holds a 20% interest in RanchoMonterey, S.A. and an 8% interest in Monterey del Este, S.A.  Our Chairman and Chief Executive Officer isan indirect owner of Rancho Holdings, S.A.  A principal of Gulfstream Development Corp. isalso an indirect owner of Rancho Holdings, S.A.

OurChairman and Chief Executive Officer and Ingrid Whitney, our Co-President andChief Operating Officer and his wife, former employees, associates andindependent contractors own Costa Rica Consulting, LLC (CRC). Our GeneralCounsel is a trustee of CRC.  CRC owns a10% share of Rancho Monterey, S.A.

OurChairman and Chief Executive Officer, our Co-President and Chief OperationsOfficer and an employee of ours are officers of and investors in AlicoInvestors I, LLC, a limited liability company that has sold or is sellingmembership interests to our students and others.  Our Vice President, Marketing, one of our externalattorneys, some of our independent contractors, and students are alsoinvestors. A member of our Board of Directors was initially part of thislimited liability company but withdrew.  AlicoInvestors I, LLC subsequently refunded his investment and he is no longerassociated with this project. We do not receive any remuneration from thislimited liability company.

Additionalinformation required by this item is incorporated by reference to our ProxyStatement.

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**ITEM 14.  PRINCIPAL ACCOUNTANTFEES AND SERVICES**

EhrhardtKeefe Steiner & Hottman, P.C., Denver, Colorado (“EKS&H”),conducted the audit of our Consolidated Financial Statements for the yearsended December 31, 2006 and 2005. It is our understanding that this firmis obligated to maintain audit independence as prescribed by the accountingprofession and certain requirements of the United States Securities andExchange Commission. As a result, our directors do specifically approve, inadvance, nonaudit services provided by EKS&H, and it considers the effect,if any, of such services on audit independence. We have concluded that theprovision of services by EKS&H is compatible with maintaining itsindependence.

The following table presents fees for professionalaudit sevices rendered by EKS&H, our independent auditor, for the audit ofour Consolidated Financial Statements for the years ended December 31,2006 and 2005, and fees billed for other services rendered by EKS&H (inthousands).

 
| ** **              | ** ** | ** **                                  | ** ** | ** ** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **              | ** ** | **Years ended December 31,** | ** ** |
| ** **              | ** ** | **2006**                                    | ** ** | **2005**   | ** ** |
| Audit fees              |       | $                                           | 400        |       | $          | 340 |   |
|                    |       |                                        |       |       |       |
| Audit-related  fees (1) |       | 25                                          |       | 29         |       |
|                    |       |                                        |       |       |       |
| Tax fees                |       | 115                                         |       | 75         |       |
|                    |       |                                        |       |       |       |
| All other fees  (2)     |       | 570                                         |       | 234        |       |
|                    |       |                                        |       |       |       |
| Total fees              |       | $                                           | 1,110      |       | $          | 678 |   |
|                    |       |                                        |       |       |       |

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(1)          Primarily includes thefees for the audit of our 401(k) plan.

(2)          Primarily relates to theForm S-1 registration statements for Whitney Information Network, Inc. andEduTrades, Inc. filed, and withdrawn, respectively, with the United StatesSecurities and Exchange Commission.

 

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**ITEM15.  EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**
| Exhibit No. | ** ** | **Title**                                                                                                                                                          |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.01        |       | Articles of Incorporation of the Registrant, as  amended(1)                                                                                                        |
|        |       |                                                                                                                                                               |
| 3.02        |       | Bylaws of the Registrant(2)                                                                                                                                        |
|        |       |                                                                                                                                                               |
| 10.01       |       | Securities Purchase Agreement - Private Placement(6)                                                                                                               |
|        |       |                                                                                                                                                               |
| 10.02       |       | Stockholders Agreement - Private Placement(6)                                                                                                                      |
|        |       |                                                                                                                                                               |
| 10.03       |       | Registration Rights Agreement - Private Placement(6)                                                                                                               |
|        |       |                                                                                                                                                               |
| 10.04       |       | Warrant Agreement - Private Placement(6)                                                                                                                           |
|        |       |                                                                                                                                                               |
| 10.05       |       | 1998 Stock Option Plan(3)                                                                                                                                          |
|        |       |                                                                                                                                                               |
| 10.06       |       | Employment Agreement with Mr. Whitney(4)                                                                                                                           |
|        |       |                                                                                                                                                               |
| 10.07       |       | Employment Agreement with Mr. Simon(4)                                                                                                                             |
|        |       |                                                                                                                                                               |
| 10.10       |       | Employment Agreement with Mr. Kane(4)                                                                                                                              |
|        |       |                                                                                                                                                               |
| 10.12       |       | Employment Agreement with Mr. Novas(5)                                                                                                                             |
|        |       |                                                                                                                                                               |
| 21.01       |       | List of Subsidiaries                                                                                                                                               |
|        |       |                                                                                                                                                               |
| 31.01       |       | Rule 13a-15(e) / 15d-15(e) Certification, executed  by Russell A. Whitney, Chairman of the Board and Chief Executive Officer of  Whitney Information Network, Inc. |
|        |       |                                                                                                                                                               |
| 31.02       |       | Rule 13a-15(e) / 15d-15(e) Certification, executed  by Alfred R. Novas, Co-President and Chief Financial Officer of Whitney  Information Network, Inc.             |
|        |       |                                                                                                                                                               |
| 32.01       |       | Section 906 Certification of Chairman of the Board  and Chief Executive Officer                                                                                    |
|        |       |                                                                                                                                                               |
| 32.02       |       | Section 906 Certification of Co-President and Chief Financial  Officer                                                                                             |

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(1)                                  Incorporated by reference to the Registrant’sRegistration Statement on Form 10 SB/12G dated March 6, 2001,designated Exhibit 3.1 therein.

(2)                                  Incorporated by reference to the Registrant’sRegistration Statement on Form 10 SB/12G dated March 6, 2001,designated Exhibit 3.2 therein.

(3)                                  Incorporated by reference to the Registrant’sRegistration Statement on Form 10 SB/12G dated March 6, 2001,designated Exhibit 99.3 therein.

(4)                                  Incorporated by reference to Amendment No. 1to the Registrant’s Registration Statement on Form S-1, FileNo. 333-103156 dated July 9, 2003, designated Exhibits 10.07 through10.11 therein.

(5)                                  Incorporated by reference to Form 8-K datedJanuary 20, 2006, designated Exhibit 10.12 therein.

(6)                                  Previously filed.

 

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**SIGNATURES**

In accordance with Section 13 or 15 (d) of the ExchangeAct, we have caused this report to be signed on our behalf by the undersigned,thereunto duly authorized.
|                           |   | Whitney Information Network, Inc.  |                        |
|---------------------------|--------|-----------------------------------------|-----------------------------|
|                      |   |                                    |                        |
|                      |   | By:                                     | /s/ RUSSELL A. WHITNEY |   |
|                      |   |                                    | Russell A.  Whitney    |   |
| Dated: April 2, 2007 |   | *Chairman  and Chief Executive Officer* | * *                    |

 

In accordance with the ExchangeAct, this report has been signed below by the following persons on our behalfand in their capacities indicated on March 30, 2007.
| Signature               | ** ** | **Title**                                                         |
|-------------------------|------------|-------------------------------------------------------------------|
| ** **              | ** ** | ** **                                                        |
| ** **              | ** ** | ** **                                                        |
| /s/ RUSSELL A. WHITNEY  |       | Chairman of the Board of Directors and Chief  Executive Officer   |
| Russell A.  Whitney     |       |                                                              |
|                    |       |                                                              |
| /s/ ALFRED R. NOVAS     |       | Co-President and Chief Financial Officer                          |
| Alfred R. Novas         |       |                                                              |
|                    |       |                                                              |
| /s/ RONALD S. SIMON     |       | Co-President and Chief Operating Officer, Secretary  and Director |
| Ronald S. Simon         |       |                                                              |
|                    |       |                                                              |
| /s/ FREDERICK A. CARDIN |       | Director                                                          |
| Frederick A.  Cardin    |       |                                                              |
|                    |       |                                                              |
| /s/ CHESTER P. SCHWARTZ |       | Director                                                          |
| Chester P.  Schwartz    |       |                                                              |
|                    |       |                                                              |

 

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